The Facts

This past week, the U.S. Conference of Mayors (“The Voice of America’s Mayors in Washington, DC”) gathered in Philadelphia for a summit on innovation. Philadelphia is Comcast Country; as the late Senator Arlen Specter said at a hearing in 2010 about the Comcast-NBCU merger, the tower of Comcast’s headquarters “distinguishes the Philadelphia skyline.” (Sen. Specter also said that day that Comcast was a “really very good corporate citizen” and that “the competency of its management is brilliant.” Specter was well-supported by Comcast.)

From Philadelphia, where it has about two-thirds of the pay-TV market and is capturing more and more subscribers fleeing insufficient DSL Internet connections, Comcast manages its other territories. Comcast covers a lot of ground: According to the Department of Justice, Comcast’s footprint in 39 states accounts for 50 million American households and about 45% of the U.S. population. And when it comes to the bundle of high-speed Internet access and TV programming that is most popular with Americans, Comcast faces competition from Verizon FiOS in only 15% of that footprint.

As a result of all this market power, Comcast is in harvesting mode: Its average revenue for each of its users is up to $155 (roughly double the amount in 2004) and in 2012 it ploughed back into its network just 13% of the revenue it reaped from subscribers. Comcast’s revenue is sharply up, margins are extremely healthy (almost 30%), and the company’s capital spending levels have been declining since 2007. Comcast faces no real government oversight.

So the appetizers must have been delicious when Comcast graciously hosted the scores of visiting mayors, government officials, and tech leaders at an evening reception during the summit. The next day, David Cohen, Comcast’s Executive Vice President, spoke during lunch.

Cohen had put out an op-ed through the Philadelphia Inquirer the day before, and his message to the mayors and other luminaries was consistent: Everything is better than fine when it comes to high-speed Internet access in America. We’ve got the most subscribers; private entities have invested more than $1.2 trillion in our networks since 1996; and critics of American high-speed Internet access are essentially un-American. According to two sources who contacted me, the speech was quite vehement.

Cohen’s piece is seriously misleading. (Other broadsides from the incumbents suffer from the same disease.) I have a feeling the mayors and other city officials who heard Cohen speak this week knew that. Here are the facts:

Investment by the incumbents is shrinking, competition is non-existent, America is falling far behind other developed nations, prices are high, and we have no path to the fiber upgrade the country desperately needs. Mayors could fix this for their communities by using their power to set policy for their rights of way, by guaranteeing loans to competitors willing to build fiber (including wholesale fiber rings), by aggregating demand so that competitors can thrive, and by not taking no for an answer.

About a third of Americans — 100 million people — still don’t have even a very slow high-speed fixed Internet access connection at home. Less than half of us have a connection that meets the slow FCC standard of 3 Mbps downloads. Since 2007, we’ve seen little change in this pattern.

The FCC has set a low standard for what counts as high-speed Internet access. (They use the term “broadband,” but that’s an industry term.) They’re keeping track of anything over 3 Mbps download and 768 kbps upload speed. This week they released a report that relies on industry-provided data about those connections. That report says that only 45% of U.S. households subscribe to a residential fixed-location connection with speeds that meet or exceed the FCC threshold. That’s the number that matters.

Comcast and the other incumbents keep pointing to mobile wireless and claiming that its use in America changes this picture. That’s just not true.

Although there has been growth in mobile wireless over the last few years, it is a complementary service: 83% of Americans with smartphones also have a wire at home. So although mobile wireless subscriptions have increased (and represent about 43% of the connections over 3 Mbps in America), that doesn’t mean that more American individuals are getting connected to the Internet at high speeds. It means that more Americans, many of whom already have slow wires at home, are buying smartphones.

Mobile wireless won’t provide the speed and capacity that fiber will. And because of usage caps and overage charges imposed by AT&T and Verizon Wireless, it’s prohibitively expensive to use a mobile wireless connection in the same way you would use a wire. (In other words, even though your mobile wireless connection might be capable of the same download speed as a slow cable connection, the number of bits you can download per month for the same price is far lower.) In fact, Americans don’t: I understand that mobile wireless use of Netflix, the most popular online application, is in the low single digits.

According to GigaOm, “If you watch a movie like Moulin Rouge in HD, you’re going to use around 3.5 GB of data.”  Unfortunately for anyone subscribing to the “shared-use” plans of Verizon and AT&T, just one such movie viewing will far exceed the 1-2 GB data caps for a single-device plan costing $85-$100 a month. Overage charges (over and above data charges) can be as much as $15/GB for those unfortunate enough to go beyond the allotted usage cap for their particular plan.

This means that, to watch Moulin Rouge or some comparable movie in HD would cost an additional $17.50-$35 (or $52.50 for those exceeding their monthly cap).  And that’s just the cost for delivering the movie on Verizon’s or AT&T’s 4G LTE network. Access to the movie itself will also trigger a charge.

Bottom line: Don’t be confused by claims that collapse fixed access together with mobile access. They’re different markets. The FCC doesn’t even include mobile wireless in its calculations of connections that exceed 10 Mbps.

Back to wires. It’s true that between 2002 and 2012 high-speed Internet access subscriptions to residential fixed-location connections grew from 14 million connections to 82 million, or an average growth rate of 19%. But averages can be misleading. Growth in adoption slowed around 2007 and hasn’t picked back up. We were at about two-thirds adoption then, and that’s about where we are now.

Many people — particularly poorer people – say that price is an important reason why they don’t subscribe. We know that adoption of high-speed Internet access fixed connections at home is tightly correlated with socio-economic status.  The FCC’s “Internet Access Services: Status as of June 30, 2012″ report, released this week, confirms this: The lowest-income counties in America have an adoption rate for 200 kbps access (even slower than the 3 Mbps baseline) of only 42%; the highest income counties have an adoption rate of 81%.

Cohen and others will claim that speeds in America are getting faster. It’s true that the percentage of existing fixed connections qualifying for the FCC’s very low definition of high-speed Internet access is up to 64%, according to industry figures. But, again, a lot of this change is in mobile wireless and thus meaningless in terms of America’s overall competitive picture. And, again overall, this isn’t very good news: It just means that we’re moving from ridiculously slow to really slow. Still, 19 million Americans can’t buy a 3 Mbps connection, at any price, according to the most recent FCC data, and 100 million of us don’t subscribe.

Very few Americans – just 12 million connections – are experiencing speeds that exceed 25 Mbps, even though other countries are adopting policies that will drive universal adoption of at least 100 Mbps (and in some places speeds ten times faster than that). Speeds in America are abysmal, and we pay more per Mbps than every other developed nation save Mexico, Greece, New Zealand, and Chile.

            Cohen claims that 82% of Americans have access to wired high-speed Internet access of speeds exceeding 100 Mbps. But these services, provided in 85% of the country by only the local cable incumbent (the large cable companies never enter each others’ territories, and Verizon FiOS is available to just 15% of the country) are extraordinarily expensive: Comcast charges $114.95 per month for 105 Mbps download services. In Seoul, you can get symmetrical 100 Mbps (equal upload and download) access for $30/month, and there are three or four competitive choices.

The FCC tells us that whatever the cable companies’ capabilities, Americans are finding these prices to be too high. Very few of us are willing to pay for these hyper-expensive services. We’re paying more per megabit than most of the developed countries in the world. Average access speeds in the US, according to the OECD, place the US as 16th of the 34 industrial nations.

Americans would buy high-capacity connections if they were available at a reasonable price. We’re an impatient and innovative people. But we’re stuck with a marketplace in which just a few players control access and set prices.

Why has this happened? Policy: We have deregulated this market. Instead of competing and investing, the major players have tacitly found ways to cooperate and consolidate. They are allocating their capital to benefit their shareholders and have no incentive to invest in the fiber upgrade the country needs. Competition is weak and only now beginning to emerge.

The key point Cohen and other incumbents fail to mention is that they have succeeded in avoiding competitive entry in many parts of the country. You’d think that in markets characterized by high demand and extraordinarily high prices competitors would show up to grab share. But that’s not happening. It could if we changed our policies and supported mayors who wanted to ensure competitive fiber in their communities.

Right now, Verizon has backed off from building FiOS, its fiber-to-the-home product, to any new areas. In the end, it will cover just 18 million households. Verizon has no incentive to change gears; it’s collaborating with the cable industry.

Now, we’ve seen a 10% growth in the number of new localized fiber providers – there are more than 640 of them now in this country. But these are small actors; fiber adoption numbers are still vanishingly low.

None of the large companies (AT&T, Verizon, Comcast, Time Warner Cable) has any incentive to invest in a fiber upgrade for the country: They have made their capital investments, divided markets (“you take wireless, I’ll take wired”), and are in harvesting mode.

Verizon’s wired capital spending as a percentage of revenue declined from 28% in 2000 to less than 16% in 2012; wireless, from more than 30% in 2000 to less than 12% in 2012. AT&T’s capital spending as a percentage of revenue is now at 15% (wires) and 16% (wireless). Comcast’s comparable percentage is 12% of revenue, down from 37% in 2001; Time Warner Cable has seen the same pattern.

These companies are, instead, sending money back to their shareholders.

Between 2002 and 2012, AT&T’s dividend increased by 64%, while Verizon’s expanded by 47%.  And for the past two years, both telcos have been paying out substantially more dividends per share than they’ve earned in profits. In 2012, AT&T’s shareholder returns-to-capital investment ratio actually exceeded 100%.  This means that the nation’s largest telco returned 17% more cash to shareholders than it invested in both its wired and wireless networks combined.

For Comcast, total shareholder returns (dividends and buybacks) as a percentage of capital expenditure has climbed steadily, from 30% in 2009 to 81% in 2012.

Similarly, Time Warner Cable’s shareholder returns as a percentage of capital expenditure have increased from 37% in 2010 to 82% in 2012.

That’s the picture. It’s not good for the country as a whole. It can be fixed. It will take political will and community involvement to address this situation. We need to reclaim the pro-competition, pro-free market, pro-value creation regulatory ideal – and mayors will play a very important role.

 

[revised to add links and fix typos]

 

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