Why cable stocks surged after the FCC’s net neutrality proposal

The incumbent ISPs have a clear track record of moving in a direction that's dangerous to Google: they react badly to new technology (Bittorrent throttling/blocking), they acquire new conflicts of interest (Comcast+NBC, DSL providers introducing TV), they do what they can to cause trouble for Netflix, and they lobby and sue against even the regulations that shouldn't pose any trouble. In the meantime, the regulations Google needs to protect its core business haven't made any tangible progress until this year.

Fair enough. So we don't have anything to compare them to. But it sounds like you're saying they would be better off being regulated as utility companies then.

> It's hard for me to hang out on HN, and read all the news about acquisitions and divestitures, and come to the conclusion that companies are in the habit of selling profitable business units that have room for growth. I don't think that's the most treasonable conclusion to draw from the evidence.

There is a difference between being profitable and having room for growth. It's not as if Frontier could ever more than double their customer base in the same geographical area, it's just not going to happen. You can certainly imagine different investors being interested in higher growth/higher risk investments vs. more stable profits with less risk, so that it would make sense to separate them into different companies.

> Note also that Verizon invested $7 billion in building FiOS in these states. Even if you value the wireless assets as the bulk of the GTE deal, it's still not clear that Verizon made their money back when you add together their investment in FiOS + what they paid for those customers originally.

There is also the matter of the ~15 years worth of subscription fees they received from millions of customers in the intervening period.

> The tech-media narrative is that these companies have incredibly valuable monopolies over customers, and that telcos don't build fiber because these monopolies allow them to make almost as much money milking DSL customers. If that narrative were true, a FiOS customer shouldn't be worth a lot less than a DSL customer in a sale, because what's being sold is the valuable monopoly over the customer.

There is the value of the monopoly and there is the cost of keeping it. The problem with DSL customers is that you can only retain them in the long term against faster cable systems by eventually doing the FiOS upgrade. So that expected future cost discounted by however many years it can reasonably be put off has to be subtracted from the value of the DSL customers, which makes them worth very little in 2015.

> Back of the envelope calculation, assuming the value of a voice : DSL : FiOS customer is 1 : 2 : 6. That still values a FiOS customer at ~$3,500.

I suspect you're double-counting the voice customers. Otherwise about half their customers would have to be subscribing to a landline telephone with no internet service. More likely the ~3.7 million voice customers are just the 2.2 million high speed data customers and 1.6 million FiOS customers who mostly also have telephones. So using your 6:2 FiOS:DSL ratio makes the FiOS customers worth ~$4285, more than the $3900 it takes to do the upgrade.

And I would guess that ratio is low if anything, again because the DSL customers will someday have to be upgraded to fiber or they'll switch to cable, but the FiOS customers already have been.

> You're assuming that Frontier can raise prices to $100 for internet-only service. What I'm asserting is that if they could, they already would have!

Duopolies are complicated. Obviously to change the price of internet service both the cable company and the phone company have to do it at about the same time or customers will just switch to the other one.

The problem is that they're both currently selling bare internet service below cost as an artifact of history. When DSL first came out it wasn't that much faster than dial up and dial up could be had for ~$15/month plus the phone line you already had. So DSL got priced in competition with that under the assumption that you were already paying for a phone line, i.e. the price of the internet service was the marginal cost of internet once most of the telecommunications infrastructure was already paid for by phone subscribers. Cable did the same thing by pricing it as the marginal cost of internet assuming customers already had cable TV. If you take away the assumption that customers are also subscribing to phone and TV then the price is wrong. But neither of them can fix it unilaterally and they aren't allowed to collude. In theory you can call that a market problem, but that's assuming it's reasonable to call a duopoly a market. It seems at least as much like a regulatory problem.

> If cable companies had arbitrary pricing power, and could increase their internet-only rates to nearly their internet+TV rate without losing customers, then Netflix isn't even a threat to them. So the whole angle of "net neutrality is necessary to keep cable cable companies from strangling Netflix" would be predicated on the idea that cable companies don't have a rational understanding of their pricing power.

Netflix makes a non-zero amount of profit which the ISP might have if it has a competing video service that could lose customers to Netflix. Even if the ISP doesn't inherently need it to be profitable, having it would make them more profitable. That gives them the incentive to kill Netflix even after they've exhausted the extent of their pricing power over bare internet service.

> Look at what's happened with Verizon's previous three divestitures. Two went bankrupt, and Frontier's stock has tanked from the third and never recovered.

To some extent this is expected. Utilities are traditionally monopolies. Duopolies in natural monopoly markets have major problems. They've both paid the fixed cost of offering service and the marginal cost of gaining an additional customer is trivial whereas the marginal benefit is the entire subscription fee, which is the recipe for a price war. Or, more realistically, a price freeze because neither wants to raise or lower prices before the other regardless of costs or inflation. And one solution to the duopoly problem is for one of them to go out of business. Then the other one can make enough money to justify making investments... but has to be regulated because they no longer have any competition.

> I'm not posing a solution, I'm asking what Google Fiber can teach us about the economics of building telecom infrastructure. Does it make sense to invest all that money if you can't make money off the content side?

And the answer is yes, if you can make a decent profit from internet service by itself. The question is whether there is any way to make that happen better than operating the business as a regulated monopoly. And maybe there isn't. Have any suggestions?

> And even if we assume Google would never do anything bad, if their core search/online services business was ever threatened by competitors, don't the market dynamics give them a strong incentive to leverage their network against that threat?

Of course they do. That's why that alternative is terrible and we need something else instead. People love Google Fiber because it's Fiber and they aren't doing that, but if the only thing stopping them is their own free will rather than any kind of market forces or government regulations then it's only a matter of time before the need for an actual solution reasserts itself.

They do significantly better than other utility companies and are significantly less volatile than most companies that provide the same ROI.

> Zero day license v. 6-9months after release.

Network programming is broadcast over the air for free from day zero, just by putting commercials in it, and for that $9/month Netflix is producing a fair amount of commercial-free zero day original content on top of what they're licensing. That's really not it.

The math on this is very simple. It takes some number of dollars to operate a data network. It takes some number of dollars to license content. If you add these two numbers together, people are willing to pay more than the sum to get both of the things. It stands to reason that if the content is instead sold by some third party who assumes the cost of licensing the content, that cost can be removed from the cost of the data service while still allowing both to be profitable.