Digital Redlining or Response to Demand?

Terms such as digital redlining imply that U.S. internet service providers upgrade neighborhoods able to pay for higher speed internet access underinvesting in poorer neighborhoods. At some level, it is hard to argue with that point of view, at least where it comes to gigabit internet access. 

Google itself pioneered the tactic of building in neighborhoods where there is demonstrated demand, building Google Fiber first in neighborhoods (typically higher-income areas) where potential customers were most interested. Other gigabit service providers have used the placing of deposits for the same reason. 

And regulatory officials at the local level seem to now agree that “universal service” (building a gigabit network past every home and business) is desirable in some cases, but not absolutely mandatory in all cases. The thinking is that allowing new internet service providers or facilities to be built wherever possible is a better outcome than requiring ubiquity, and getting nothing. 

Also, higher-speed facilities often are not found everywhere in a single market or city. CenturyLink does sell gigabit internet access in Denver, just not everywhere in the metro area. That is not necessarily “redlining,” but likely based on capital available to invest; expectations about financial return; customer density or any other combination of business issues that discourages the investment in new access facilities. 

The economics of communication networks also are clear. Density and cost per location are inversely related. Mobile networks typically have 10 percent of cell sites supporting 50 percent of usage. About 30 percent of sites carry about 80 percent of traffic. That has been true since at least the 3G era.  

In fixed networks, network cost and density also are inversely related. So population density has a direct bearing on network costs. In the U.S. market, network unavailability is concentrated on the last couple of percent of locations.  

With cable operators already holding at least 70 percent share of the internet access installed base of customers, any new investment in faster facilities faces a tough challenge. Any new fiber to home network, for example, essentially is playing catch-up to a cable operator, as roughly 80 percent of U.S. households already also are reached by gigabit speed cable networks. 

And cable share has grown, up from possibly 67 percent share in 2017. 

That noted, internet speeds do vary by geography: speeds in urban areas frequently are higher than in rural areas. But the argument that large numbers of U.S. households are underserved often is correct, depending on what standard one wished to apply, and how one defines the supplier market.

Some claim 42 million U.S. residents are unable to buy broadband internet access, defined as minimum speeds of 25 Mbps in the downstream.  That actually is incorrect. 

Virtually every household in the continental United States is able to buy 25 Mbps or faster service from at least two different satellite providers. But those who claim “42 million” people cannot buy broadband simply ignore those choices, and focus only on the claimed availability of 25 Mbps service by fixed network providers. 

There are other estimates which also vary wildly. Roughly 10 percent of U.S. households are in rural areas, the places where it is most expensive to install fast fixed network internet access facilities, and where the greatest speed gaps--compared to urban areas--almost certainly continue to exist.

In its own work with TV white spaces, Microsoft has targeted perhaps two million people, or roughly a million households, that have no fixed network internet access. That assumes there are two people living in a typical household, which is below the U.S. average of roughly 2.3 to 2.5 per household.

Recall that the definition of broadband is 25 Mbps downstream. Microsoft has argued that 20 million people (about 10 million homes) or perhaps eight percent of the population (perhaps four percent of homes) cannot get such speeds from any fixed network service provider.

Microsoft also has cited figures suggesting 25 million people cannot buy broadband--presumably using the 25 Mbps minimum standard, most of those people living in rural areas. 

That conflicts with data from Openvault that suggests 95 percent of the U.S. population can buy internet access at a minimum of 25 Mbps, while 91 percent to 92 percent can buy service at a minimum of 100 Mbps. 

Using the average 2.5 persons per U.S. household average, that suggests a universe of about 10 million U.S. homes unable to purchase internet access at 25 Mbps from a fixed network supplier, in 2018. What is not so clear is the percentage of households or persons who can do so using a mobile network. 

None of that explains urban areas with slow speeds, though. There the issue is more likely to be high construction costs in urban areas where underground construction is necessary, along with demand expectations that are lower than in suburban areas. That is true whether it is electrical lines or communications networks being considered.   

But at least one Microsoft analysis suggests that about half of all U.S. households are not using 25 Mbps access. The claim is that 162.8 million people are “not using the internet at broadband speeds.” That seems to clearly contradict data gathered by firms such as Ookla and Opensignal suggesting that average U.S. speeds are in triple digits.

In 2018, the average U.S. broadband speed was 94 Mbps, according to the NCTA. That same year, Ookla reported the average U.S. speed was 96 Mbps. 

It is not quite clear how the Microsoft data was generated, though one blog post suggested it was based on an analysis of “anonymized data that we collect as part of our ongoing work to improve the performance and security of our software and services.” 

The claim of 162.8 million people “not using the internet at broadband speeds” (probably using 25 Mbps as the definition) equates to about 65 million households, using the 2.5 persons per household definition. That does not seem to match other data, including the statistics Microsoft itself cites. 

What remains difficult, but might explain the divergence, is if applications and services include both apps run on smartphones as well as PCs and other devices connected to fixed networks. That would explain the number of users, while usage on mobile networks might account for large numbers of sessions where 25 Mbps speeds downstream were not noted, or perhaps it was the upstream speed definition (minimum of 3 Mbps) that was the issue.  

Even then, downstream average 4G speeds in 2018 were in excess of 40 Mbps downstream, so even that explanation is a bit difficult. 

Perhaps there are other ways to make sense of the data. There is a difference between users (people) and households. There is a difference between usage and availability; usage by device (mobile, PC, tablet, gaming device, sensor); application bandwidth and network bandwidth. 

Perhaps the issue is application performance on a wide range of devices including mobiles and untethered devices using Wi-Fi, which would reduce average experienced speeds, compared to “delivered access speed.” 

Methodology does matter. So do the costs and benefits of broadband capital investment under competitive conditions, in areas with high construction costs or low demand for advanced services, especially when newer platforms with better economics are being commercialized. 

Telecommunications is a business like any other. Investments are made in expectation of profits. Where a sustainable business case does not exist, subsidies for high-cost areas or universal service support exist. 

The point is that every human activity has a business and revenue model: it can be product sales, advertising, memberships, subscriptions, tax support, fees, donations or inheritances. Children have a “parents support me” revenue model, supported in turn by any of the aforementioned revenue models. 

But every sustainable activity has a revenue model, direct or indirect. The whole global communications business now operates on very different principles than the pre-competitive monopoly business prior to the 1980s. We still have a “universal service” low end, but we increasingly rely on end user demand to drive the high end. 

Our notions of low end change--and higher--over time. We once defined “broadband” as any data rate of 1.544 Mbps or higher. These days we might use functional definitions of 25 Mbps or 30 Mbps. Recall that 30 Mbps--in 2020--was called “superfast” as a goal for U.K. fixed network broadband. 

Few of us would consider 30 Mbps “superfast” any longer. Some might say the new “superfast” is gigabit per second speeds. But that is the change in real-world communications over just a decade. What was a goal in 2010 now is far surpassed. 

What some call “redlining” is simply a response to huge changes in the internet access and communications business. “Maximum” is a moving target that responds to customer demand. “Minimums” tend to be set by government regulators in search of universal service. 

As independent internet service providers cherry pick service areas where they believe the greatest demand for gigabit per second internet access exists, so do incumbents. 

Similar choices are made by providers of metro business services; builders of subsea connectivity networks or suppliers of low earth orbit satellite constellations and fixed wireless networks. They build first--or pick customer segments--where they think the demand is greatest.

Up Next: Mobile Substitution for Fixed Internet Access

Mobile substitution has been a huge driver of revenue, market share and profit margin change in the consumer connectivity industry. Long distance revenues, voice revenues have been the big obvious examples. 

The next areas to watch are video entertainment and internet access. 

Parks Associates, for example, reports more than 12 million U.S. households have cancelled their home broadband service and use only mobile broadband for internet access.

That equates to more than 15 million households using mobile broadband service exclusively. Some three million of those households that have never had a home internet subscription, and have been mobile-only from the start. 

Other estimates of mobile-only internet access support that observation. As much as 20 percent of U.S. households were mobile only for internet access in 2017, Deloitte estimated, with take rates correlating with household income. Mobile-only behavior occurred in 15 percent of richer homes and 20 percent in poorer households. 

The new wrinkle is 5G for fixed wireless, which some proponents suggest could add another 15 percent to 20 percent market share for mobile operators, with share taken directly from fixed network suppliers.  

Over the top application substitution has been the other big driver of revenue and profit margin change, diminishing service provider revenues and profits from text messaging, long distance calling and voice calling. 

In the connectivity business, the "mobile substitution" trend has occurred in phases, and affected a wider range of products over time.

Mobile voice supplanted fixed voice as the preferred consumer use case. "Mobile substitution" for voice has been a global trend since the advent of 2G networks. In fact, mobile is the only sort of ubiquitous network in most parts of the world. But that now might become an issue for internet access as well.

“I will say over time--a three to five year time horizon--unequivocally 5G will serve as a broadband, a fixed broadband replacement product,” former AT&T CEO Randall Stephenson said. “I am very convinced that that will be the case.”

“Back in the 90s everybody was saying wireless would never serve as a substitute for fixed line voice because there wasn't sufficient capacity,” Stephenson said. “Well it is a substitute for voice.”

Mobile messaging displaced voice. Mobile social media displaced fixed modes. Mobile turn-by-turn navigation displaced dedicated GPS devices and maps.

Mobile phones displaced watches, cameras, music players and flashlights. Mobile entertainment video is encroaching on fixed modes of viewing (TV sets, PC or tablet screens).

Mobile internet access, which began to find niches in the 3G era, found many more use cases in the 4G era (both for home broadband replacement and on-the-go access). In developing regions, mobile internet access is the preferred form of access.

In the 5G era, we will see a big test of fixed wireless and mobile wireless as a substitute for fixed network access in a wider range of settings. No later than 6G, we might routinely be using mobile access as a substitute for home broadband. The key enabling trends are higher routine speeds and some shifts of pricing plans and consumer behavior.

source: Parks Associates 

Cost and speed are cited by cord cutters as reasons for ditching fixed network internet access. Obviously that behavior could change if cabled network speeds are upgraded and cost becomes more appealing. 

At least initially, it can be hypothesized that mobile substitution will be most appealing for households with modest bandwidth requirements, as that is where the best match of fixed wireless speeds and pricing with customer demand. 

If the average U.S. household consumes 269 GB per month, according to OpenVault, and the average number of people per household is 2.5, than per-user consumption is about 108 GB per month.  

If a typical household spends $66 for fixed internet and between $40 and $60 a month for mobile data, we can roughly estimate the breakeven point where going all-mobile for internet access costs no more than what already is spent for mobile and fixed internet access, ignoring a bit of hassle factor for doing so.

Assume per-user mobile data costs $50 a month, while per-household fixed data costs $70 a month, and about $28 per user in each household. For a multi-user household of an average 2.5 users, that implies something like $78 per user for an all-mobile approach.

It’s a rough estimate, but that implies usage allowances currently set at about 110 GB, priced at about $80, would be competitive offers for many users, and allow substitution for fixed internet access.

U.S. Broadband Faster, More Available Than in Europe, Study Finds

On some measures, U.S. consumers have access to, and use, faster Internet access services, more than consumers in Europe, in large part because U.S. policies have encouraged investment, compared to European policies that historically have been more focused on wholesale access to encourage competition.

It also would be fair to note that most communities have access to at least two facilities-based providers, a fact that arguably has encouraged investment in upgraded facilities.

Google Fiber’s entry also has had a direct impact, encouraging other Internet service providers to drop their prices to $70 to $80 a month for gigabit access, and to invest in such facilities.

Some would argue Google Fiber’s decision not to allow wholesale access, and thus reap the benefits of capital and operating investments, is one example of how there are incentives to invest. Google Fiber cannot be compelled to sell wholesale access, especially at low rates, to other competitors.

A far greater percentage of U.S. households have access to Internet access at 25 Mbps or faster, the study argues.

On a national basis, 82 percent of U.S. consumers can buy access at 25 Mbps or faster, compared to 54 percent of Europeans.

In rural areas, 48 percent of U.S. rural consumers have access to 25 Mbps or faster services, compared to 12 percent in Europe, according to a study by Christopher Yoo, University of Pennsylvania law school professor.

The study also found that the United States had 23 percent fiber-to-premises coverage, compared to 12 percent in Europe.

The United States also has 86 percent coverage of Long-Term Evolution (4G LTE), compared to 27 percent LTE coverage in Europe.

U.S. download speeds during peak times (weekday evenings) averaged 15 Mbps, below the European average of 19 Mbps, however.

During peak hours, U.S. actual download speeds were 96 percent of what was advertised, compared to Europe, where consumers received only 74 percent of advertised download speeds.

U.S. consumer experience in the areas of latency and packet loss also was better than in Europe.

U.S. broadband “stand-alone” prices were cheaper than European broadband for all speed tiers below 12 Mbps.

U.S. broadband was more expensive for higher speed tiers. The caveat is that most U.S. consumers do not appear to pay “stand-alone” prices for fixed network broadband, typically buying bundles that in essence discount prices.

Consider that 97 percent of AT&T customers bundle their video subscription service with other AT&T services.  Cable providers have 75 percent or more of their subscribers on a bundle of video and broadband, AT&T notes.

Standard coverage is available in 99.5 percent of U.S. households and 99.4 percent  of European households. Standard fixed coverage is available in 95.8 percent of U.S. households and 95.5 percent of European households, the study found.

Mobile broadband coverage at 3G speeds also fall within quite similar ranges, covering

98.5 percent of U.S. households and 96.3 percent of European homes.

Yoo attributes a regulatory “light touch” for higher U.S. investment in broadband and expanded access to high-speed internet in the US compared to Europe.

The University of Pennsylvania Law School study also showed that Europe’s treatment of broadband as a public utility, which some net-neutrality advocates are pushing for in the US, has hindered internet access growth there.

The study notes that, in Europe, where telecom service revenues have fallen by more than 12 per cent since 2008, the financial return for investing in next-generation networks is less promising, since those facilities must be leased to competitors, allowing them to avoid building their own networks.

Those rules also reduce the “scarcity value” of new networks, though.

“The empirical evidence thus confirms that the United States is faring better than Europe in the broadband race and provides a strong endorsement of the regulatory approach taken so far by the US,” said the study, which was written by law professor Christopher Yoo.

The differences in regulatory regimes also contributed to $562 of broadband investment per household in the US versus $244 per household in Europe, where regulators treat broadband as a public utility and promote service-based competition where new players lease existing facilities at wholesale cost.

U.S. policy has emphasized facilities-based competition by firms that can build new facilities, and then reap any rewards, without enabling competitors.

U.S. policy also shows the importance of competition between cable TV and telcos. Although many advocates regard telco fiber to the home as the primary platform for faster networks, the data suggest otherwise.

In Europe, DOCSIS 3 (39 percent coverage as of 2012) and VDSL (25 percent) both contribute more to fast network coverage than does FTTP at 12 percent.

In terms of actual subscriptions, the distribution skews even more heavily towards cable connections (DOCSIS 3), with 57 percent of subscribers, followed by FTTP at 26 percent,

and VDSL at 15 percent.

Even if one were to focus exclusively on FTTP coverage, the data clearly give the edge to the U.S. market. As of the end of 2011, FTTP service was available in 17 percent of U.S.

households and 10 percent of European households. By the end of 2012, FTTP service increased to 23 percent of U.S. households and 12 percent of European households, the study found.

But mobile Internet access now is more important than ever. As of the end of 2011, Long Term Evolution networks covered 68 percent of the U.S. population and eight percent of European households.

By the end of 2012, LTE coverage increased to 86 percent of the U.S. population and 27 percent of European households. Note the difference in data collection, though. European dat is “by household.” U.S. data is by “person.” That understates European coverage figures, to the extent that households have more than a single occupant.

On the other hand, average download speeds at peak periods are higher in Europe, compared to the United States.  

Internet Access Too Expensive; Too Slow?

One often hears complaints that U.S. broadband is “too expensive” or “too slow,” as one hears that municipal internet access services are needed to do the job internet service providers will not do. It always is worth evaluating such claims.

Is U.S. broadband “too slow.” Maybe not. About 80 percent of U.S. households can buy gigabit per second service if they choose, looking only at coverage by cable TV networks. Yes, households in rural areas often cannot buy service at such speeds, but speeds improve all the time, for a greater number of locations. 

According to comparethemarket.com, the United States ranks fifth among 50 for downspeeds.

Is U.S. internet access too expensive? Maybe not. According to a new analysis by NetCredit, which shows U.S. consumers spending about 0.16 percent of income on internet access, “making it the most affordable broadband in North America,” says NetCredit.  

In Europe, a majority of consumers pay less than one percent of their average wages to get broadband access, NetCredit says. In Singapore, Hong Kong, New Zealand and Japan,  10 Mbps service costs between 0.15 percent and 0.28 percent of income. 

Back in 2017, actual U.S. broadband speed was more than 100 Mbps, on average, according to Akamai. Upstream speeds varied by location, but are at or above plan goals in most cities, with performance varying by provider.   

Another study by Deutsche Bank, looking at cities in a number of countries, with a modest 8 Mbps rate, found  prices ranging between $50 to $52 a month. That still places prices for major U.S. cities such as New York, San Francisco and Boston at the top of the price range for cities studied, but do not seem to be adjusted for purchasing power parity, which attempts to adjust prices based on how much a particular unit of currency buys in each country.

source: McKinsey  

This chart from McKinsey compares cost trends for various products purchased by consumers in the 22 Organization for Economic Cooperation and Development countries. It shows price changes, indexed to inflation, between 2002 and 2018, covering nearly two most-recent decades. 

Here is a Bureau of Labor Statistics analysis of U.S. prices for about the same time period.  It shows that U.S. mobile communications prices have dropped almost identically with the OECD data for communications services. 

That matters since mobile phones are the clear consumer choice for using voice services . 

source: BLS 

One can see the same general downward price trend for U.S. internet access, normalizing for higher consumption over time. 

source: Strategy Analytics 

Some will argue that is the wrong way to look at consumer internet access prices. Some will point to non-inflation-adjusted retail prices, or note that posted U.S. retail prices are high by global standards. Without adjusting for different costs of living in different countries, one can conclude U.S. Internet prices are too high. 

Adjusting for local prices, as when comparing the cost of an Internet access subscription to national income statistics, yields a different answer, namely that prices are quite low in developed countries. 

Granted, there always are challenges. Rural areas are harder to serve than urban areas. Poorer countries have a harder time supplying access at low prices than richer countries. 

A normalization technique used by the International Telecommunications Union is to attempt to compare prices to gross national income per person, or to adjust posted retail prices using a purchasing power parity method. 

There are methodological issues. Gross national income is not household income, and per-capita measures might not always be the best way to compare prices, income or other metrics. But at a high level, measuring prices as a percentage of income provides some relative measure of affordability. 

Looking at internet access prices using the PPP method, developed nation prices are around $35 to $40 a month. In absolute terms, developed nation prices are less than $30 a month. 

source: ITU

That is worth keeping in mind.

According to BroadbandNow, less than half of U.S. households have access to fixed network internet access at prices of $60 or less per month. The implication is that this is a problem. 

Maybe it is not generally a problem. The average global price of a fixed network internet access connection is $73 a month. So average U.S. prices are significantly lower than the global average.

How Much Can the "Median" Household Afford to Spend on Internet, Video, Mobile?

With the caveat that higher-income households might not face so many choices, the cost of linear video subscriptions arguably is a problem for median-income households.

Consider the key issue of ability to pay. There is some evidence that explains why lower-cost streaming alternatives (live TV and non-real time) are growing. Researcher SNL Kagan said in 2015 that DirecTV subscriptions represented as much as 2.4 percent of median household income. That was expected to grow to perhaps three percent of median household income by about 2021.

That is unsustainable, some of us would argue. Increasingly, entertainment video is part of total household spending on mobile communications, internet access and other related services. So the issue is not just how much is spent on video subscriptions, but also how much is spent on communications of all types.

In developed countries, household spending on internet access, for example, is less than two percent, but added to just one linear video subscription could mean that as much as 5.4 percent of household spending is for one video subscription and fixed network internet access.

Then one has to add mobile service, which in a four-person household could be close to $200 a month, or perhaps another five percent of household income. So now more than 10 percent of median household income would possibly be spent on mobility, TV and internet access.

That exceeds what most median households probably could afford to spend (again, with the caveat that higher income households might spend more than that amount).

In 2016, the entire household entertainment budget in the United States was about four percent of average income before taxes in 2016, for example.

source: Nscreen Media

According to another estimate, U.S. households spend 5.6 percent of their household income on “entertainment,” but that includes spending on pets, tickets to events, audiovisual equipment such as TVs, hobbies and other services that include video subscriptions. Other U.S. Bureau of Labor Statistics data for 2016 suggest households spend about five percent of income on “entertainment.”

But a study by Pew Research suggested in 2016 that U.S. households spent only about 2.3 percent of income on entertainment.

The implications are clear. Whether you believe a household will spend two percent or five percent of income on entertainment, that budget does not change much. In 1996, Pew researchers say households spend about $1444 on entertainment. In 2016, that amount was $1496. That is the median spending for households with two working parents and two children.

On a per-capita basis, that is only about $374 in 2016, but s single linear video subscription at $80 a month would have represented $960, or 64 percent of the total family budget for all entertainment.

Also, keep in mind that healthcare spending in 2016 was about eight percent per household, according to the Bureau of Labor Statistics.  Even spending on clothing is nearly And recall that pet expenditures also are considered “entertainment.”

If you want to know why a shift to lower-cost video subscriptions is happening, part of the reason is that traditional video subscriptions cost too much, as a percentage of total available entertainment spending.

source: Creditloan.com

Still, some 63 percent of U.S. households have both linear TV and at least one streaming service as well, according to Leichtman Research Group. But more change is coming. In the second quarter of 2018, more live streaming accounts were added than linear accounts were lost. In fact, live streaming accounts grew as much as four times faster than linear accounts were lost.

In the second quarter, the major linear service providers lost about 417,000 accounts, while six million to seven million live streaming accounts were added.

In addition to Netflix, Amazon Prime and other streaming services that provide non-real-time content, there is a new class of “live TV” streaming providers that are certain to become more important, as they are an even more-direct replacement for linear (live TV) services.

In the second quarter of 2018, for example, such co-called “virtual multichannel video programming distributors (vMVPDs) added 868,000 net accounts.

The total number of vMVPD accounts then reached 6.73 million, an increase of 119 percent, year over year.

Linear TV accounts (cable, satellite, IPTV, vMVPD) fell to 93.78 million, according to Strategy Analytics.

source: Strategy Analytics