Google Fiber: A Case of "Good Enough" Beating "Best?"

Most of the opinion about Google Fiber is that “it failed.” Some of us are not sure about that. Much hinges on what one expected. If the objective was to spur existing ISPs to upgrade faster, Google Fiber succeeded. If the objective was to create a big new revenue-driving service, Google Fiber has not yet achieved that goal. Also, much hinges on whether this is a case of “iterate, iterate, iterate.”

The first iteration has failed to dislodge enough consumers and win Google Fiber enough market share to sustain itself in current form, that is certain. But unless Google Fiber assets are sold, or the whole business simply is shuttered, another effort likely will be made.

So far, it is fair to note that Google Fiber does not seem to have taken significant share away from the existing leading ISPs in the target markets.

“Why” Google Fiber has not been able to take share is the question, and “answers” have ranged from permitting issues to competitor lawsuits; lack of marketing to higher-than-anticipated costs or harder-than-expected construction. All of that seems plausible.

In addition, there are other reasons.  In the competitive access services business, attacker actions always are countered with incumbent counterattacks. That is why there is no “sustainable advantage” in the access business, just  relatively-temporary advantage that competitors eventually erase with rival offers.

Acknowledging that all the aforementioned issues might also have contributed to a slower-than-expected rollout, the cable operator and telco response might also have blunted the Google Fiber value proposition. The “symmetrical gigabit for $70 a month” offer was disruptive, to be sure. On a megabit-per-cents basis, it completely reset the value proposition, in downstream and upstream performance terms.

But that is where the competitor dynamics--and consumer demand--come in. One might argue that the competitor response was “good enough” to blunt Google Fiber’s appeal. It is no accident that Comcast announced its nationwide--to every home--gigabit upgrade after Google Fiber was launched. As skeptical as Comcast and others might have been about demand, once they determined there was a conceivable challenge to their “leadership,” upgrade programs were announced.

At the same time, even in advance of the gigabit upgrades, existing tiers of service were bumped to higher speeds as well, for the same price. In Charlotte, N.C., Time Warner Cable upgraded service substantially, for no additional cost. Customers who had TWC's standard 15 Mbps or 30 Mbps were upgraded to 200 Mbps. Customers on the 50 Mbps tier were upgraded to 300 Mbps, without charge.

Comcast made similar upgrade moves in Provo, Utah, where Google Fiber also was building. AT&T did so in Austin, Texas, offering to match the gigabit offers made by Google Fiber.

The point is that competitors responded by changing their own offers by boosting value. The changes did not match the Google Fiber offer, but apparently represented enough incremental value to convince consumers to stay with their current providers, even if Google Fiber represented an offer with “significantly-more” value.

That happens frequently in all parts of the access business. “Good enough” value propositions often beat “the best” value propositions, since absolute cost matters to most consumers. In this case, it appears that most consumers remain satisfied with hundreds of megabits for less money, rather than buying gigabit service for a bit more money.

Perhaps that is a prime example of price anchoring, where consumers evaluate all offers from a reference point. A 50-inch TV might be priced at $1,000, where smaller models in the 24-inch to 36-inch range might cost only hundreds of dollars. Then a model with a 48-inch screen is priced at perhaps $600. That is a “gold-silver-bronze” pricing strategy that creates perceptions of value for the 48-inch model.

The other angle is that consumers might be rational in another sense. The primary value of any higher-speed internet access connection is typically that it tends to ensure reasonable speeds for multiple users at a location. How much “speed” any single user requires depends on the applications to be supported, but for most users an actual speed of 20 Mbps or so is likely enough to support all applications any consumer presently requires. Even assuming a requirement for occasional speeds of 40 Mbps per user, that still means a “hundreds of megabits per second” connection is all a single account might require.

Likewise, symmetrical gigabit as a headline speed is eye-catching, but far more than a typical multi-user household requires.

It is not yet completely clear that Google Fiber has “failed.” Access speeds are dramatically higher, and continuing to climb at significant rates. In that sense, Google Fiber already has succeeded. Whether Google Fiber will also prove to be a sustainable business remains to be seen.

What does seem clear is that most consumers have chosen to buy “good enough” offers, not the “best possible” offer. What cable companies have done is counterattack by creating a “better” offer that is “good enough” to satisfy consumers.

More than anything else, that might be what has limited Google Fiber success.

Telcos Losing Ability to Compete in Consumer Fixed Network Segment?

Though every market will be different, some important trends can be seen in firm strategies related to the business customer segment. In the U.S. market, an argument can be made that cable TV companies are, and will be, the leaders in consumer services, though such firms also will gain business segment revenues.

The largest U.S. firms--with the exception of AT&T--are moving towards greater reliance on business customer revenues, though all of the three largest firms have a major reliance on business accounts.

Potentially, the most reliant on business customers will be CenturyLink, formerly a rural telco whose revenues were driven by consumers.

If the CenturyLink acquisition of Level 3 Communications is approved by shareholders and regulators, its revenue will be 76 percent derived from business customers. Prior to the deal, CenturyLink already was earning 64 percent of total revenues from business customers.

Verizon earns about 66 percent of total revenue from business customers, while AT&T earns about half its revenue from business customers.

Other firms that formerly were rural telcos, with revenue driven primarily by consumer accounts, also now derive at least half of total revenue from business customers. Frontier Communications earns more than half its revenue from the business customer segment, while Windstream earns about 78 percent from business customers.

That “business segment” strategy now emerges as the key business model for virtually all of the largest U.S. fixed network providers. It also the strategy followed by metro fiber specialists and competitive local exchange carriers. Small independent suppliers of fixed network services are not going to be able to replicate that strategy, as there are too few business customers in most rural areas to underpin the approach.

Eventually, all the leaders of the U.S. market will be integrated carriers with both fixed and mobile assets, even if half the U.S. mobile leaders are “mobile only.” In the fixed network segment, though, cable is likely to emerge as the clear leader, as it will be tougher every year for a fixed telco to maintain a business model based on consumer services.

Consider CenturyLink, the third-largest U.S. telco, with 11.2 million total access lines at September 30, 2016. At September 30, 2016, CenturyLink had six million broadband subscribers and approximately 318,000 Prism TV subscribers, implying some 4.88 million voice lines and no mobile operations.

But most of the actual revenue is generated by business customer services (about 64 percent in 2016).

Also, CenturyLink revenue growth has been basically flat since 2012, which explains the importance of the Level 3 Communications acquisition, which will add about $8 billion or so of additional revenue to the $18 billion or so CenturyLink has been earning in recent years.

The problem is that revenue is expected to decline at CenturyLink, absent this or other acquisitions.

Taking an average of four research analyst forecasts, CenturyLink annual revenue will dip to about $17.4 billion from 2017 to 2020.

CenturyLink Revenue Forecast Without Level 3 Acquisition
	2017(E)		2018(E)		2019(E)		2020(E)
	(In $ millions)
Revenue	$	17,381	$	17,358	$	17,390	$	17,490
EBITDA	$	6,450	$	6,424	$	6,396	$	6,391
Capital Expenditures	$	2,965	$	2,900	$	2,874	$	2,838

For the medium term, telcos are going to continue to lead in business and mobile revenues, but will continue to lose leadership in all fixed network consumer services. That explains the extraordinary challenge telcos face in the consumer segment. It is difficult to maintain high levels of investment in a segment of the business that is steadily declining.

U.S. Consumers Not Too Happy with Linear Video or Internet Access, Never Have Been, ACSI Data Suggests

With the important caveat that some service providers do much better than others, U.S. consumers generally do not say they are exceptionally happy with their internet access or video services. They never have been.

Customer service provided by U.S. cable TV providers likely has improved quite a bit over the last 30 years, and definitely over the last 40 years. Still, linear video service never has gotten much love from consumers, as video service virtually always ranks low on multi-industry satisfaction indices.

One might argue that, for all the progress, consumers still are not terribly satisfied. U.S. consumer satisfaction with subscription video ranks at 65 out of 100, among the very lowest scores for any consumer product.

Mobile services rank higher, across the board, with an industry average of 71 out of 100.

Internet access services, sold by the same entities, ranks lower than video or mobile, at an average of 64, earning the absolute lowest scores of any product tracked by the American Customer Satisfaction Index.

It is fair to note that there is more variation within categories (companies providing video, internet access or mobile service) than there is between different industries. The absolute highest average score is earned by TV suppliers (87 or 100), compared to an average score of 65 in the linear video subscription category. The lowest industry score in earned by the ISP business, at 64, a dynamic range of 23 points.

The best and worst mobile providers differ by just seven points. ISP satisfaction ranking vary by 17 points, high to low. Video service satisfaction varies by 16 points, high to low.

Fixed network voice scores vary by about 14 points, high to low, with an average industry score of 70.  

I cannot really explain why the fixed network services tend to generate less satisfaction than mos other products, other than to point to impressionistic evidence (consumers or businesses complaining about incorrect billing, overcharges, lack of responsiveness).

Once upon a time, service availability was far worse, with noticeable number of service outages every year. It has been argued that, aside from network outages caused by power outages or equipment failure, consumers notice immediately if their TV goes out, but might not notice if their phone stops ringing.

Given that TVs might be “on” for seven or more hours a day, while phones actually were used for minutes a day, there is some logic to that argument. If a phone did not ring, a customer would logically simply assume nobody was calling.

But almost every process related to linear video has gotten much better over the last 40 years, including network performance, billing and customer service performance.

Some four decades ago, most urban cable TV systems were under construction for the first time, meaning there was significant disruption of existing life, and the ever-present danger of accidents.

Over the next 30 years a process of acquisition also meant there was going to be a chance of customer service irritation as staffs and processes changed, billing systems were revamped and databases merged.

The all-copper networks were prone to outages, when built, for reasons having to do with the concatenation of failure points (amplifiers in series). Cable operators generally were cash strapped and arguably under-investing in customer service operations. It would not have been unusual to wait all day for an install. More recently, install windows moved to four hours, and in some cases even two hour windows.

The hybrid fiber coax architecture, meanwhile, has dramatically improved network availability performance.

Some will point to rate increases as a big source of irritation. If so, then wider adoption of “skinny bundles” and streaming services could move the needle.

source: ACSI

Still, it remains a bit of a puzzle why the subscription services, with the exception of mobile service or even fixed network voice service, always ranks so low.

Some will suggest that is at least in part because the customer has to keep paying every month. Others might argue the receipt of the bill is a constant reminder to the customer of the value-price proposition. But that also is true of groceries or supermarkets, fuel and utilities and personal services. And none of those products are ranked as low as internet access or video subscriptions (on average).

Ironically, though the linear video experience is unquestionably much better, satisfaction has not grown too much. For some of the suppliers, virtually no improvement has been seen over the last 15 years.

Why Ubiquitous Fiber to Home No Longer Makes Much Sense for AT&T, Verizon, CenturyLink

Perhaps you can argue that the CenturyLink acquisition of Level 3 Communications actually is not so much transformative as deepening a transformation that already had happened. But the proposed transaction still represents an important change.

Before the transaction (assuming it is approved by regulators), CenturyLink already was earning 64 percent of total revenues from business customers.

After the transaction, CenturyLink will earn fully 76 percent of total revenues from business customers, not the consumer segment.

Compare that to Verizon and AT&T. Verizon earns about 66 percent of total revenue from business customers.

AT&T earns about half its revenue from business customers, in large part because it is much more involved in the entertainment video business.

So after the acquisition, CenturyLink will be the service provider most reliant on business customer revenues. Of the three firms.

That should indicate fairly clearly why, even as it upgrades consumer internet access services, CenturyLink might not be able to justify a full “fiber to home” strategy. It is doubtful CenturyLInk can, at this point, recover its costs, as all consumer revenues combined amount to less than a quarter of total.

Verizon, which upgraded much of its consumer network to fiber already, alread had halted consumer fiber to home deployments, and appears now to be preparing a fiber distribution strategy that relies as much on wireless services as fixed network support.

AT&T, on the other hand, has much more reliance on mobile and satellite platforms to support its mobility and video services, and seems clearly to believe that mobile access is the foundation for the next wave of on-demand video entertainment.

So one reason telcos have been losing market share in consumer internet access to cable operators is because they are, indeed, investing elsewhere for growth. That is rational. At this point, none of those three firms likely could recover their costs if they invested heavily in consumer fiber-to-home access. There simply is not enough revenue to be gained, by doing so, as consumer revenues no longer represent the bulk--in some cases, overwhelming bulk--of revenues.

Targeted builds, in some neighborhoods, have a different payback, and might make good sense. But we are likely past the point where ubiquitous fiber to home makes financial sense.

That inevitably means these telcos will lose market share in consumer fixed network services, including internet access accounts. But it is rational to assume that is inevitable, and to focus growth efforts elsewhere.

source: Revenues and Profits

source: Market Realist  

source: CenturyLink

Most U.S. Consumers Choose Not to Buy the "Fastest" Available Internet Access Speed

Methodology always matters. “What” one chooses to account and “how” one chooses to count always affect the results. There also is a difference between what providers choose to supply and what consumers choose to buy.

The former can point to gaps in supply, the latter to the nature of demand.

The latest Federal Communications Commission’s latest report on fixed network internet access illustrates the interplay between consumer demand and supply. That is to say, it is easy to mistake “what is available” from “what people buy.”

The FCC report illustrates the services “most people buy,”  and not directly “what people could buy, if they wanted.” Services faster than 300 Mbps, if offered, are not included in the analysis if less than five percent of consumers choose to buy them (where available).

To be sure, what gets bought is in substantial part driven by what suppliers choose to make available, and at what prices, including promotions and other packaging mechanisms that actually obscure the actual “retail price.”

In other words, the FCC study reflects what most people choose to buy, which itself is shaped by the inducements (bundle offers) offered by ISPs. When the offers change, so will the data.

A similar, but different methodological problem applies to estimating the average “price” of internet access. Advertised plans are not necessarily the ones people actually buy.

That is necessary, at least in part, because most consumers buy bundles (two or three services, typically) for a flat monthly fee. By some estimates, in 2015 some 61 percent of U.S. consumers bought a bundle.  So it actually is something of a guess what the actual internet access service “costs.”

In such cases, it is necessary to “impute retail prices” for consumers who buy bundles, since they do not pay a separate retail internet access fee.

Those methodological issues noted, among the clearest conclusions one might draw from the the Federal Communications Commission’s latest report on fixed network internet access, based on 2015 data, is that median U.S. internet access speeds are growing; that consumers are buying faster tiers; and that cable companies have driven most of the speed increases and gained the most accounts in the 100-Mbps and faster ranges.

Conversely, digital subscriber line speeds are stagnant, and gigabit services either had not been significant enough by 2015 to affect the median speeds, or the FCC simply chose not to track them (presumably on the correct assumption they could not yet be among the “most popular” tiers of service, as availability was still too limited in 2015).

The study arguably also indicates that--at least in 2015--the interplay between demand and supply. On the supply side (what consumers are able to buy), the “most popular” services actually purchased by consumers were in the 100-Mbps range.

That is not to say these tiers were the “fastest” speed tiers available, but that these were the tiers most consumers chose to buy. That is a key distinction. Consumers in some markets are able to buy gigabit service from Google Fiber, AT&T or CenturyLink, for example, but it does not appear that many consumers actually do so.

The most popular advertised speed plans purchased by consumers tend to range about 100 Mbps for cable providers. AT&T U-verse plans generally were in the 45 Mbps range in 2015, while DSL speeds (all-copper access)  were quite low, in comparison, and have not changed in several years. Verizon FiOS speeds are generally in the 80-Mbps range.

 

source: FCC  

The study reflects deliberate policy choices by internet service providers, with cable operators choosing to boost speeds the most, and providers of fiber-to-home services already have scale choosing to maintain speeds.

It arguably is the case that most suppliers of DSL services face technology constraints, so the lack of progress on that front is a reflection of decisions not to upgrade either to fiber to neighborhood or fiber to home platforms.

Such choices also are evident for fiber-to-home services. Among participating ISPs, only Frontier and Verizon use fiber as the access technology for a substantial number of their customers, the FCC notes. While the maximum supplied download speed for Frontier’s Fiber product has remained 25 Mbps, the maximum popular download speed included in the FCC survey for Verizon more than doubled from 35 Mbps to 75 Mbps in 2012 and has remained at that speed in subsequent years.

The report shows median internet access speeds of about 39 Mbps, with that increase of 22 percent over the prior year driven almost entirely by cable TV providers, as digital subscriber line accounts have increased little, if at all, and deployment of  new fiber-to-home services was too small to affect the overall results.

The maximum advertised download speed among the most popular service tiers, weighted by the number of panelists in each tier, increased from 72 Mbps in September 2014 to 105 Mbps in September 2015, a growth of 45 percent, the FCC says.

Likewise, the percentage of customers able to buy gigabit connections remains small, and actually cannot be tracked in the report, as the study examined only the “most popular” tiers of service, which top out at 300 Mbps.

source: FCC  

The point is that consumer purchasing behavior, which indicates “most” consumers buying services at lower rates than a gigabit, is partly a matter of supplier investments and packaging (including price points and bundling) as well as consumer demand. Most consumers do not seem to buy the “fastest” tier of service.

Shared Spectrum On Many Levels is Coming

Federated Wireless and Alphabet have demonstrated interoperability between their respective spectrum access systems (SAS). The SAS is the key enabler of shared spectrum allocation at the heart of the Citizens Broadband Radio Service (CBRS).

The 3.5 GHz CBRS is a revolutionary approach to increasing the supply of communications spectrum, protecting the rights of licensed spectrum owners while also enabling use of such spectrum by sub-licensees, or on a best-effort basis in other cases.

The CBRS will mean an additional 150 MHz of spectrum can be made available to new communications users and applications without the costly relocation of existing users to allow shared use by new commercial entities.

In principle, spectrum sharing will make possible a wider use of existing communications spectrum, allowing present licensees priority access, while also allowing secondary licensees access to unused or lightly-used spectrum, as well as supporting unlicensed, best effort access when primary or secondary users do not require use of the assets.

Such dynamic spectrum allocation mechanisms are quite new, as traditional allocation mechanisms were highly static, giving exclusive use to some licensees, whether that spectrum was used, or not, and often specifying what applications could be run, and just as often what platforms could be employed.

As spectrum in the low and mid-bands remains relatively scarce, dynamic allocation will improve the efficiency and intensiveness of use of those assets.

The other new development is sharing of different spectrum assets across licensed and unlicensed boundaries, such as bonding of mobile and Wifi assets.  Significant spectrum sharing of this type is expected to be a key feature

The advent of 5G mobile networks, for example, will feature the use of “bonded spectrum” approaches such as License Assisted Access (LAA) to aggregate across spectrum types, LTE Wi-Fi Aggregation (LWA) to aggregate across technologies, CBRS/License Shared Access (LSA) to share spectrum with incumbents and other deployments, says Qualcomm. In addition, there will be new platforms such as Qualcomm’s “MulteFire” that provide quality-assured services exclusively in unlicensed spectrum.

All of those developments represent a revolutionary approach to spectrum usage, moving away from command-and-control to more-dynamic allocation processes.