3Q 2007 Broadband Report Card: B-Minus

[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.

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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

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