Cable Operators

Broadband Growth Slows, but Cable Still Leads

8/27/2012 12:01 AM Eastern

Cable operators continued to dominate the broadband
market in the second quarter, snatching up nearly
80% of all high-speed-Internet additions in the period
despite the weakest growth in the sector’s history.

Top cable operators far outpaced their telco competition
on the broadband front, adding 320,000 total highspeed-
data customers in the period
and off setting another quarterly loss
for the telcos, which have continued to
see their fiber gains eroded by losses on
the digital-subscriber-line front.

Overall, 260,000 broadband customers
were added in the period, behind the
315,000 gained in the same period last
year and the smallest increase ever for the sector.

Although broadband growth has been slowing for
years, cable continued to show its dominance. According
to Leichtman Research Group, cable operators control
57% of the broadband market, with nearly 11 million more
broadband customers than the top telephone companies.

Leichtman Research president and principal analyst
Bruce Leichtman said the telcos’ poor showing is a combination
of market maturity — about three-quarters
of U.S. households subscribe to some form of broadband
— and a direct result of Verizon Communications
and AT&T’s strategy of converting digital-subscriberline
customers to their respective higher-speed services,
FiOS and U-Verse.

“Unfortunately, they are leaving their flanks wide
open where only DSL exists,” Leichtman said in an interview.

DOUBLE BLOW TO TELCOS

Sanford Bernstein cable and satellite analyst Craig
Moffett, in a recent note to clients, wrote that the telco
losses are “yet another body blow to a high fixedcost
wireline business that, until recently, had helped
off set voice line losses with DSL gains. Now, both are
in decline.”

Cable has steadily increased its share of broadband
additions since the first quarter of 2010, according to
Moffett, when MSOs accounted for 63.1% of all new
high-speed-data customers. In the second quarter of
2012, that share increased to 79% of new additions.

At the same time, DSL losses are continuing to outweigh
gains in fiber-optic-based broadband
for telephone companies. For
example, in the second quarter, Verizon
Communications’ 134,000 FiOS
high-speed-data additions were nearly
erased by a loss of 132,000 DSL customers.
At AT&T it was worse: Its
553,000 U-Verse high-speed-data additions
were wiped out, and then some, by a loss of
649,000 DSL subscribers.

DSL losses are also plaguing smaller telcos. Cincinnati
Bell, Windstream Communications, Frontier
Communications, FairPoint Communications and
CenturyLink all experienced DSL declines, which either
cut into or eliminated gains in their respective fiber products.

CABLE’S TAPERING GROWTH

For cable operators, growth was steady, although not
at the same level as a few years ago. Comcast led MSOs
with a gain of 156,000 broadband customers in the
period, ahead of the 144,000 additions in the yearago
period, but well behind the 279,000 of the same
timeframe in 2008.

The same held true for other cable operators. Time
Warner Cable added 72,000 broadband customers in
the quarter, better than the 67,000 added last year but
less than the 201,000 in 2008. Charter Communications
doubled its 2011 second-quarter performance,
adding 37,000 broadband customers in the most recent
period. That could be due, in part, to the MSO’s focus
on adding data-only customers — it added 49,000 residential
non-video subscribers in the period, ending the
quarter with nearly 900,000.

That focus on non-video customers is spreading to
other MSOs and has led to stronger growth, according to
Credit Suisse media analyst Stefan Anninger. In a recent
research note, Anninger noted that although many other
MSOs resisted selling standalone broadband for fear
of cannibalizing the bundle, with more than 65% of cable
customers already taking at least two products, standalone
off erings are tapping a whole new segment through
promotional pricing and higher speeds. Anninger predicted
that so-called “naked” HSD now accounts for as
much as 50% of cable’s broadband growth.

“Standalone broadband has become cable’s broadband
growth engine,” Anninger wrote.

Anninger predicted that MSOs would add 3 million
high-speed data customers in 2012, making it the best
growth year for the sector since 2008. And the analyst
said the biggest driver of that growth will be former
DSL subscribers.

“Our previous analysis suggests that as many as 50%
or more of cable’s net new HSD net adds are coming
from HSD single plays, many of which are DBS subscribers
that previously subscribed to DSL service,” Anninger
wrote.

TAKEAWAY

Cable is maintaining its
dominance over telco’s DSL
products even in an atmosphere
of declining
subscriber growth.

September