Verizon Wireless has been named the top provider of mobile network service in America, according to a survey by market research firm RootMetrics. Ranking No. 1 (or tied for No. 1) in 48 states for overall performance, 44 states for reliability, 45 states for speed — and particularly good with mobile Internet, where it tops the rankings in 46 states for data, Verizon Wireless is now officially the best mobile provider in the country.
But what about wireless’s 20th Century cousin? Turns out, the news is less than happy for consumers still attached to fixed, “wireline” service.
Honey, the Internet Pipes Are Clogged Again
There’s a theory floating around out there on the Internet that too many people are downloading too many movies on Netflix (NFLX) and Amazon.com (AMZN) Prime, and that all of this downloading is clogging up the Internet’s “series of tubes” and creating congestion.
If that were true, then the logical — the economic — solution to the problem would be for ISPs to charge more for Internet access, or set limits on Internet usage and charge more for customers exceeding those limits. Such actions would curb demand for Internet access, reduce downloading activity, and unclog the pipes.
That’s the theory. Now here are the facts.
Sorry, Sir. I Can’t Find Anything Wrong With Your Pipes
Last week, the U.S. Government Accountability Office released the preliminary results of a survey it conducted among ISPs, industry experts and consumers regarding Internet usage and congestion. What it found was that, indeed, “some wireless ISPs” have congestion issues. And to solve the problem, they do indeed impose data usage caps and higher prices for exceeding those caps.
However, GAO also asked the major wireline ISPs — companies like Comcast (CMCSA), ATT (T) U-verse, and yes, Verizon (VZ) FiOS as well — what they’re seeing, Internet traffic-wise. Surprisingly, “wireline ISPs said that congestion is not currently a problem.”
And yet, according to GAO, these wireline ISPs are nonetheless beginning to charge their customers based on the volume of Internet data they use, a policy known as “usage-based pricing,” or UBP. So far, only about 25 percent of Internet users say they’ve run into UBP demands by their ISPs — but that number seems set to increase. GAO’s survey shows that seven of the top 13 wireline ISPs now impose UBP on their customers “to some extent.”
The reason: UBP can generate more revenues for ISPs.”
Paying the Price, for One Reason or Another
Could this mean that, even in the absence of congestion, ISPs are starting to impose UBP and charge for Internet traffic just because they can?
ISPs and other industry experts argue that they need more revenue “to help fund network capacity upgrades as data use grows.” And maybe that’s true. After all, ISPs forecast that wireless data traffic will grow 20 percent annually between now and 2018.
Then again, a quick look at the financial statements these companies have on file with the Securities Exchange Commission shows that they aren’t exactly hurting for revenues — or profits — to begin with.
- ATT, for example, did nearly $129 billion in business last year, and earned $18.2 billion in net profit on those revenues — a 14.1 percent net profit margin.
- Verizon’s 2013 revenues totaled more than $120 billion, and the company earned $11.5 billion in business on these revenues — a 9.5 percent profit margin.
- Even Comcast, lacking the phone companies’ massive wireless business as a source of sales, sold $64.6 billion worth of goods and services in 2013. Its $6.8 billion in net profit yielded a profit margin better than Verizon’s, if not quite so rich as ATT’s — 10.5 percent.
So as businesses, all three of these companies appear to have plenty of revenue already, with which “to help fund network capacity upgrades,” were they so inclined. What’s more, their profits are increasing at a phenomenal rate. Data from SP Capital IQ show that net profit margins at each of Comcast, ATT, and Verizon expanded in each of the last two years.
Follow the Money
As for what these companies actually do with the profits they earn, let’s look at another example. Data from SP Capital IQ show that Comcast’s cable division in particular (Comcast also owns NBCUniversal) boasted earnings of $21.4 billion — 41 percent of revenues — before accounting for the costs of interest on the firm’s $44 billion debt load, for taxes, depreciation and amortization costs. So most of those “EBITDA” profits were actually earmarked for paying down these costs.
And how much of Comcast’s revenue was earmarked for capital spending “to help fund network capacity upgrades”? That was a much smaller figure: $5.4 billion.
Don’t be surprised if in your next cable bill, they ask you to chip in to make up the difference.
Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool both recommends and owns shares of Amazon.com and Netflix. Try any Motley Fool stock picking newsletter service free for 30 days.
A handful of companies dominate the cable industry, and two of the biggest, Comcast (CMCSA) and Time Warner Cable (TWC), are planning to merge. Not only is the already shallow pool of cable providers shrinking, but in many areas there are few good substitutes, says Steve Beck, managing partner at cg42, the business consulting group that released a study on dissatisfaction with cable service. Among the study’s findings: 73 percent of customers believe their cable provider takes advantage of consumers’ lack of choice.
What to do: Bruce Leichtman, a researcher who specializes in the broadband and entertainment industries, says about 9 percent of Americans have access to satellite TV (such as Dish (DISH) and DirecTV (DTV)). About 40 percent have access to so-called overbuilders: noncable providers such as Verizon (V) that launch their own networks in markets where cable networks already exist. Online services such as Netflix (NFLX) and Hulu offer movies and TV shows to subscribers, no cable box required.
A promotional offer can get you phone, TV and Internet service combined for well under $100 a month. But after the promotional period ends, your bill will increase significantly, even though your cable provider continues to advertise the very same cheap deals. As it turns out, those low introductory rates are reserved for new customers only. Existing customers aren’t eligible.
What to do: Don’t accept the price hike without a fight. You can haggle your way back to promotional-level pricing with a call to your cable company. Tell the phone agent that you’ll switch providers if the price isn’t lowered, and don’t shy away from mentioning a friend who got a better deal on a similar contract. A Kiplinger writer saved $35 a month on cable services alone by negotiating tips.
The explosion of cable networks has taken some of the fun out of channel surfing. Even a basic cable package can feature dozens of channels, while premium packages can run into the hundreds. Yet why should you be forced to pay for Nickelodeon and Sprout when you’re childless and really only interested in watching “Cops” reruns on Spike TV? A la carte cable sounds appealing, but be careful what you wish for, says Leichtman. Bundling channels keeps costs down, he says.
What to do: For consumers who want to cut the cable cord and only pay for specific types of programming, set-top boxes and adapters that link your TV directly to online streaming services are an option. Amazon.com (AMZN) recently released Fire TV, a tiny box that connects to your HDTV. The Microsoft’s (MSFT) Xbox One and Wii U, Sony’s (SNE) PlayStation 4 and Roku also have Web-to-TV streaming capabilities, and each can connect to a variety of programming sources, including Netflix, Hulu, Amazon Instant Video and some sports streaming sites. You have to pay the upfront cost of the box or adapter (usually $30 to $130, but upward of $400 for an up-to-date gaming system) and the subscription fee for the streaming services — usually less than $10 a month each.
The best prices per service for phone, TV and Internet often come in bundles. If you are in the market for all three, then a “triple play” bundle deal from your cable provider could be the answer. But there’s a catch: The rock-bottom prices on bundles often require a two-year agreement, with the cheapest rates only applying to the first 12 months. That means the price can go up for months 13 to 24. Cox, for example, offers a triple-play bundle with a two-year agreement for $90 a month for the first year, but the price jumps to $120 a month the second year. There can be an early termination fee if you opt out before the two years are up.
What to do: Create your own “bundle.” There’s a good chance you’re happy with your cable company’s Internet service, considering cable broadband speeds increased 450 percent in 2013 alone, according to the National Cable Telecommunications Association. If so, keep it and look elsewhere for phone and television services. Unlimited domestic phone service from Web-based Skype, Vonage or Viber ranges from 1.9 cents a minute (Viber Out) to $25 a month (Vonage). Apps allow you to use your computer, tablet or smartphone to make free calls. Streaming services for less than $10 a month each offer access to movies and TV shows. A do-it-yourself bundle that uses Netflix ($8.99 a month) and Hulu Plus ($7.99) for programming, plus Skype for calling (unlimited calls to the U.S. and Canada for $2.99 a month) and Comcast for high-speed Internet service (about $70 when not on promotion) totals about $90 a month. Compare that to $120 (not on promotion) for a comparable triple-play bundle from Comcast.
The base fee you pay for your cable service is just the start. You’ll fork over more for extra equipment (digital video recorders, digital adapters, upgraded wireless routers), premium programming (sports packages, movie channels) and premium services (faster Internet connections).
What to do: Do you really need a DVR for every TV in the house, a subscription to the Australian Rules Football network and download speeds better suited for NASA Mission Control than your living room? Probably not. You could save a small fortune simply by paying attention to what you really need and use. Cutting out DVRs and digital adapters on little-used TVs could slash your annual cable bill by $100 or more. Instead, invest in an HD antenna for the spare bedroom. A $40 Mohu Leaf indoor antenna, for example, will grant you access to local channels in high definition without the rental cost of a cable box. Satellite is another cheap option. From Dish, you can get a no-frills plan with about 55 channels for $20 a month during a promotion.