Overall growth in broadband subscriptions is slowing but is still in positive numbers in the U.S. That’s the conclusion of a tabulation by Leichtman Research Group. Looking at the fourteen largest cable and telco broadband providers, which account for “about 95% of the market”, the aggregate count grew by only 190,000 high speed subscribers in the second quarter of this year. According to Leichtman, that’s the lowest quarterly figure since they starting keeping track of Internet service providers fifteen years ago.
It’s not a fluke. The past seven quarters are the quarters with the lowest net subscriptions adds over those years.
A deeper dive into the numbers, though, shows that the bad news is mostly coming from telephone companies. Cable companies are still posting respectable growth figures. The seven on Leichtman’s list – Comcast, Charter, Altice, Mediacom, WOW, Cable One and Cox – added 523,000 high speed subs, which was “the most in any second quarter since 2008”.
That’s not bad for a quarter that’s known for heavier than average churn figures, although it’s about half of the one million net new subs cable gained in the first quarter of 2016. Over the last year, cable broadband subscriptions have grown by 3.5 million units.
Sometimes the simplest laws bring the biggest changes. That might be the case for a proposal from California assemblyman Mike Gatto (D – Los Angeles) to make it as easy to cancel broadband or video service as it is to sign up for it. Assembly bill 2867 adds one sentence to California consumer protection law…
If a cable or Internet service provider enables an individual to subscribe to its services through an Internet Web site, it shall also enable all of its customers to cancel their subscriptions through the Internet Web site.
A one-click disconnect puts consumers’ fingers on a trigger that can blow a giant hole in service providers’ financials. Churn is the leading killer of business models in subscription services businesses. It’s the rate at which subscribers leave. The cold math involved means that a rising churn rate stops growth, raises marketing and other subscriber acquisition costs and can send a company into a death spiral.
It’s also a sign of a competitive market, with customers facing fewer barriers to switching and providers aggressively poaching each other subs. That would be less true, of course, in the duopoly market that cable and telephone companies have lobbied themselves into, and not at all where pure monopolies can be found. But punching a hole in the surly walls Comcast, AT&T and their brethren use to fence in customers is a useful step in the right direction.
Gatto is well positioned to move his bill through the California legislature – he’s the chair of the assembly’s utilities committee. But that also makes him well positioned to either benefit from cable and telephone lobbyists’ largesse, or become their target. They will fight it like they’ll fight no other piece of legislation in Sacramento this year. His enthusiasm, or lack thereof, depends on which side he’s on.
The road to broadband nirvana has its ups and down. Adoption figures – the number of people who pay for regular broadband access – are on a general upward trend, despite a tremor in the latest Pew Research Center report. But the market is messy, and sometimes people who subscribe to in-home broadband service decide to drop it. Churn out, in industry jargon.
In comparison with their “never-adopter” counterparts, un-adopters are significantly more likely to cite cost, the potential to use the Internet elsewhere, and the inadequacy of their computer as reasons for their discontinued use. In particular, our models show that households with incomes up to $40,000 are more likely to select “too expensive” as their reason for stopping service – suggesting that policies focusing on un-adopters may need to cater to more than very low-income households.
Translation: like every other commodity, demand for Internet access depends on price. But only 4% of U.S. households can be classified as former broadband subscribers, as opposed to 29% who have never bought it at all, as the Benton Foundation figures suggest. It’s a figure that’s in line with a service that’s not quite a necessity like electricity, but expendable in a particularly tight pinch, like phone or cable subscriptions.
Retirees, though, are likelier to cite “no need” as a reason for dropping home broadband. This is where the Benton Foundation’s analysis misses the boat completely. Its suggestion is to target them with “digital literacy/educational efforts that include strategies to assist those who do not feel Internet content and services are relevant to their lives”.
Reeducation camps designed to assist people with counter-revolutionary feelings enjoyed a brief resurgence after the fall of Saigon, but haven’t proven particularly effective since. How about creating services that are relevant? That’s the way to attract and, more to the point, keep customers.
Tagg is a mobile pet tracker and promising veterinary diagnostic tool, offered by Snaptracs, a Qualcomm subsidiary. The hardware costs $100, with ongoing service at $8 per month for the first pet and and $1 for each additional one.
That eight bucks gets you a text message whenever your dog strays from home, with GPS feeds to help you find him. Or your cat, if it’s one of the few big enough to handle the weight and tolerant enough to wear it.
It also lets you analyze the GPS and accelerometer data it collects all day to assess his activity level and give you a rough indicator of his overall health. The online analysis can be passed on to your veterinarian for assessment.
It’s popular enough that Snaptracs is wholesaling the hardware to vets and using them as a distribution channel. But Snaptracs is missing a bet by not including them in the ongoing revenue stream.
True enough, Tagg isn’t any use without an ongoing subscription and it’s a new enough product that early sales growth will swamp anychurn at this point. But the novelty will wear off and the actual utility will diminish in value: most dogs don’t often stray far from home (although the ones that do can lead you on a merry chase) and you don’t really need daily confirmation that he’s getting his usual 16 hours of sleep. The business model is heading toward an annual churn rate north of 50%.
That’s where vets can help. Use more of the sensors on the chipset – thermal and audio, for example – to monitor vital signs, mine the data and pass it on to vets. They can tell you when your dog might be having health issues and be frontline churn fighters. And the more skin they have in the game, the more enthusiastically they’ll fight. Right now, they don’t have any.
Snaptracs is working on the technology needed to boost utility, but not as yet on the business model. Parent company Qualcomm is a dominant player in mobile hardware and intellectual property with a poor track record selling services and content. To turn that around, they need to give their distribution channel partners a reason to help.
Nearly all of the city-scale, mainly WiFi-based wireless ISPs of the past three years are dead. Some, like Philadelphia, lumber on as zombie ventures. A few small town systems will continue to operate as long as the social and political consensus supports the subsidy required. And there are a couple of big city projects that haven’t burned through their initial operating capital yet.
But the rest are dead. The disease that killed them was cash flow hemorrhage, brought on by virulent churn.
Churn measures the percentage of total subscribers who cancel service and have to be replaced, in a given period of time. It also lets you calculate subscriber lifetime. In the mobile phone industry, a typical 2.5% monthly churn rate results in an average subscriber lifetime of about 40 months. Take an ARPU (monthly revenue per sub) of, say, $53, subtract $30 a month to provide service to a subscriber, and there’s sufficient cash flow over that period to pay off a subscriber acquisition cost (SAC) of perhaps $400 and still have something left over to improve the balance sheet, or grow the business, or even pay dividends. The business model works, although different companies implement it in a variety of ways with a wide range of results.
Let’s run the numbers for a municipal (or municipally bounded) wireless ISP (WISP). First of all, ARPU is limited by competition from DSL. At a typical monthly cost of $20 (forgetting for the moment promotional rates that are a few dollars less initially), and with performance metrics far superior to WiFi, DSL keeps WISP rates in the $15 range. (DSL’s superior performance is constantly debated, mostly by wireless equipment manufacturers and other vendors, but the hard fact is that it’s almost always faster, usually has significantly greater effective market coverage and, most importantly, always delivers a more consistent subscriber experience. Some will argue this assertion, but real world results trump arguments).
From that $15, subtract $12 for a small system (5,000 subs, say) and $8 for a large system (more like 50,000 subs) to pay for the cost of providing service. These cost figures are highly optimistic, it’s very possible to see a monthly operating cost of twice that range. But for the sake of discussion, let’s start with a rosy operating cost scenario.
In the best case, then, you have $7 per month left over to pay down SAC, put towards growing your subscriber base and improving your network. Let’s start with SAC. Take just the cost of providing and supporting the installation of CPE (consumer premise equipment, in other words the wireless bridge every subscriber needs to access the service reliably from homes and businesses), the direct cost of selling and activating a new customer, and a little indirect marketing cost, and you’re over $200. But let’s say $200 for SAC.
With $7 of operating cash flow, you’ll need 26 months just to break even on the average subscriber. If you can hang on to that subscriber for as long as mobile phone company does, you have a makeable business case. Unfortunately, WISPs don’t, and can’t, manage that essential trick. WISP churn rates are 2, 3, 4 times and more that of mobile phone companies. At a 7.5% monthly churn rate, which is not particularly high for a WISP, your subscriber lifetime is only 13 months, half what you need to pay the cost of getting and serving a sub. Even a 5% churn rate won’t get you there, and that’s wildly optimistic.
It’s easy to build a spreadsheet and plug in numbers that make it work – lower churn, lower operating cost, lower SAC, higher ARPU. And dozens of would-be municipal wireless ISP operators did just that. But the real world doesn’t pay attention to spreadsheet models and powerpoint presentations.
An $8 operating cost, $15 monthly rate and a $200 SAC are difficult to achieve, but possible. What’s not possible is a monthly churn rate much under 7% or so. And that’s what kills the model. The annual loss (or subsidy) is in the hundreds of thousands of dollars for a small system and in the millions for a large one.
The high churn rate is a direct and inevitable consequence of the competitive position of a WISP versus DSL and other wired technologies. If significantly superior service is available for $20 a month – and it is – people who rely on Internet access (which these days is nearly everyone who has it – it’s long past being a luxury) will pay the extra $5 if they can afford it. Unless they don’t want to sign up for a minimum term of a year or can’t pass the phone company’s credit check standards.
So as a competitive tactic (and often as a matter of public policy), WISPs either adopt easier credit standards and shorter terms or, more usually, all but eliminate those requirements. As a result, the core subscriber profile leans heavily towards households with lower disposable income and credit scores, and people who don’t plan to be in town very long. With this subscriber profile, even a well designed and operated WISP is going to have a high churn rate, well out of reach of a sustainable enterprise.
Mobile workers are touted as the sweet spot for municipal broadband, but they tend to give up on service and churn out too, for a couple of reasons. First, WiFi-based WISPs are not optimized for truly mobile service. When you’re driving around in a car, for example, handoffs from one access point to another are problematic. Second, service ends at the city limits, and it’s a rare private sector or government worker whose job is limited to a single city, except for city employees themselves. Mobile data service from cellular providers is a far better solution to both problems, and people with job-related needs quickly migrate to those platforms.
The grand municipal WISP ventures of the past three years died when the cash transfusions stopped. In some cases, they simply ran out of capital. In others, they had unworkable business models, often resulting from unrealistic demands by policy makers for free service and various other perks. When the subsidies, explicit or otherwise, stopped, the systems went dark. RIP.