Technology

No Slowdown for High-Speed Internet

10/21/2005 8:00 PM Eastern

Despite hitting the 50% penetration benchmark that many observers believed would signify the end of the exponential growth of broadband Internet services from cable and telephone companies, the product is experiencing some of the most robust acceleration in its brief history.

According to Sanford Bernstein & Co. cable analyst Craig Moffett, despite competition from “free” wireless fidelity, or Wi-Fi, services currently in the works, that growth is not expected to slow down.

Where the Adds Are
Residential broadband subscribers:
Cable Modem
Q2 ’04 Q2 ’05 %Change
Comcast 6,005,000 7,705,000 28.3%
Time Warner Cable 3,548,000 4,323,000 21.8%
Cox 2,246,109 2,846,438 26.7%
Cablevision 1,179,040 1,519,864 28.9%
Charter 1,711,400 2,022,200 18.2%
Insight 273,900 391,300 42.9%
Mediacom 327,000 426,000 30.3%
Adelphia 1,237,397 1,556,567 25.8%
Other 2,259,254 2,695,105 19.3%
Total 18,787,100 23,485,474 25.0%
DSL (Including small/medium business)
Q2 ’04 Q2 ’05 % Change
SBC 4,277,000 5,968,000 39.5%
Verizon 2,944,000 4,124,00 40.7%
BellSouth 1,738,000 2,473,000 42.3%
Qwest 853,000 1,190,000 39.5%
Other 1,739,140 2,528,397 45.4%
Total 11,551,140 16,301,397 41.1%
Dial-Up
Q2 ’04 Q2 ’05 % Change
United Online 3,102,000 3,078,000 -0.8%
MSN 4,300,000 2,700,000 -37.2%
EarthLink 3,976,000 3,753,000 -5.6%
AOL 19,200,000 15,600,000 -18.8%
Total 30,578,000 25,131,000 -17.8%
Source: Company reports and Sanford Bernstein estimates

In a report last week, Moffett wrote that growth in cable-modem and digital-subscriber line connections has been accelerating, while dial-up Internet services like America Online Inc., NetZero Inc. and EarthLink Inc. continue their downward spiral.

WI-FI: STILL FAR AWAY

And although EarthLink has proposed offering Wi-Fi service in Philadelphia and Internet search giant Google Inc. has said it will offer a free Wi-Fi service in San Francisco, Moffett said the fine print in those offerings are likely to turn off potential subscribers.

According to Moffett, Google plans to offer a 300 Kilobit-per-second service in San Francisco — about one-fifth the speed of SBC Communications Inc.’s DSL offering in the market and one-twentieth as fast as Comcast Corp.s cable-modem service. In addition, the Google service will be ad-supported, which means that users must slog through intrusive advertising to get online.

The EarthLink service, Moffett added, is priced at $20 per month, a 25% premium over Verizon Communications Inc.’s lowest-priced DSL service.

Moffett wrote that the Google Wi-Fi service also has propagation issues: Its coverage area is limited per wireless access point (WAP) and the signal does not travel through buildings well. That means it most likely won’t reach many of the homes in the area.

According to Moffett, other municipal Wi-Fi networks have used between 267 and 10,000 WAPs to provide service, with each point covering an area of about 600 square feet. In a separate report, Moffett cited a study the city of Philadelphia conducted of its own indoor Wi-Fi test in the city’s Norris Square Park section (about 0.6 square miles in area). That experiment had an 80% success rate, with failure “where the path to the nearest access node was blocked completely by adjacent buildings.”

And while there have been some successful launches of municipal Wi-Fi services — particularly in Chaska, Minn., and in Santa Clara and Cupertino, Calif. — they’ve mostly been small in scale. Chaska has about 7,500 residents and offers service for $16 per month.

MetroFi Inc. began offering a Wi-Fi service in Santa Clara and Cupertino earlier this year for $19.95 per month (for speeds of 1 Megabit per second downstream and 256 Kbps upstream) and believes it can be profitable in about two years, with a modest penetration rate of 5% to 10% of households.

While MetroFi has not released how many subscribers it has in the two markets, it has said that it is on pace to reach 5% to 10% penetration.

Technical issues not withstanding, Moffett wrote that even though cable-modem and DSL service have reached the 50% penetration plateau — which means they have successfully picked off the more affluent segments of the population — high-speed Internet subscriber additions are growing.

THE BIG GET BIGGER

And, Moffett added, the strongest growth comes from the cable operators with the highest high-speed Internet penetration rates.

“Against this backdrop, municipal Wi-Fi will emerge at a time when terrestrial broadband will already have achieved very high penetration rates, where expectations for speed and reliability are high and when many (if not most) consumers will be loathe to try to fix what isn’t broken,” Moffett wrote.

Free municipal Wi-Fi will have an impact on cable-modem and DSL offerings, he added, but “that impact won’t be as simple as investors seem to expect.”

Comcast, which has a total of 8 million broadband subscribers (19% of homes passed), added 297,000 high-speed Internet customers in the second quarter (up 4% from the previous period and 28% year-over-year) and Time Warner Cable (which has 22% data penetration of homes passed) added 201,000 high-speed customers in the period (up 4.9% from the first quarter and 21.8% year over year).

Cablevision Systems Corp., which has the highest high-speed data penetration in the industry (34% of homes passed) added nearly 80,000 customers in the second quarter. That’s a 5.5% increase over the first quarter and a 28.9% rise compared to the second quarter of 2004.

As a whole, the cable industry added 927,000 high-speed subscribers in the second quarter, up 4.1% sequentially and 25% year-over-year.

DSL is growing at an even faster pace. According to Moffett’s research, DSL subscriber rolls were up by 1.2 million customers in the second quarter, an 8.2% sequential gain and up 41.1% year over year.

“The fact that penetration has reached 50% of the total market — and has not yet decelerated — is a good indication that broadband substitution of dial-up is trending toward 100%,” Moffett wrote.

The second quarter was the third-worst in history for the four largest dial-up Internet service providers — AOL, Microsoft Corp.’s MSN, EarthLink and United Online — and the worst second quarter to date. Those four providers lost a combined 1.5 million customers in the quarter.

And the rate of decline is gathering steam, Moffett wrote.

From its peak of 38 million subscribers in 2002, total dial-up customers dipped to 25 million in the second quarter. What’s more disturbing is that almost 6% of the dial-up base defected during the most recent second quarter, almost three times the rate of decline in the second quarter of 2004, according to Moffett.

BEHNID AOL CHURN

Moffett added, the numbers may be even worse than they appear. He said the bulk of AOL’s dial-up losses are coming from churning off non-paying promotional customers. According to the report, free trial subscribers accounted for almost 50% of all AOL customer losses in the past year.

“After adjusting for these losses, the decline in dial-up looks less steep thus far, but the acceleration looks even more pronounced,” Moffett wrote.

For broadband services the reverse appears to be true. Broadband increased its total share of the Internet market by 2.9% in the second quarter, Moffett said, equaling the rate of the first quarter and second quarter of 2004.

At the four most highly penetrated MSOs — Comcast, Time Warner Cable, Cox Communications Inc. and Cablevision — high-speed data additions were a combined 675,064 in the second quarter, up 4% sequentially and 26.3% year-over-year.

On the DSL front, the top four regional Bell operating companies added a combined 750,000 subscribers in the second quarter (up 5.8%) and 3.96 million customers year over year (up 40.4%)

The biggest gains were at SBC Communications Inc., with 360,000 additional DSL subscribers in the period and Verizon Communications Inc. with 198,000 new DSL subscribers.

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