Protecting Cable’s Data Flank6/20/2004 8:00 PM Eastern
Cable-modem subscriber additions and average revenue per unit (ARPU) are expected to continue to decline for the next four years, as competing offerings from telephone companies gain momentum, but cable operators would be best off sacrificing some market share to protect their video and data customer base.
In a research report earlier this month, Credit Suisse First Boston cable analyst Lara Warner mapped out four possible scenarios — one in which MSOs maintain aggressive revenue growth (10%, 9.6% and 8.5% between 2005 and 2007), ARPU is maintained at $42 per month and cable-modem revenue rises 23.1%, 17.1% and 12.1% between 2005 and 2007, respectively.
In this scenario, cable’s percentage share of gross additions would decline modestly, to 44% by 2008.
Under a second scenario — which Warner called “ARPU preservation” — first-quarter ARPU of $42.06 is maintained through 2008 and as a result, net add share falls from 46% in 2004 to 20% in 2008.
Overall cable revenue growth is 9.8%, 9% and 7.8% between 2005 and 2007, and cable-modem revenue growth decreases from 21.8% in 2005 to 9.2% in 2007.
A third scenario involves cable matching the discounts proffered by digital subscriber line providers, which helps MSOs maintain their market share but dramatically reduces revenue. In that case, cable-modem ARPU dips to $25.98 in 2008, in line with DSL pricing, and cable’s net add share remains at 55%.
But cable revenue growth at 9.1%, 7.6% and 6.6% between 2005 and 2007 is substantially lower. Cable-modem revenue growth under this scenario would be 17.6%, 6.3% and 1.9% between 2005 and 2007.
Warner also mapped out a fourth option — one which she believes has the best long-term prospects for cable.
Here, ARPU declines to $36.03 in 2008, compared to $41.38 in 2004, and cable’s share of net adds falls from 50% in 2004 to 36% by 2008. But more importantly, Warner writes, overall cable revenue growth would remain fairly consistent at 8.9%, 8.5% and 7.8% between 2005 and 2007. Warner estimates that cable-modem revenue growth is 16.7%, 11.9% and 9% between 2005 and 2007.
Dropping prices to a manageable $36.03 per month in the next four years serves two purposes, according to Warner. First, it lowers the price differential between cable-modem and DSL service (priced at about $19.95 per month by 2008, according to Warner’s estimates) while still providing an attractive margin. While Warner writes that most cable MSOs are engaged in the “ARPU preservation” scenario at the moment, she said that could be dangerous in that it could hamper the industry’s ability to bundle customers and could lead to increased video and data churn.
“If cable remains the 'expensive provider,’ changing the market’s perception might take time and significant marketing efforts down the road,” Warner wrote.
Warner added that as penetration for cable-modem service reaches 30% — expected by year-end — it will become increasingly difficult to maintain the $40 to $45 per month price point as the less price-sensitive segment of the market becomes fully penetrated.
In addition, cable’s entrance into the voice arena, through the rollout of voice-over-Internet protocol technology, will likely force the regional Bell operating companies to further discount DSL service in an effort to hang on to their wireline telephony subscriber base.
DSL AS LOSS-LEADER
Given the regional Bell operating companies’ high base of fixed costs, Warner said, they’re likely to offer DSL at a loss in order to retain customers. Assuming a $50 ARPU for voice service, Warner wrote, the RBOCs could offer DSL at $21 per month (a $12 loss) and still cover their fixed costs. However, as DSL costs decline, that service could be offered for free, bundled with a voice service priced at $41 per month, allowing the RBOC to cover the variable cost of providing both services.
There are about 25.2 million broadband subscribers (both cable and DSL) in the U.S. at the end of the first quarter, Warner estimated. While cable has regularly outpaced DSL in net subscriber additions, DSL gained momentum in the first quarter of this year, adding 1.1 million subscribers — 30% above the analyst’s estimates. That’s an indication that cable’s dominance in the high-speed data arena is beginning to shift.
Warner predicts that in the second quarter ending June 30 — traditionally a seasonally weak period for cable — DSL will surpass cable-modem service in net new subscriber additions for the first time. Cable-modem share of net additions will also dip to 41% in the second quarter, followed by a rise in the third quarter to 47%, Warner estimated.
“Our view is that broadband net adds will peak in 2004 at 8.6 million and slowly trail off to 7 million by 2008,” Warner wrote in her report. “By the end of 2008, we believe that 62 million homes will have broadband (about 60% of homes passed), a reasonable estimate considering about 35 million narrowband subscribers exist today and RBOCs are more actively discounting and promoting DSL.”
|Cable Vs. DSL|
|(In thousands, except for percentage data)|
|Source: Company data; CSFB estimates
|Total Broadband Subscribers||23,013||25,253||27,202||29,376||31,615||31,615|
|Share of Net Adds||2003||1Q04||2Q04E||3Q04E||4Q04E||2004E|