Communications Industry Trends

BROADBAND DEPLOYMENT IN THE UNITED STATES

Cable industry may be winning the battle with telcos, but can it win the war?

Broadband is making rapid inroads into the U.S. households, with about 57% of the homes currently subscribed to a broadband service, as opposed to a mere 20% in 2004. However, with the broadband service providers adding about 1 million (net) new subscriptions during the second quarter of this year, the relative number of new subscribers has peaked. Amidst the aggressive competition between telecom companies (telcos) and cable companies, the quality and capability of access network primarily influences subscriber decisions on choosing a service provider for triple–play services.

Cable companies have added about 670,000 subscribers, accounting for about 76% of the new broadband subscriber volume during the second quarter – a clear lead over the telcos, which seem to be rapidly losing their DSL subscriber base to the cable companies. Comcast and Cablevision were among the top cable companies in terms of new subscriber addition, while AT&T and Verizon continued their dominance among the telcos.

Broadband subscriber volume of cable companies totaled 35.3 million by the end of Q2 2008, while the phone companies lagged with a subscriber base of 29.7 million. AT&T retained its lead as the country’s largest Internet service provider, trailed by Comcast.

An Insight into the Consumer Shift towards Cable…

Broadband over cable costs about $6 more a month in comparison with DSL, while offering significantly faster downloads, which is a major market share driver, given the increasing popularity of bandwidth–intensive applications like streaming video. Curtailing of aggressive price–based offers in the DSL segment by the telcos also eroded the rate of new subscriber additions. About two–thirds of the new subscriber additions at Comcast during the second quarter were converts from DSL.

DSL – A Change in Strategy?

The decline in DSL subscriber base is a result of a shift in focus of telcos towards emerging, faster and advanced broadband technologies such as Verizon’s FiOS (Fiber Optic Service) and AT&T’s U–verse. These players are targeting the high–end customers, often at the cost of losing the lower end of the subscriber base which comprises DSL connections. However, given the worst quarter in terms of new subscriber additions over the last seven years, telcos, in a reversal of strategy are stepping up their promotions in the DSL segment. Verizon, for instance, has recently announced a new promotion offering six months of free DSL service to the company’s existing landline customers. AT&T is promoting a new offer which locks in DSL pricing for two years without the necessity of signing a contract.

Transition towards Fiber – Can Telcos Justify the Expense?

Taking the fiber route towards increased speed and efficiency comes at a cost. Migrating to a higher technology, which rivals the download speeds offered by the cable companies, affords a chance to win subscribers in the long run. However, the costs associated with building FTTH are huge, often in the initial stages. To quote an analyst with Sanford C. Bernstein, “Verizon would be $6 billion in the hole [as a result of FiOS] when all was said and done”. A few players, on the other hand, argue in favor of extending the life of copper plant investment as long as possible. This group underlines the current transition towards wireless for both voice and data, questioning the expense associated with establishing a new wireline network such as FTTH.

The United States currently ranks third among the world’s economies in terms of total number of FTTH households, at 3.3 million. The country ranks tenth worldwide in terms of FTTH market penetration among households.

It pays to ‘Bite–the–Bullet’ for Verizon and AT&T…

A fact which often gets lost in the argument is the impact of wireless on leading telcos such as Verizon and AT&T, given that these players are wireless companies with wireline assets. Wireline derived revenue is increasingly becoming a minor component in their revenue generation. Thus, while the two leaders can afford to gamble with their wireline strategy, other telcos cannot afford the luxury and are more at risk with such a policy. Players such as Qwest have refused to toe the line of the industry leaders, instead opting for an FTTN strategy, which seeks to utilize VDSL2 to the home and deliver a top end speed of about 30–35 Mbps. FTTH remains unrealistic for Qwest, given the high costs associated with retrofitting the company’s extensive buried plant assets. Verizon, on the other hand, banks on its extensive aerial plant.

Factors influencing the decision to invest in new wireline broadband technologies such as FTTH include consumer preferences, implications of technology innovation, market demographics and capabilities of competitors. A comprehensive understanding of these factors is essential in decisions concerning investment in fiber–based technologies.

FiOS – Beating Initial Expectations…

According to Verizon, the company’s FiOS fibre–optic TV, internet and telephony service has exceeded initial expectations. Valued at US$23 billion, the fiber–based network has currently been deployed in over 19 million households at a cost of US$4,000 per customer. FiOS internet subscribers totaled 2 million at the end of June this year, while FiOS TV customer based increased to 1.4 million.

DOCSIS 3.0 – A Potential FTTH Competitor?

Leading cable companies in the United States currently provide their services over the Hybrid Fiber–Coax (HFC) access networks. In response to the FTTH wireline technology being offered by the telcos, cable players have developed a new broadband technology termed ‘DOCSIS 3.0’, which promises downstream speeds of up to 100Mb/s to subscribers. DOCSIS is an acronym for ‘Data Over Cable Service Interface Specification’. Given the major differences between the architectures employed by FFTH and DOCSIS 3.0 networks, there exist key differences in the capabilities of the two types of access networks.

Cablevision recently announced its decision to roll out DOCSIS 3.0 in the United States. While fending off FiOS, the decision also enables the company to effectively compete against other MSOs. Comcast, a primary competitor, also announced plans to upgrade 20% of the platform by the year’s end, and complete the roll out by mid 2010. Time Warner Cable has announced plans towards initiation of DOCSIS 3.0 testing in New York, later this year.

Given the scope and potential for growth in the broadband market, it’s too early to project a winner. Speculation currently dominates the strategy rollouts, with a clear leader likely to emerge only in the long term.

Latest News

Verizon goes on the offensive in Northern New Jersey, promoting FiOS
http://www.fiercetelecom.com/story/verizon–goes–offensive–northern–new–jersey/2008–08–13

AT&T U–verse Voice Launched in Northeastern Illinois
http://www.voipmonitor.net/2008/09/03/ATT+Uverse+Voice+Launched+In+Northeastern+Illinois.aspx

Cablevision deploying DOCSIS 3.0 against FiOS
http://www.telecommagazine.com/newsglobe/article.asp?HH_ID=AR_4356

Comcast and MGM Announce Partnership to Launch Impact…The First All–Action Video–On–Demand Network
http://www.comcast.com/About/PressRelease/PressReleaseDetail.ashx?PRID=791