Q1: Broadband Sales Show Strength
By Matt Stump and Karen Brown
from the May 21, 2001 issue of Broadband Week
Broadband service providers entered first quarter 2001 fearing the worst for digital subscriber line and cable modem Internet services sales.
Fourth-quarter additions, spurred by holiday sales, looked tough to beat in a first quarter where the news was all negative: widespread corporate layoffs, falling sales by PC manufacturers, rising DSL rates, a shakeout among DLECs, negative consumer sentiment about the economy that spurred talk of a recession.
But as cable and telephone companies report first-quarter earnings, DSL and cable modem sales are showing surprising strength. "The numbers are holding up extremely well," says Michael Harris, president of research firm Kinetic Strategies. "High speed Internet access is still a supply constrained business."
There still are some challenging quarters ahead, given that both cable modem and DSL providers are intent on boosting subscription rates at a time of continuing economic uncertainty. But as those types of factors emerged in past months, broadband service providers appeared to weather the challenge.
"The deployment rate of cable high-speed data subscribers in 1Q wasn't apparently impacted by either seasonality or a weaker macroeconomic environment," Douglas Shapiro, an equity research analyst for Banc of America Securities, stated in a recent research note.
The four major ILECs-Verizon, BellSouth, Qwest and SBC Communications-added 506,000 DSL subscribers in first quarter 2001, compared to 564,000 in fourth quarter 2000.
Cable's big six-AT&T Broadband, Time Warner Communications, Comcast Communications, Cox Communications, Charter Communications and Cablevision Systems Corp.-added 832,000 subscribers in first quarter 2001, compared to 794,000 in the fourth quarter 2000.
"It looks like cable net additions will be about flat-to-down 2 percent sequentially, while DSL deployments are down 10 percent sequentially in 1Q 01," Shapiro wrote. With perhaps the worst quarter of the year over for BSPs, Banc of America Securities expects residential U.S. DSL penetration to reach 3.3 million by year's end, while cable penetration will reach 7.2 million.
Year over year, subscribership continued to accelerate. SBC jumped from 86,000 to 187,000, year-over-year in the first quarter of 2001, while Qwest rose from 26,000 to 51,000. AT&T Broadband increased from 91,000 to 206,000, Time Warner Cable rose from 117,000 to 237,000 and Charter Communications jumped from 38,500 to 90,900.
The relatively strong U.S. first quarter numbers extended into Canada. Kinetic Strategies says cable MSOs added 985,140 modem subscribers in North America while DSL modem additions totaled 736,985. There are now 5.5 million cable modem subscribers in North America, Harris says, and 3.3 million DSL subscribers.
Harris expects full year North American modem numbers to reach 9 million, while DSL (residential and business) subscribers will reach 5.7 million.
For DSL, while the economy may be having some impact, well-publicized problems early this year might have contributed to a slowing of new subscriber numbers, according to Adam Guglielmo, an analyst for TeleChoice Inc.
Among those factors were an SBC price increase just as the economy was souring and the demise of competitive carrier NorthPoint Communications. Guglielmo, himself an orphaned NorthPoint customer, says when the company went into bankruptcy he received numerous e-mails from people wondering if DSL was dead.
"DSL might have been given a black eye this quarter by what happened with NorthPoint," he says.
While cable and DSL operators need to concentrate on creating more compelling services to drive broadband subscribership, the DSL analyst says the cable side may have the advantage. With faster installation times and the development of DOCSIS 1.1 cable modems able to offer voice services, cable may offer subscribers more broadband for their buck.
"While I hate to admit it, I think cable right now offers a more compelling package of services--they are offering voice, video and data," Guglielmo says. "DSL needs to get its act together, and I think that the Bells are concentrating a lot on winning the regulatory battles and getting things where they want. They have to figure out how to get services added on to better compete with cable."
In his research note, Shapiro delved into why cable modem sales stayed strong in the face of weak economic news, including PC sales, which modem sales are often tied to. "Besides strong demand, larger footprints, retail availability and self-install are all offsetting seasonality," Shapiro wrote.
Deployment rates, even in an economic downturn, aren't suffering, he wrote, for several reasons: Internet access in many homes is considered as crucial as the telephone or the TV; cable modem pricing is equivalent to dial-up subscribers paying for a second phone line; and high speed data deployments "continue to be largely supply constrained, not demand constrained."
Although Shapiro continues to believe DSL penetration eventually will pass cable modem penetration because of the resources of the ILECs, "the likelihood of this occurring anytime soon seems diminished lately" because of DLEC financial troubles and ILEC DSL price increases. Cable operators, led by AT&T Broadband, also have begun to raise cable modem prices.
SBC took the biggest quarter-to-quarter hit, falling from a fourth quarter 2000 record of 251,000 subscriber adds to 187,000. That's still higher than the 163,000 per quarter it averaged throughout 2000 and more than double its first quarter 2000 additions of 86,000.
"SBC raised prices 25 percent and additions dropped 25 percent," Harris says. "Yes, they are committed to DSL but they are committed in a way that doesn't crush earnings."
BellSouth added 88,000 DSL subscribers in the quarter, up from 81,000 in fourth quarter 2000. Qwest Communications jumped from 42,000 adds last quarter to 51,000 in first quarter.
On the cable side, Time Warner Cable added 237,000 cable modem subscribers in the quarter, up from 227,000 in the previous quarter. Cox Communications saw additions rise from 83,000 to 105,000, even as it saw a quarter-to-quarter digital set-top additions decline. For some subscribers a modem offers more value than an extra digital programming tier, Harris says.
Some MSOs took a first-quarter hit. AT&T added 239,000 in fourth quarter 2000, but dropped to 206,000 adds in the first quarter. That contributed to Excite@Home's quarter-to-quarter drop in additions from 544,000 to 449,000. The rest was attributed to a decline in international subscribers, according to Banc of America Securities.
Cable MSOs reported a mixed bag with retail modem sales in the first quarter. Cox attributed part of its strong first quarter growth to retail sales. Cablevision added 65,000 subscribers, a huge jump over first quarter 2000's 19,000, but a drop from fourth quarter 2000's 99,000 additions. Retail sales make up 85 percent of Cablevision's modem sales, according to Jim Dolan, Cablevision president, who says the first quarter "is traditionally a slow retail season."
John Alchin, chief financial officer at Comcast, says first quarter retail sales dropped below 15 percent of the MSO's overall cable modem revenue, versus 20 percent in November and December of 2000. "Retailing was down on a seasonal basis," he says.
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