For the last few years, an alternate wireless network has been emerging in the U.S.; one not built by the mobile operators but by cable providers. Cablevision, Time Warner Cable, and Comcast have all launched numerous Wi-Fi hotspots in their service areas, and last week Bright House joined the club, turning on 2,000 outdoor and indoor hotspots across the state of Florida. The Multiple Service Operators (MSOs) have latched onto the idea of Wi-Fi as a way of extending their home and business broadband services to customers on the go, and its paying dividends. Why haven’t their mobile counterparts followed suit?

Apart from AT&T, U.S. mobile carriers have been slow to adopt Wi-Fi in their networks. Verizon Wireless only began limited use of Wi-Fi hotspots in big public venues last year. Meanwhile, Sprint and T-Mobile have been content to let their customers take advantage of the plethora of free Wi-Fi in the public domain, they haven’t launched any hotspots of their own. Even AT&T is being fairly conservative. It makes extensive use of use of the café/restaurant/airport network it acquired from Wayport to offload mobile data traffic, but it has only built outdoor networks extensively in New York City. In the rest of the country, AT&T’s outdoor access points are limited to handful of high-profile, high-traffic “hotzones” such as Chicago’s Wrigleyville and San Francisco’s Embarcadero.

Time Warner's Los Angeles WI-Fi network

In comparison, Time Warner’s Wi-Fi coverage of Los Angeles is a dense mass of polka dots covering major intersections, parks and public venues from downtown all the way to Santa Monica and snaking down the coast to Redondo Beach. The MSOs have even expanded their reach by signing network-sharing deals with each another, creating the cable equivalents of roaming networks. Wi-Fi has proven to be tremendously popular with their customers, who get to access the networks for free as long as they’re home cable modem subscribers.

The obvious answer as to why mobile carriers haven’t been as quick to pull the trigger the trigger on Wi-Fi is that they don’t need it from a geographic standpoint. Their networks already cover every conceivable area they could hope to reach with Wi-Fi, so the business case for carriers isn’t coverage; it’s capacity. As more customers consume more network resources, they place tremendous loads on the network’s high-traffic zones.

Many international operators have already gotten wise to the benefits of Wi-Fi for cheap data offload, probably none more than Free.fr, which is building its Free Mobile unlimited and data service on the back of 5 million Wi-Fi “nano cells” embedded in the set-top boxes of its broadband subscribers.

If you’re looking for an example closer to home, Republic Wireless is signing hotspot deals to create a “Wi-Fi first” service that, allowing it to offer unlimited voice and data for a mere a month. Republic acknowledges that it’s service is still experimental and it’s not sure if it can make its unlimited business case viable, but if it weren’t for Wi-Fi, it wouldn’t be able to make the attempt.

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Cox Communications is ending its not-so-grand experiment with mobile on March 30. The cable provider in a statement said it would discontinue its wireless service on March 30, appeasing its mobile subscribers with a 0 service credit for every line deactivated. No matter how good ‘quadruple play’ bundles look on paper, cable providers can’t seem to get the wireless component right.

“Cox is working to make this transition as seamless and easy as possible for our customers,” EVP of product development Len Barlik said in the statement. “We are proud of our employees’ dedication to delivering the excellent customer service that Cox is known for, and we will continue to keep our wireless customers’ satisfaction a top priority during this transition period.”

Cox originally planned to become a full-fledged wireless operator, buying advanced wireless service (AWS) and 700 MHz at auction in the cities where it offers cable service. It tapped Chinese vendor Huawei to build a CDMA networks, partnered with Sprint to provide roaming access outside of its territory and even hinted at a future LTE build to add mobile broadband to its already extensive home and business broadband service portfolio.

However, Cox got off to slow start, launching it’s “Unbelievably Fair” service in just a handful of markets in late 2010 – a year behind schedule. Cox added more markets in 2011, but it showed signs that it was having second thoughts about its mobile strategy. Rather than use Huawei network gear, Cox turned to its roaming partner Sprint to power its service while it expanded into new cities, until May when it revealed that it planned to junk its networks entirely but continue to provide service as a Sprint mobile virtual network operator (MVNO).

Now, with wireless available in roughly half of its cable territory, Cox is abandoning mobile entirely. Why did it fail? With the waves of consolidation in the wireless market it’s becoming increasingly more difficult for a small wireless operator to make it on its own. The money Cox would sink into its own infrastructure wouldn’t produce much in the way of returns. While remaining an MVNO would allow it to maintain its quad-play bundles, the math probably stopped making sense as demand for home phones wanes. Cox was probably merely replacing its customers’ cable telephony service with a far less profitable mobile phone.

The big question is what Cox will do with its spectrum. Cox has already said it plans to sell off whatever networks it has built, but it will find few buyers. A CDMA network using Huawei gear at AWS would be incompatible with all of the major operators networks. The spectrum licenses, however, would be valuable to almost every operator. Leap Wireless and MetroPCS could use the spectrum to grow their regional CDMA and LTE footprints. Verizon Wireless and AT&T both are using 700 MHz for LTE and plan to expand into the AWS bands. T-Mobile’s high-speed packet access plus (HSPA+) network is built at AWS. Sprint is probably the only operator with no conceivable interest in the spectrum. If a bidding war hasn’t started already, Cox is definitely going to see a lot of suitors.

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DSL is on the ropes, and cable companies are seeing their broadband numbers rise, according to data on broadband sign ups during the second quarter. Leichtman Research Group found that the top 18 providers in the U.S. acquired about 350,000 net additional high-speed Internet subscribers in the April-June period. Net broadband additions in the quarter were the second fewest of any quarter in the ten years LRG has been tracking the industry.

That’s pretty significant. It means that new subscribers are hard to come by, so gains for providers will come from the competition — and so far cable and fiber products are the winners there. For every consumer that added service from a telecoms provider, cable providers added three. The top cable broadband providers have a 56 percent share of the overall market, with 8.9 million more subscribers than the top telephone companies – compared to 7.85 million this time a year ago.

But all is not lost for telecom companies — at least those that are upgrading to fiber. AT&T and Verizon added 628,000 fiber subscribers in the quarter (via U-verse and FiOS), while losing 578,000 net DSL subscribers. No wonder Time Warner Cable’s CEO thinks broadband is his company’s future and AT&T’s CEO says DSL is obsolete.

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With Cablevision reporting a loss of 23,000 subscribers and Dish Network shedding 135,000 in the second quarter, the U.S. pay TV industry has lost nearly 200,000 subscribers in the second-quarter — and those are just the ones we know about. But if there was a lack of concern about cord cutters on second-quarter earnings calls, it’s not because operators were unaware of the losses; it’s because in most cases, they didn’t want those subscribers anyway.

As seen in the chart below, public pay-TV providers collectively shed 193,000 subscribers in the most recent quarter. While losses by cable providers are nothing new, they are usually offset by stronger growth in satellite and IPTV providers picking up the slack. That didn’t happen this quarter, as somewhat weak growth by IPTV providers and a big loss at Dish highlighted what seems to be an exodus of pay TV subscribers amidst a weak economy.

When the numbers actually shake out, things are likely to be even worse than this. Keep in mind that these are just the top eight public pay TV providers, and most of those above operate in metropolitan markets. There’s a number of Tier 2 and Tier 3 providers not in this list, and many of those are in rural or underserved areas where the down economy has hit even harder.

Is competition really the cause?

On most of the earnings calls we sat in on over the past several weeks, there seemed to be a common refrain: Cable and satellite providers were losing subscribers in part due to increased competition and deals from the telco providers — Verizon and AT&T — who are aggressively buying share with steep upfront discounts.

But a look at the actual numbers doesn’t seem to bear that out. AT&T added 202,000 video subscribers in the second quarter, while Verizon added 184,000 in the same period. The addition of about 386,000 video subscribers combined is not out of line with previous quarters, and in fact is actually a little low compared to the 410,000 the telcos signed up in the first quarter or the 440,000 they added in the fourth quarter.

Will the real cord cutters please stand up?

If those pay TV subscribers aren’t actually going to competitors, where are they going? Most likely they’ve actually become cord cutters — two words that we didn’t hear much of on those earnings calls. In part, that’s because the rhetoric around cord cutters as anti-establishment, online video-watching rebels has largely been dispelled.

Studies have found those going without cable aren’t doing so because of over-the-top streaming offerings. Instead, those who are choosing to go without cable are doing so because they either don’t see much value in pay TV packages, can’t afford to keep paying for TV, or some combination of the two.

Operators acknowledge that the few video subscribers who have left the pay TV ecosystem so far have most commonly been on the bottom end of the cable value chain — that is, generally low-income users that just paid for TV and didn’t subscribe to broadband, HD or other higher-value services. And for most operators, that’s ok because they weren’t very high-margin customers anyway.

The myth of the higher-value customer

Cable providers are increasingly seeking ways to get more money out of their existing subscriber base. As a result, we’ve seen steady increases in average revenue per user (ARPU) as users sign up for more HD, more premium channels, more DVR set-top boxes throughout the home. That’s the reason Comcast’s ARPU stands at about 0, when basic cable service starts at about based on some introductory offers.

On the other side, operators are increasingly shying away from customers who might not want to pay for the premium cable package, multiple DVRs and other bells and whistles. DirecTV and Dish Network both run credit scores of potential subscribers to weed out those who might turn out to be flakes and cancel after an introductory deal is over. The goal — to get customers signed up for as many value-added services as possible — is not just about driving up revenues, but about making those services sticky and increasing customer lock-in.

The problem is that in a world where all the cable operators are trying to sell ever-more expensive packages of services, there’s a sad truth of business they’re running up against, and it’s that not everyone is a luxury car buyer. That is, not everyone is in the market for the biggest and best. But in the cable world, there’s very little choice if all you want is a Kia.

Will cable reach a tipping point?

It’s not enough to blame the weak economy when things get rough and folks stop paying for cable; there’s also a structural problem with the way the industry views its subscribers. In the quest for higher margins and customer retention, those companies are generally willing to sacrifice subscribers at the low end if it means they can get more out of their so-called higher-value customers.

The question is how long the industry can keep pushing ARPU up before it starts to shed some of its better customers — those that aren’t necessarily poor, but don’t have 0 or more a month to spend on entertainment. There’s the old belief that TV is recession-proof, as consumers hunker down and spend more time at home rather than going out when their disposable income gets low. But at some point, the value proposition has to break down — especially when there are other ways to get low-cost video entertainment from services like Netflix or Hulu.

No TV image courtesy of Flickr user Mykl Roventine.

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Clearwire’s shift to LTE is not just a move away from WiMAX, but it cements Clearwire’s shift in strategy from being a retail operator to a wholesale provider — a shift that has been coming for a while. In this week’s announcement Clearwire said that it would sell its LTE network not just to partners such as Sprint, but also to anyone that wants such service.

This isn’t a new field for Clearwire, which has sold wholesale WiMAX access to the cable providers that funded it and to retailers such as Best Buy, but as it moves to LTE and closes down retail locations this wholesale strategy is becoming more clear. And it’s also setting Clearwire up as an odd operator out in the industry as many other cellular companies try to sell services as opposed to pure capacity. However, in Clearwire CTO John Saw’s view “LTE is all about capacity.”

Building the LTE wholesale network.

During the call to discuss the transition to LTE, Clearwire emphasized that it would employ a version of LTE known as LTE-Advanced. This refers to releases 10 and 11 of the LTE technology, but Release 10 was just frozen in March and the gear isn’t out yet for it. What Clearwire hopes to deploy if it gets 0 million or so from investors, is LTE Release version 8, and will be upgradable to later releases that are actually LTE-Advanced. The key elements for Clearwire, and the reason it’s using the LTE-Advanced lingo is because it’s using some features built into the version of the standard that are associated with LTE-Advanced. Plus, since LTE-Advanced was the “real 4G” according to the ITU, I’m sure there will be some marketing spin on this later.

Saw says that Clearwire plans to take advantage of features that allow an operator to group different spectrum bands together to create a virtual pipe as well as features known as MIMO that allow multiple antennas on the device and base stations to boost upload speeds. Those two things are the most important reasons Clearwire has switched to LTE.

For the deeply nerdy, it’s using TDD-LTE (GigaOM Pro sub req’d), a different variation from Verizon and AT&T, which are deploying FDD-LTE. The difference is that Verizon and AT&T must deploy their spectrum in equal clumps going upstream and downstream, but Clearwire (and anyone using TDD-LTE) can allocate their spectrum unevenly, with a greater proportion going to downstream and less for upstream use.

Upgrading the existing infrastructure will be easier in cities where Clearwire has recently deployed WiMAX said Saw: “Adding LTE to those markets is as simple as plugging in another line card on the cell site.” In some areas Clearwire may have to install new radios and in general it will upgrade the core network and backhaul networks, all for that estimated 0 million mentioned.

What happens to WiMAX?

But amid the Clearwire move to LTE, what happens to the existing WiMAX network? Saw says it will remain intact. The company will use 20 MHz of spectrum for LTE and reserve 10 MHz for WiMAx and operate both networks side-by-side. In most cases the equipment is designed to do just that.

It all depends on devices.

By managing multiple networks, even if it can reuse some of the same equipment, Clearwire avoids the challenge of clearing spectrum and getting people to transition to new devices. But devices will still be a key element in Clearwire’s success with LTE. Because it plans to offer wholesale access, Clearwire will have to rely on device makers to put radios into their products that are TDD-LTE compliant and that work in the 2.3 to 2.7 GHz spectrum band that Clearwire is using. Wireless radios, with their associated IP aren’t cheap, so the key is getting them both inexpensive, but also small enough and power efficient enough that a tablet using Clearwire’s LTE won’t cost a lot more and will still have decent battery life.

Clearwire has teamed up with China Mobile and Vodafone to promote a world band in its spectrum for TDD-LTE as part of the Global TD-LTE Initiative. Saw claims that the members of the GTI represent hundreds of millions of potential subscribers and members are deploying networks this year. He didn’t provide details but said Qualcomm, Broadcom and others are planning chips for the band. When I asked if the chips were sample and if we could expect a 12-18 month time frame before such devices hit the market, he said pre-commercial devices are already available. That’s not a clear answer so figuring out when devices that could use the network will arrive is still an open question. Qualcomm recently made its own spectrum play in India in the 2.3 GHz band suggesting it does have plans to support it with radios.

Clearwire’s gamble may all depend on cheap chips

Clearing up Clearwire’s business model.

With its plans to deploy LTE only in areas with high demand, Saw explains that Clearwire’s business model will be built around providing capacity offload. This is something other carriers are doing with Wi-Fi today, but having a more mobile option clearly has benefits in areas where one can’t find a hot spot. By offering LTE it would compete against the planned wholesale LTE network from LightSquared, which wants to use a mix of satellite and terrestrial capacity from Sprint to offer service.

Clearwire is up against LightSquared’s planned satellite network.

Saw bristled when compared with LightSquared pointing out that the company is not only in a fight with the GPS industry over interference, but it also doesn’t have a network. “It’s hard to speculate about LightSquared. It has zero spectrum and no network, and even if they, by some miracle, get their lower 10 MHz approved, that’s a very thin network compared to having 160 MHz in the top 100 markets,” Saw said.

And once again we’re back to capacity, which is what Clearwire has to hope matters. Even with its WiMAX network, Clearwire was hitting the capacity angle hard, because it had those vast spectrum reserves. And while technologists will argue about the poorer spectrum propogation characteristics of the 2.3 and 2.7 bands (they don’t go through buildings easily), that’s the cards Clearwire was dealt (or bought, cheap at auction actually). So the question for Clearwire investors and partners becomes whether or not Clearwire can build out an LTE network designed to offer mobile broadband in areas where carriers and other providers need service and whether that business is big enough to support the costs of building and running such a network.

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Cablevision is now offering its cable customers cable modem speeds over its Optimum Wi-Fi network of hotspots, hitting 15 megabits per second down and 4 megabits per second on the uplink. The upgrade is a vast improvement over the previous speeds, which hit 3 mbps down and 1.5 mbps up.

The faster performance is available at tens of thousands of Optimum Wi-Fi locations around the New York, New Jersey and Connecticut area such as downtown areas, parks, commuter rail platforms, as well as 7,000 indoor hotspots built by Cablevision business customers. Cablevision said half a million of its 3 million cable subscribers have accessed its Wi-Fi network while out of the home. The upgrade should also be available to Time Warner Cable (s TWX0 and Comcast subscribers, who have access to the Optimum Wi-Fi network in New York.

“This is a huge enhancement for our customers and a significant step forward for mobile online access.  With this increase, Optimum WiFi not only blows away 3G and
4G cellular data speeds, it’s three times faster than the average wired residential broadband service across the country,” said Kevin Curran, Cablevision’s senior vice president of wireless product management.

And that “blows away 3G and 4G cellular data speeds” element is a large component of the shift as cable providers realize they not only have to compete against Verizon and AT&T’s wireline networks, but increasingly with their newly launched 4G networks. Sure, Wi-Fi can help ease the mobile bandwidth crunch, by offloading big traffic from cellular networks, which is why AT&T and Verizon are so keen, but it’s also a way to keep wireline customers loyal and seeing the value of sticking with Cablevision.

New York City is getting some Wi-Fi love lately. AT&T just announced it was launching Wi-Fi hotspots in 20 New York parks. The DUMBO neighborhood of Brooklyn, home to a number of startups, also recently received free Wi-Fi thanks to a local improvement district and management company. The city also has big Wi-Fi deployments from AT&T and Towerstream in Manhattan. It’s a good thing because cellular service can be extremely trying in New York, where getting and holding on to a signal can be tough.

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