Broadband Pickup Seen Next Quarter8/17/2007 8:00 PM Eastern
Investors were in a tizzy earlier this month after the four major cable operators reported weak growth in high-speed Internet subscribers, taking it as a sign that cable’s perennial cash cow was losing some of its luster.
But in a research report last week, Sanford Bernstein cable and satellite analyst Craig Moffett offered some perspective. While broadband growth indeed showed signs of a slowdown in the second quarter — a typically weak period, as college students and snowbirds disconnect service as they return to summer residences — it should come roaring back in the third quarter.
|Milking the Cash Cow|
|The slowdown in high-speed data subscriber growth:|
|Company||2Q Net Additions||Year-To-Year Change|
|SOURCE: Company reports and Sanford Bernstein research|
|Time Warner Cable||197,000||-14.3%|
GROSS ADDS ARE UP
While net growth was down across the board for the four top publicly traded cable operators — Comcast, Time Warner Cable, Charter Communications and Cablevision Systems — Moffett wrote that gross additions were actually up. Gross additions were particularly strong for Comcast — up 27% or 360,000 customers from the year-ago period, according to Moffett — and for Charter. Gross additions were more modest at Cablevision and TWC.
That growth in gross additions, Moffett wrote, suggests that cable operators will report solid rebounds in the third quarter.
Of the four major cable operators, only Charter (with 57,000 net additions) showed any material acceleration from the previous year. But Moffett added that second-quarter broadband growth at the phone companies — long the bane of cable operators — was even worse.
Moffett estimates that in aggregate, broadband additions were down 20% at the cable companies in the period. At the telcos — Embarq, Qwest Communications International, Verizon Communications and AT&T — the aggregate growth fell 44.6%.
Operators had several excuses for the deceleration of broadband growth — a weak housing market, a focus on adding digital subscribers and normal seasonal churn. While Moffett wrote that all of these factors have some merit — he estimated that weak housing starts reduced net additions by between 100,000 and 200,000 customers in the period — he placed more weight on growing churn rates.
Moffett dismissed the severity of the housing slump on broadband growth, mainly because unlike the basic-subscriber market, high-speed Internet service is more about share shift from dial-up than organic housing growth.
“The impact of the housing slowdown therefore remains relatively small compared to the rate at which share is changing hands,” Moffett wrote.
But if the deceleration is due to increasing churn, shouldn’t cable operators be concerned? Not really, Moffett wrote, because the greater the season churn, the greater the third-quarter rebound.
Moffett looked at broadband subscriber churn in the cable sector for the past two years, determining that churn rates rise from an average of 2.4% in the first quarter to an average of 3% in the second quarter. Those churn rates dip to 2.4% in the third quarter and 2.5% in the fourth quarter. Based on that data, Moffett expects a sharp rebound in third-quarter net additions.
Moffett estimated that Comcast will add about 555,000 high-speed data subscribers in the third quarter, compared to 536,000 additions in the third quarter last year. The growth will be more modest (286,000 additions versus 251,000 in 2006) at Time Warner Cable — mainly because of the addition of the former Adelphia properties, which have less robust growth rates.
Moffett appeared most encouraged by the continuing “melt down” in the dial up market. Subscriber growth at two of the top four dial-up ISPs — United Online and EarthLink — has been in freefall since the fourth quarter of 2004. At United Online, subscriber growth went from 7.3% in the fourth quarter of 2004 to a negative 21.7% in the second quarter this year. EarthLink’s subscriber growth declined from a negative 2.6% in fourth-quarter 2004 to a negative 9.9% in second-quarter 2007.
That trend, Moffett wrote, suggests that “dial-up subscribers are showing no greater stickiness than they have in the past.”
GOOD QUARTER VS. DSL
While dial-up market share is dwindling, Moffett wrote that cable’s slice of the broadband pie is growing substantially versus its chief competitor, digital subscriber line service from telephone companies.
Moffett said cable’s share of total broadband additions was 53.5% in the second quarter, compared to 46.5% for DSL. It was the highest level of additions for any second quarter since 2004 for cable. And that continues a trend from the first quarter, when cable added an aggregate 1.6 million broadband subscribers, compared to DSL’s 1.1 million additions. That suggests a 60/40 split in favor of cable, Moffett wrote.
And there are more opportunities for growth. According to a recent Pew Research study, a large segment of the population — particularly lower-income and older Americans — were still underserved by broadband. While that may raise fears about pricing concerns, Moffett wrote that price sensitivity in the broadband sector is usually low.
“Unlike most products, where marginal utility falls as penetration continues to rise, marginal utility of broadband continues to rise as penetration increases,” Moffett wrote. “As more Americans have broadband, more Web sites and applications are designed to serve only those who do, making it less tenable to remain a dial-up subscriber. The value of a dial-up connection for the last dial-up subscriber in America will be essentially zero.”