Technology

Cable’s Data-Add Lead Could Fade Fast

11/28/2004 7:00 PM Eastern

Cable regained the lead in net high-speed data additions in the third quarter, but it could lose that crown as telephone companies become increasingly more aggressive in pricing their competing digital subscriber line service.

Mostly through aggressive promotion and marketing, cable operators captured about 54% of the third quarter’s net new additions to high-speed Internet service — a significant boost from the sector’s 46.7% second-quarter market share.

High-Speed Data Additions
Cable vs. DSL
Source: Company reports and UBS estimates.
DSL % Share Cable Modem % Share
1Q ’03 834,000 41% 1,201,000 59%
2Q ’04 919,000 53.3% 806,000 46.7%
3Q ’04 1,072,000 46.3% 1,241,000 53.7%
2004E 4,400,000 51.5% 4,144,000 48.5%
DSL vs. Cable
Weighted Average Monthly ARPU Trends
Source: UBS Warburg estimates and company reports.
DSL Cable
1Q ’04 $38.73 $40.99
2Q ’04 $38.42 $41.64
3Q ’04 $38.63 $41.09
4Q ’04 E $37.85 $40.67
2005 E $35.41 $39.23

But that tide is expected to shift in the fourth quarter, according to a research report by UBS Warburg cable debt and equity analyst Aryeh Bourkoff.

RING UP PRICE WAR

The second quarter was the first time that cable modems fell behind DSL in new data-customer additions.

While cable quickly regained its first-place status in the third quarter, Bourkoff estimated that continued aggressive pricing by regional Bell operating companies will chip away at cable’s lead.

In his report, he estimated total high-speed Internet additions in the third quarter would be at 2.3 million new subscribers, with DSL making up 1.25 million of those additions (54.9%) and cable making up the rest.

For the year, DSL should account for 4.4 million (52%) of the 8.5 million new high-speed Internet subscribers in 2004, with cable accounting for 4.1 million (48%).

Comcast Corp. will lead service providers with 1.7 million new data customers for the year, Bourkoff estimated, followed closely by SBC Communications Inc. with 1.6 million net adds.

MSOs are holding fast to their pricing schemes — average data revenue per unit for cable operators is about $40 per month. But RBOCs are aggressively lowering their prices.

BellSouth Corp. reduced the price of its 1.5 Megabit tier by $7 to $32.95 per month and is offering a promotional discount of $15 per month for six months for new customers. Verizon Communications Inc. eliminated the requirement to have a high-priced bundled voice plan to be eligible for the $29.95 monthly price for its standard service.

SBC continues to be the most aggressive, offering DSL for $19.95 per month as part of a promotion in conjunction with unlimited voice and a one-year commitment.

HIGHLY PENETRATED

Part of why Bourkoff expects cable-modem additions to slow down is the service’s high penetration rate, compared with DSL.

Cablevision Systems Corp. leads the industry with 41.5% data penetration of basic subscribers (27.7% of homes passed), followed by Cox Communications Inc. with 38.7% data penetration of basic customers (23.1% of homes passed).

In contrast, among the telcos, SBC has the highest data penetration at 20.1% of primary residential lines, followed by BellSouth at 15.8% penetration.

Bourkoff doesn’t expect the MSOs to follow DSL into a price war. Instead, he believes tiering will take a more prominent role, allowing MSOs to continue to reap the benefits from high-margin top tier services while addressing the needs of more price sensitive customers.

PROTECT AND DRIVE

Cable has been reluctant to aggressively market lower tiers of data service, for fear of cannibalizing its HSI base.

“We expect among several competitive steps to protect the core cable subscriber base and drive ARPU growth, cable operators will offer lower-priced tiers for high-speed data offerings, given aggressive price competition from RBOCs on DSL products,” Bourkoff wrote. “This could lead to more aggressive high-speed data-video bundles during 2005.”

Bourkoff added that those lower-priced tiers may even be enough to buck recent trends and shift incremental high-speed data increases back toward cable.

September