Broadband Cable Association of Pennsylvania

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February 20, 2014

Google Inc. is considering expanding its fiber network to nine more metropolitan areas, intensifying the competitive threat the Web giant could pose to cable operators that now dominate the broadband market. Google said Wednesday it has begun early discussions with 34 cities in the nine areas, including San Antonio, Salt Lake City, Atlanta, Portland, Ore., Nashville, and Phoenix. Google Fiber now operates in Kansas City and Provo, Utah and had previously announced plans to extend its service to Austin, Texas. Google hasn't disclosed how many people have signed up for its service.

In its first two markets, Google Fiber offers download speeds of up to one gigabit per second for a monthly charge of $70, vastly faster than any broadband service offered by major cable and phone companies. It also offers a pay-television service for additional fees. Comcast Corp.'s top broadband offering is only half as fast as Google's and costs $399.95 a month. Those speeds are only available in a portion of Comcast's service area. For the Web giant, faster Internet speeds mean consumers can gorge themselves on more of its services, including Google Search and YouTube, providing it the opportunity to show them more advertising. "People do more of what they love on the web when speeds are fast," Kevin Lo, general manager of Google Fiber said on a conference call Wednesday.

The extent of Google's ambitions in offering fiber remains unclear: some in the media industry have long regarded the venture as an experiment, aimed at motivating broadband providers to boost their speeds. Building a fiber network is enormously costly, even for as deep pocketed a company as Google. Google gave little clue about its longer term plans on Wednesday. It doesn't expect to get to all of the 34 cities, the company said in its blog post, although a spokeswoman said later that Google hoped to get to most of the 34 cities. Mr. Lo said the extensive planning that the cities will be exploring with Google would ultimately benefit any broadband provider that wants to boost speeds. Mr. Lo didn't offer specifics regarding how much the expansion of Google Fiber will cost.

Cable investors reacted negatively to the news, sending cable stocks falling. Comcast Corp fell 3.7% while Time Warner Cable Inc. dropped 2.8%. The two companies announced a $45 billion merger agreement last week, a combination that if approved by regulators would give Comcast 32 million broadband subscribers, before any divestitures. Among the cities Google has pinpointed for expansion include several markets where Comcast offers service, including Atlanta, San Jose, Portland and Nashville, as well as regions of North Carolina where Time Warner Cable serves customers. "Competition is good in these local markets," said San Antonio Mayor Julian Castro on Wednesday's conference call, since it leads to lower prices for consumers and improved service.

Cable operators provide broadband to 52 million American households out of a market of about 90 million homes with broadband as of the third quarter of 2013, according to SNL Kagan data. For cable operators, growth in broadband has offset a stagnant TV market in the past couple of years. Still, cable companies haven't ramped up speeds to gigabit levels, questioning whether there is consumer demand. Technology companies argue that faster speeds make it possible to offer better services to consumers, like streaming video. In five years, Google Fiber "could turn out to be a significant, profitable business for Google and headwind for [traditional broadband providers]," Bernstein Research analyst Carlos Kirjner wrote in a note on Wednesday.

Cable operators have already come under competitive pressure in recent years, from private companies working with local municipalities to build fiber networks, as well as phone companies like Verizon Communications Inc., which invested billions of dollars building its fiber optic FiOS network that has signed up millions of customers for both broadband and TV. While Verizon doesn't offer gigabit speeds, full-fiber networks like FiOS are easier to upgrade to faster speeds than the pipelines built to homes by cable companies which use a mix of coaxial cable and fiber.

Cable operators have responded. Comcast offers its fastest broadband speeds in FiOS markets. Google hasn't picked any FiOS markets among the 34 cities it announced Wednesday. Meanwhile, Time Warner Cable first deployed its top speed of 100 megabits per second in Kansas City, where it competes with Google Fiber. Google's plans could be bolstered by indications Wednesday that the Federal Communications Commission is likely to encourage towns and cities to build their own broadband networks, in hopes of fostering competition in broadband. Google's announcements could also factor into regulators' review of the Comcast-Time Warner Cable deal. A potential roadblock to that deal might come if regulators determine there isn't enough competition in providing broadband Internet service to consumers. Wall Street Journal; more from New York Times

The Federal Communications Commission said Wednesday it would again issue rules to prevent Internet service providers from blocking or slowing down access to content providers that don't pay a toll to reach consumers. However, analysts said the rules could open the door for broadband providers to cut deals with content companies like Netflix Inc. or Google Inc. to give their products some kind of advantage, either though speed or prominent placement.

The FCC's announcement means it doesn't plan to reclassify broadband as a public utility at present, as Democrats and public-interest groups had urged. Doing so would give the FCC much greater authority to set rules for broadband providers. Supporters say treating all Internet traffic equally, a concept known as net neutrality, is crucial to keeping the Internet open and allowing smaller companies to compete with the biggest content providers. But the courts have ruled against the FCC's previous attempts to enforce net neutrality on companies like Comcast Corp. and Verizon Communications Inc. that provide Internet connections to households and businesses. Last month, the U.S. Court of Appeals for the District of Columbia Circuit threw out FCC rules barring providers from blocking or slowing down websites, but it acknowledged the FCC has some authority to regulate broadband-company practices under a section of the 1996 Telecommunications Act that gives it broad authority to encourage U.S. broadband service.

The FCC said Wednesday it won't appeal the D.C. Circuit's ruling. Instead, it plans to take advantage of Section 706, of the law to propose new rules in the late spring or early summer, after soliciting public comment. "The FCC must stand strongly behind its responsibility to oversee the public interest standard and ensure that the Internet remains open and fair," FCC Chairman Tom Wheeler said in a statement. "The Internet is and must remain the greatest engine of free expression, innovation, economic growth and opportunity the world has ever known."

The court said in January that the FCC could impose a "no blocking" rule if it found a different legal justification. Mr. Wheeler's statement indicates the FCC will do just that, by establishing a minimum standard for how broadband companies treat content. The rules would likely outline expectations and unacceptable practices for broadband providers, and provide for case-by-case enforcement when websites complain of unfair discrimination. Analysts said the new rules could pave the way for deals between Internet providers and content companies to carry their content to consumers at higher speeds. Paul Gallant, a telecom policy analyst at Guggenheim Securities, said his reading of the commission's principles is that the agency is more likely to focus on policing anti-competitive conduct than on discouraging the content deals. "I think the FCC will be inclined to permit voluntary paid prioritization deals," he said.

Even with that caveat, Republicans are opposed to the new proposed rules. "I am deeply concerned by the announcement that the FCC will begin considering new ways to regulate the Internet," FCC Commissioner Michael O'Rielly said. "The Obama administration refuses to abandon its furious pursuit of these harmful policies to put government in charge of the Web," House Energy and Commerce Chairman Fred Upton (R., Mich.) and Rep. Greg Walden (R., Ore.) said in a statement. Any rules would have to be approved by a vote of the five-member commission, which includes three Democrats and two Republicans.

Net neutrality supporters, however, were disappointed with the FCC's decision not to reclassify broadband Internet as a public utility, which they had argued was the only way to make the rules stand up in court. Andy Schwartzman, a telecom lawyer and adviser to the anti-media consolidation group Free Press, said not reclassifying broadband "would be repeating the biggest mistake" made during prior efforts by former FCC Chairman Julius Genachowski.

Broadband providers have argued that reclassification would be disastrous for the industry because it would subject them to regulations designed for the landline phone system. "We think reclassification would probably be the ultimate death of the broadband market," Comcast Executive Vice President David Cohen said in an interview last week. "We think it would dry up private investment and destroy all the gains made in the broadband market in the U.S." Cohen's comments were made in the context of his company's bid to acquire Time Warner Cable Inc. Comcast has already agreed to abide by the FCC's net neutrality rules, even though they were struck down in court, as part of its acquisition of NBC-Universal in 2011. Comcast has also agreed to extend the agreement to Time Warner Cable Inc. subscribers if that acquisition is approved.

Mr. Wheeler has left the reclassification option open for now, which could serve as a deterrent for broadband providers seeking to challenge the rules in court again. A Verizon spokesman said the company said it wouldn't appeal last month's court ruling, and that it is too early to determine whether it would challenge the FCC's latest rules. As part of the process, the FCC will also examine ways to encourage competition in the broadband market. That could include removing legal restrictions that prevent cities and towns from building their own broadband or Wi-Fi networks. Wall Street Journal

Investors gobbled up $2.2 billion of bonds from Comcast Corp., giving the cable operator a vote of confidence about a week after it surprised Wall Street by setting plans to buy Time Warner Cable Inc. for about $45 billion in stock. Bankers managing the sale received $12 billion in orders, allowing them to offer higher prices on the debt. A person familiar with the transaction said the bond sale's size was in line with the company's expectations.

Comcast sold 10-year bonds yielding 3.669% and 30-year bonds yielding 4.806%. They were priced at 0.93 of a percentage point above comparable 10-year Treasury debt and 1.10 percentage points over comparable 30-year Treasurys. Bond yields fall when prices rise. The strong showing for the deal reflects optimism from some bond investors about Comcast's acquisition of Time Warner Cable, as well as good demand for longer-dated debt from such institutional investors as pension funds and insurance companies looking to move into safer, higher-quality assets.

Comcast said it would use the proceeds of Wednesday's sale for general corporate purposes, which could include paying off $900 million of debt that comes due in April as well some commercial paper, which is very short-term debt used to fund operations. Bond investors have largely cheered the planned Time Warner Cable acquisition, in part because of Comcast's decision to pay for the purchase with stock rather than with cash. Selling bonds to raise cash for the deal could have sent prices on Comcast's existing debt falling. Instead, Comcast bonds have rallied. The company's 2023 bonds recently yielded 0.71 percentage point more than Treasurys. Before the deal was announced, the debt was trading at about 0.80 percentage point more, according to MarketAxess.

In conjunction with the transaction, Comcast said it would buy back another $10 billion of shares. The repurchase could be financed with bond sales, but some investors said the acquisition still makes Comcast a stronger competitor. Time Warner Cable bonds have also rallied since the Comcast deal was announced. Debtholders had been worried that Time Warner Cable could be bought instead by junk-rated Charter Communications Inc., an event that could lead to rating downgrades and lower bond prices. Comcast is rated single-A-minus, an investment grade rating. Time Warner Cable carries triple-B ratings, also investment grade. Bond buyers have been wary that as the economy improves, companies will sell more debt to buy other firms. Bondholders can take a hit if a lower-rated firm buys a higher-rated company. If the Comcast deal is "as bad as it gets with releveraging on the industrial side, we're not in bad shape," said Gary Cloud, co-portfolio manager of the about $325 million Hennessy Equity and Income Fund, which owns Comcast bonds. Wall Street Journal

Elk County is upgrading its phone system, with the county commissioners voting Tuesday to replace the aging system currently in place with a more modern program. The Elk County Commissioners meeting included board approval of a contract between Zito Media and the county for purchase of a digital Voice Over Internet Protocol (VOIP) system to be used in county administrative offices, as well as the county courthouse and prison. The initial fee will be $15,292 for the equipment, with monthly payments of $1,807.34, county officials said. Commissioner Dan Freeburg said the up front costs will be offset by monthly savings of between $400 and $500.

The new phone system will also incorporate the county's Domestic Relations office and Children and Youth Services - at a 25 percent reduction in cost, according to county clerk Jean Zore - as well as two Elk County District Court offices. Freeburg said the upgrade is not likely to result in changes to the county directory, new phone numbers or service outages, saying, "it should be a seamless transition." The outgoing system is so old that the county is no longer able to find replacement parts, according to Freeburg, who added the new system offers county offices more versatility, greater capacity and more advanced features. The commissioners also agreed on Tuesday to sell the old county 911 building on Boot Jack Road in Ridgway by naming local realtor Anderson & Kime Inc. to represent the sale. There was no word on an asking price or any prospective buyers for the 10-acre property.

Freeburg said the county will maintain possession of a still operational 911 call tower at the location, adjacent county equipment building and some surrounding acreage. He characterizes the parcel as "heavily wooded" and suited for a seasonal residence. The new Elk County 911 Center is located on Montmorenci Road in Ridgway Township. The commissioners also reminded attendees that effective March 1, there will be a single point of entry at the Elk County Courthouse due to security updates. The next commissioners meeting will be held on March 4. Bradford Era

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