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Summary:

[qi:109] For the third quarter in a row, U.S. broadband growth lost steam, impacting broadband service providers across the board. No single company escaped the slowdown, indicating that the malaise might be driven by the broader economic issues. According to analyst estimates there are about 60.5 […]

[qi:109] For the third quarter in a row, U.S. broadband growth lost steam, impacting broadband service providers across the board. No single company escaped the slowdown, indicating that the malaise might be driven by the broader economic issues. According to analyst estimates there are about 60.5 million broadband subscribers in the U.S., or roughly 53 percent market penetration.

The broadband penetration data might indicate that there is room to grow, but UBS Research’s John Hodulik doesn’t buy it. In a note to his clients he pointed out:

Roughly 53% of the nation’s 111M occupied housing units, or 58M homes, had broadband at the end of 3Q. However, only 77% of households have a PC (June 2007, CEA), and we estimate 90% of homes currently have access to broadband service. Assuming the 77% of homes are evenly distributed among that 90%, then 69% of the 111M homes, or 76M homes, have a PC and can get broadband. This puts penetration of eligible homes at closer to 76% and suggests the days of wireline broadband connectivity as a major growth driver of U.S. telecom are largely over.

3q2007broadbandstats.gif

And while this is by no means a calamity, slower growth rates indicate that the business is going to go through a period of turmoil and some price wars. As I wrote earlier, some of the smaller telecom operators are planning to increase speeds and cut prices. They will soon be joined by cable providers, who are now contemplating lower-priced, slower speed offerings. They need to offer cut-rate broadband or keep losing market share to telcos, who are actively pushing lower price point offerings.

As expected, 2007 will be the first year that the number of new broadband Internet subscribers added during the year falls. We expect 2007 DSL/fiber net adds to total 4.6M in 2007 compared to 5.6M in 2006, a decline of 18%. We expect cable net adds to decline 9% annually 3.9M.

UBS is forecasting that the total annual subscriber growth for the U.S. in 2007 is going to be about 16 percent, and will decline to 12 percent and 10 percent in 2008 and 2009, respectively. The impact of this is going to be felt through the entire ecosystem — from chip vendors to modem makers to DSLAM makers — and it is more than likely that carriers are going to try and squeeze blood out of stones here.

The reduced growth forecasts also explain why many carriers are looking at alternatives such as search, domain redirection and even web portals as a way to goose up their revenues. In other words, 2008 is going to be one brutal year for the broadband business.

Some interesting facts from LRG Research:
* Top five states in residential broadband penetration as of the beginning of 2007 were New Jersey, Hawaii, Maryland, Massachusetts and Connecticut.
* The bottom five states in residential broadband penetration were Mississippi, West Virginia, Alabama, Arkansas and New Mexico.
* 87 percent of cable broadband lines had speeds of over 2.5 mbps in the fastest direction –- compared to 39 percent of the telephone providers’ DSL lines.

Top Five US Broadband Service Providers at end of 3Q 2007
* AT&T 13.76 million
* Comcast 12.89 million
* Verizon 7.98 million
* Time Warner Cable 7.41 million
* Cox Communications 3.93 million

  1. The problem in America is that income is so poorly distributed compared to Japan, Germany, France and other successful democracies that while America has the richest people in the world Europe or Japan have “the richest poor people in the world”. In order to increase penetration in the States you would need to have education and income better distributed accross the population. Internet penetration depends not only on wealth but also on education and income distribution.

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  2. Well done for filtering the analyst-speak, Om. This is not the end of the world and there are still millions of units of product to be sold before the market is saturated.

    I think it is misleading for UBS to use a YoY growth figure in Net Ads… If Net Ads > 0, then there is YoY growth in the market.

    As you say, that really means that growth is slowing, but to express than as a -18% YoY growth (of Net Ads) figure is simply spinning numbers.

    It also ignores the fact that in a scarce market, exponential growth will eventually slow as the base gers bigger and you get the other side of the inflection point on the S curve. This may be in spite of the fact that you are only half the way to full adoption.

    If you want to project a negative view you say “We expect 2007 DSL/fiber net adds to total 4.6M in 2007 compared to 5.6M in 2006, a decline of 18%. We expect cable net adds to decline 9% annually 3.9M.”

    Alternatively if you want to project a positive view you say “We expect 4.6M new DSL/fiber connections and 3.9M more cable connections in 2007 as the market continues to grow.”

    There are 4.6m more DSL/fiber connections this year than last but it’s too easy for some muppet to come along and intepret UBS’ analysis as an 18% decline in DSL/fiber connections…

    Or is that the point? Write it in doublespeak and you look double-clever?

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  3. Interesting points you bring up Martin. I agree to some extent, but the market size is relatively large compared to some of the other democracies you bring up. so that plays a big factor in market penetration. after all if you a larger pool, the variance is much larger.

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  4. @ Jeremy Penston

    The negative in this report is that the growth is slowing pretty fast, which means we are going to see some jostling for market share.

    That means better offers – cheaper or higher bandwidth tiers – and that would mean a good thing for the consumer. If Comcast knows that it can lose a customer then it is less like to make moves like rampant traffic shaping.

    But your points are well taken.

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  5. Assuming the 77% of homes are evenly distributed among that 90%,

    Clearly an inaccurate assumption, but the question is how inaccurate?

    The problem in America is that income is so poorly distributed compared to Japan, Germany, France and other successful democracies that while America has the richest people in the world Europe or Japan have “the richest poor people in the world”.

    No, this is incorrect. Income inequality is clearly higher in the US than in Europe and Japan (especially post-tax and government transfer), however, poor people in the US have almost identical real incomes to poor people in Europe, with the exception of Norway (oil income) and Switzerland.

    See this study, among others.

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  6. Assuming the 77% of homes are evenly distributed among that 90%,

    This would be an interesting number to study. It’s certainly true that the states that lag behind in broadband connections are also those with the least income inequality, but also the poorer states. Do they have both fewer computers and less access to broadband? Is it really conceivable that areas with no broadband access are evenly spread out among areas with computers and without? Or, as is likely, are wealthier areas more likely to have both computers and broadband availability, and the real potential market is roughly equal to the number of households with computers?

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  7. John,

    another point to add to the conversation: not everyone wants broadband. We go on an assumption that people care. There is a substantial portion of the population that is happy with their luddite life so to speak. your thoughts?

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  8. I’ve seen a number of such articles recently (doom and gloom because US broadband sub growth is slowing). All seem to ignore an important factor: what is broadband? More importantly, are service providers investing in infrastructure in order to be able to move an “old” broadband subscriber to a “new” type of broadband?

    The answer is, absolutely.

    Even ignoring the ludicrous FCC definition of broadband (200 Kbps in at least one direction), most of what passes for broadband today is still characterized by a peak downstream bit rate of 1-5 Mbps. But, in response to YouTubers, Slingboxers, gamers, video chatters, and even GigaOM TV watchers, service providers are aggressively deploying infrastructure that: (a) delivers peak downstream but rates of 10, 50, 100 megabits per second or more, (b) delivers higher average bit rates (the Achilles heel for most cable broadband offerings), and (c) is more symmetrical.

    All of this activity is lost in the superficial analysis that simply looks at the number of broadband subs and the rate of growth in that number. As we continue to push broadband penetration (and I see no reason why it can’t eventually reach 80-90%), we are also going back and replacing everything we’ve already done.

    And anyone that thinks we’ll stop at 100 megabits per second hasn’t been taking very good notes over the last decade or so.

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  9. [...] US recover to a 2,8% growth in 2009; personally I’m extremely sceptical about this wish. Read this article of Om Malik on the US broadband growth sharply decreasing as an example of why I think the US challenges are still seriously [...]

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  10. [...] difficiles “. Il y a trop de start-ups. La pénétration des lignes à haut débit se tasse (selon le blogueur Om Malik , au troisième trimestre 2007 53% des foyers en étaient équipés alors que 77% avaient un [...]

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