Broadband Cable Association of Pennsylvania

NewsClips

June 17, 2013

There is a popular story going around about the state of America's broadband networks: service is pitifully slow, hugely overpriced and limited to the richest neighborhoods - whereas in Europe, service is cheap, fast and widespread because regulators force big companies to make room for smaller service providers.

Almost none of this is true: America's broadband networks lead the world by many measures, and they are improving at a more rapid rate than networks in most developed countries. Much of the disparity between perception and reality has to do with timing. Before the recession, American Internet service was on a very different path, not keeping pace with large sections of Western Europe and East Asia. But that began to change as the economy turned around. Private investment and advances in technology, brought about by a competition policy that encouraged cable and phone companies to improve their networks, have propelled America's networks forward.

Over the last three years America's broadband systems have doubled in speed, while Europe's have remained stagnant. And that will continue, because broadband companies here are installing advanced fiber-optic technology faster than Europe, and most of the world's users of the fastest mobile broadband technology, 4G/LTE, live in America. This is particularly impressive for a nation where low urban population density imposes higher actual costs on network upgrades than in most of the world, and in which government subsidies are rare. In fact, America outranks all nations with similar population density.

Much of the recent growth has come thanks to our system of facilities-based competition - that is, each service provider is responsible not only for broadband service but for the underlying infrastructure, which encourages them to improve network quality to win customers. Most European providers still depend on telephone wires controlled by the local phone company, leasing infrastructure they have no ability to improve. Only two European nations, Belgium and the Netherlands, have more network-based competition than America, and many European regulators are now seeking to mimic the American model.

As the reality has changed, many critics have simply stopped discussing international rankings. Others repeat outdated statistics: Susan Crawford, a law professor and author of the widely praised book "Captive Audience," relies on 2009 data to claim that America is 22nd in average broadband speed among developed countries - and falling. This is despite the fact that the source of that data, the technology company Akamai, has updated its analysis showing America in eighth place - and rising. Critics have also focused on price and profit, claiming that America's broadband companies earn windfall profits at the expense of customers. But company financial reports show that American providers are four times less profitable than their European counterparts.

Others say the reason almost a third of Americans don't subscribe to broadband is because networks are underbuilt or overpriced. Yet over 96 percent of households are in areas with access to wired broadband, while prices for entry-level plans are now the third-lowest in the world. The major causes for low subscribership, as extensive survey research shows, are low interest in the Internet and minimal digital literacy. And too many American households lack the money or interest to buy a computer. As a result, more Americans subscribe to cable TV and cellphones than to Internet service. Our broadband subscription rate is 70 percent, but could easily surpass 90 percent if computer ownership and digital literacy were widespread.

Indeed, the most critical issue facing American broadband has nothing to do with the quality of our networks; it is our relatively low rates of subscribership. This is one place where we could learn from the rest of the world. The leaders in broadband subscriptions, like South Korea and Singapore, use outreach, education and computer ownership programs to get people online. We are starting to see something like this in outreach and education initiatives in the United States, including Connect2Compete and Comcast's Internet Essentials. It is too early to evaluate them fully. But at least they address a genuine, present-day problem - rather than an overwrought historical phantom. New York Times

Liberty Media Corp. Chief Executive Greg Maffei recently met with Time Warner Cable Inc. Chief Executive Glenn Britt to discuss the benefits of mergers in the cable sector, said a person familiar with the situation, the latest sign that Liberty is interested in sparking consolidation in the industry. Liberty, which early last month acquired a 27% stake in pay-television operator Charter Communications Inc., didn't make any proposal for a specific deal. Instead, at the meeting, which occurred several weeks ago, the two discussed the advantages in companies joining forces, the person said. It isn't clear the two saw things the same way, however.

Word of the discussion between the two men comes just 10 days after Liberty Chairman John Malone told Liberty shareholders that Charter had the strong balance sheet and stock valuation to be a "horizontal acquisition machine looking at other assets in the U.S. cable business." Charter is the eighth-biggest U.S. pay-television operator by subscribers. Mr. Malone, who led a wave of consolidation in the cable industry in the 1980s and 1990s, added at the shareholder meeting that the "name of the game in the cable business is scale."

At the same time, Time Warner Cable faces some uncertainty. As previously reported, Mr. Britt, 64 years old, is expected to step down at the end of this year when his contract expires, though the company hasn't publicly addressed the issue. And by some measures, Time Warner Cable's performance has lagged behind that of its peers. In the first quarter, the company lost 119,000 video subscribers, a deeper loss from the year-earlier quarter when it lost 94,000. Its bigger rival Comcast Corp. also lost video customers in the same period, but only 60,000 in comparison. Throughout last year, Time Warner Cable's video-subscriber losses worsened or stayed flat, even as Comcast's improved.

Time Warner Cable executives have acknowledged disappointment in their video numbers and have blamed weak results earlier this year on too-aggressive promotional offers that led to customer disconnections after the discount expired. The company has taken steps to improve its video performance, including changes to its pricing and technological updates. Meanwhile, Charter is run by Tom Rutledge, an executive who previously worked at Time Warner Cable and more recently Cablevision Systems Corp. Mr. Malone told Liberty shareholders last week that Charter has "probably the best operating team in the business."

It isn't clear that Liberty has any specific targets in mind for Charter to go after. One challenge in pursuing Time Warner Cable: Charter is half its size, so a combination of the two companies would require Liberty to inject significant cash to stop itself from being diluted. Time Warner Cable, whose shares advanced 7.8% on Friday after CNBC reported the meeting between Mr. Britt and Mr. Maffei, has a market capitalization of about $30 billion. With its net debt, its enterprise value is $51 billion. Charter has a market capitalization of $11.8 billion and debt of $12.8 billion, making it approximately half Time Warner Cable's size. Time Warner Cable, the fourth-biggest pay-television operator by subscribers, has about 12 million video subscribers, compared with Charter's nearly four million. The merger talk comes as growth in the pay-TV industry has almost disappeared, with about 90% of U.S. homes now subscribing to some form of traditional video packages. At the same time, steadily rising programming costs threaten to erode margins in the video business. Smaller operators get charged higher fees per video customer than bigger cable companies, which receive discounts for their scale. But even Time Warner Cable has been vocal about the unsustainability of rising costs for the video business.

Cable operators have largely been able to offset softness in their video businesses with the growth of broadband in recent years. But the cable industry has experienced new pressures to spend capital to upgrade its networks as newer entrants such as Verizon Communications Inc.'s FiOS and Google Inc.'s Google Fiber gigabit Internet offering challenge the speeds offered by cable to homes today. Consolidation would help give operators scale to finance such upgrades. Mr. Britt told analysts last week at the annual cable-industry convention in Washington that consolidation is likely over time. "We are competing against bigger companies with bigger footprints, and there's a need for the overhead you can spend on the technology, the guides and all that kind of stuff that we're doing, that Comcast is doing. You can have great marketing if you have more overhead and that sort of stuff." Wall Street Journal

Links