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MSO v. DBS v. Telco: 2008 Winners and Losers by the Numbers
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By Larry Hettick, Current Analysis Principal Analyst, Digital Home Services
Mar 20, 2009
Summary
Recapping FY 2008 results from the top phone companies, cable companies and satellite providers, a summary of each provider category shows a continuation of trends from 2007. Phone companies continue with double-digit voice line losses yet now own a double-digit market share of video customers. Both telcos and cable operators showed high single-digit growth in broadband subscribers, with the MSOs edging out the telcos with slightly higher growth. Cable companies collectively claimed about half of telco voice line losses, while wireless substitution accounted for the second half of wireline losses. And the satellite TV operators continued to show their exposure to the telco sales channel with almost half of DIRECTV and DISH net sales coming from AT&T, Qwest and Embarq. Yet even with the increasing competition for subscribers, ARPU increased across the board: telcos grew ARPU an average of 9.8%, MSOs averaged a 7.9% increase and DBS operators showed a collective 5.6% ARPU gain.
Current Perspective
Telcos
As a group, traditional phone companies continued their five-plus year trend, losing over 8 million voice subscriber access lines, representing an average line loss of just under 12% for FY 2008. The difference in the 8.3 million residential lines lost in 2008 by the incumbent local exchange carriers and the voice subscribers gained by the MSOs is largely attributed to wireless substitution. According to a December 2008 CDC study, “Wireless Substitution: Early Release of Estimates from the National Health Interview Survey, January-June 2008,” in H1 2008 some 17.5% of U. S. consumers have “cut the cord” to the traditional home phone and now use their mobile phones exclusively. Broadband access line growth grew slightly to 8.0% in 2008 compared to the 7.1% FY 2007 growth rate. However, Verizon’s FiOS Internet service, which grew by 956,000 subscribers, accounted for half of the broadband growth of all four telcos combined. Verizon added 975,000 FiOS TV customers and AT&T added 814 U-verse video subscribers in 2008, bringing the 2008 telco wireline video total to just under 3 million customers. Telcos earned a weighted average of $64.27 in monthly ARPU: AT&T earned $64.08, Embarq had $55.84, Qwest reported $55.84 and Verizon had the top wireline ARPU position with $68.46.
Collective results from AT&T, Embarq, Qwest and Verizon are shown in the table below on a pro forma basis reflecting acquisitions and spin offs as though they had occurred in FY 2006. Actual values are in 000s except ARPU which is in dollars; penetration percentages are based on switched access lines in service.
| FY 2008 | Change FY 2006 to FY 2008 | Change FY 2007 to FY 2008 | ||||||
| Telco Totals: | FY2006 | FY2007 | FY 2008 | Penetration | Actual | Percent | Actual | Percent |
| Wireline Video Customers (U-verse, FiOS) | 207 | 1,174 | 2,963 | 4.8% | 2,756 | 1331.4% | 1,789 | 152.4% |
| Satellite Video (AT&T, Qwest, Embarq) | 2,083 | 2,965 | 3,285 | 5.3% | 1,202 | 57.7% | 320 | 10.8% |
| Total Video Subscribers (without Verizon DTV subs) | 2,290 | 4,139 | 6,248 | 10.2% | 3,958 | 172.8% | 2,109 | 51.0% |
| DSL Broadband Connections | 17,613 | 22,255 | 23,211 | 37.7% | 5,598 | 31.8% | 956 | 4.3% |
| FiOS Broadband Connections | 687 | 1,525 | 2,481 | 4.0% | 1,794 | 261.1% | 956 | 62.7% |
| HSI Net Broadband Subscribers | 18,300 | 23,780 | 25,692 | 41.7% | 7,392 | 40.4% | 1,912 | 8.0% |
| Consumer Voice (Switched Access Lines) | 75,844 | 69,866 | 61,543 | - | (14,301) | -18.9% | (8,323) | -11.9% |
Multi System Operators (MSOs)
Cable companies gained about half of the voice lines lost by the telcos - adding over 4 million voice subscribers in 2008. Cablevision led the way with voice service success: over 60% of Cablevision’s video subscribers also buy the company’s voice service, and it has just under 40% voice market share of total homes passed by the Cablevision network. MSOs edged out the telcos slightly for broadband growth with a 9.5% FY 2008 annual increase. Including broadband lines sold by providers in this analysis, cable operators had a 57% share while telcos had 43% of the broadband connections sold. The worst 2008 news for cable operators was the modest 1.7% decline in basic video subscribers, attributed largely to competition from AT&T and Verizon wireline video. Weighted monthly ARPU for MSOs in 2008 was $111.03. Cablevision had the best results with ARPU of $134.85 while Mediacom had the worst with ARPU of $90.88.
Cable company total results for are shown in the table below for Cablevision, Charter, Comcast, Cox, Mediacom, and Time Warner Cable on a pro forma basis reflecting acquisitions and spin offs as though they had occurred in FY 2006. Actual values are in 000s except ARPU, which is in dollars. Penetration percentages are based on for total video subscribers are based on homes passed; digital penetration, high speed Internet (HSI) and voice penetration are measured against total video subscribers. Cox homes-passed and video subscriber counts are estimated since as a private company, Cox did not report full results for FY 2008.
| MSO Totals | Penetration | Change 2006 to 2008 | Change 2007 to 2008 | |||||
| FY2006 | FY2007 | FY2008 | FY2008 | Actual | Percent | Actual | Percent | |
| Homes Passed | 102,939 | 106,163 | 107,545 | - | 4,606 | 4.5% | 1,383 | 1.3% |
| Total Video Customers | 52,806 | 53,062 | 52,179 | 48.5% | (627) | -1.2% | (882) | -1.7% |
| Digital Video Customers | 28,479 | 32,747 | 35,518 | 68.1% | 7,039 | 24.7% | 2,772 | 8.5% |
| HSI Customers | 26,465 | 30,530 | 33,430 | 64.1% | 6,965 | 26.3% | 2,900 | 9.5% |
| Digital Voice Customers | 8,152 | 12,631 | 16,695 | 32.0% | 8,543 | 104.8% | 4,064 | 32.2% |
| Total Revenue Generating Units (not counting Cox) | 102,713 | 114,680 | 122,313 | - | 19,600 | 19.1% | 7,633 | 6.7% |
Direct Broadcast Satellite (DBS) Operators
Based on U. S. Census estimates of 128 million domestic “housing units” at the end of 2007, DBS operators owned about 24% of the pay TV market share in FY 2008. However, much of the DBS success is owed to triple play offers from the telcos. Demonstrating the satellite companies’ interdependence on the ILEC triple play, out of 1.553 million combined customer satellite TV additions in 2007, 1.198 million were sold through the telco channels of AT&T, Verizon and Qwest. In 2008, AT&T, Qwest and Embarq contributed 320,000 out of the 688,000 total net additions for DIRECTV and DISH combined. The bad news for DBS is that AT&T and Verizon are more interested in selling U-verse and FiOS TV—combined these two telcos added over 1.7 million wireline video subscribers in 2008. However, the good news is that both DIRECTV and DISH still are second only to Comcast with pay TV subscribers. In addition, Verizon and AT&T continue to need their DBS partners in areas not served by FiOS or U-verse, while Qwest, Embarq and Century Tel will probably always rely on DBS operators to supply video across their territories.
Actual values are in 000s except ARPU, which is in dollars; penetration percentages are based on 128 million U. S. domestic “housing units”.
| FY2006 | FY2007 | FY2008 | FY2008 | Change 2006 to 2008 | Change 2007 to 2008 | |||
| DIRECTV | Penetration | |||||||
| Cumulative Subscribers | 15,953 | 16,831 | 17,621 | 14% | 1,668 | 10.5% | 790 | 4.7% |
| ARPU | $73.74 | $79.05 | $ 3.90 | - | $10.16 | 13.8% | $4.85 | 6.1% |
| DISH Network | Penetration | |||||||
| Cumulative Subscribers | 13,105 | 13,780 | 13,678 | 11% | 573 | 4.4% | (102) | -0.7% |
| ARPU | $62.78 | $65.83 | $69.27 | - | $6.49 | 10.3% | $3.44 | 5.2% |
| Total DBS Subscribers | 29,058 | 30,611 | 31,299 | 24% | 2,241 | 7.7% | 688 | 2.2% |
| Weighted ARPU | $68.81 | $73.23 | $77.32 | - | $8.51 | 12.4% | $4.08 | 5.6% |
Wireless Implications
Although wireless substitution had a material effect on wireline voice, accounting for about half of telco consumer access lines lost, the 2008 results are also telling in what they don’t discuss. For example, attempting to address the “cord cutter” market niche, Verizon and AT&T both offer a triple play that includes wireless voice, satellite or wireline video, and wireline data as a bundle. However, neither company has disclosed if this bundle had a material effect on 2008 voice losses; rather both companies suggest the triple play bundle that includes wireline voice is their most effective tool to combat voice line losses. On the MSO side, cable operators espouse the need for mobile data and mobile video, yet almost a year after Comcast, Time Warner Cable and Bright House Networks invested billions in the Clearwire venture, no wireless commercial services are yet offered by these cable operators. Outside of MSOs who invested in Clearwire, no other MSOs have disclosed a strategy for out-of-territory 4G mobile services. And finally, despite long-standing satellite TV operator partnerships with the “old” Clearwire to bundle data and voice service into a triple play, no market traction for a fully wireless digital home triple play is evident. Together, the “what’s missing” from wireless integration represents an opportunity for future competitive differentiation.
Summary and Conclusions
In 2008, finding and acquiring triple play customers became almost a zero sum game since cable operators have largely finished their voice deployments, adding to already ubiquitous video and data competition. Broadband speeds increased to meet customer’s needs for bandwidth-hungry applications – and customers are shifting from low-speed DSL to higher speed cable and FiOS solutions as evidenced by the net broadband growth categorization. Telcos continued to lose voice lines to cable competition and wireless substitution, although telco TV matured into a serious long-term competitive threat to cable and satellite video. Satellite TV providers’ growth slowed without their own triple play, and in the face of pay-TV market saturation—marking their continued dependence on telco bundles for net annual sales. And except for taking a toll as a competitor to wireline voice, integration of mobile data and mobile video into the digital home service bundle remains elusive.
Recommended Actions
Recommended Vendor Actions
• Verizon should not sit back and rest on its FiOS broadband laurels. While FiOS high speed Internet may be the fastest game in town, cable operators are catching up in the speed race with DOCSIS 3.0 deployments. FiOS has also won out in consumer ratings for customer service over cable. However with Circuit City’s firedog tech support arm now in liquidation bankruptcy, Verizon must quickly secure a new in-home professional services partner to fulfill its vision of customer care.
• AT&T needs to proceed with FTTP deployments, because cable companies are building an infrastructure that will compete with the FTTP model built by Verizon. Although cable companies will likely throw their bandwidth advantage against Verizon FiOS as a defensive measure, the cable companies’ 2007 and 2008 infrastructure upgrades (made to defend against FiOS) will allow them to also create an offensive position against AT&T’s U-verse architecture and services.
• Cable operators should continue to hammer at DSL services as “slow” through marketing campaigns, while concurrently moving toward DOCSIS 3.0 to increase broadband capacity that AT&T and Verizon cannot meet with a DSL or VDSL infrastructure. Cable operators that don’t already offer a “low-end” broadband option to meet the telcos’ competitively priced DSL offers should do so, especially to capture the value-conscious shopper in these tough economic times.
• Cable companies need to step up their value-added support service options, especially since AT&T and Verizon both now offer support services that beat any cable company’s customer care experience. Cable companies are at a disadvantage to extend in-home support, because they already rely heavily on outside contractors to install basic services. These companies should train their installation and maintenance force to support more than a triple play bundle with a focus on extending their capabilities beyond a simple PC Internet hook-up.
• Clearwire should work with Sprint and other cable investors to deploy the MVNO data service quickly and then lay the network foundation for mobile video since video will become the next major differentiator beyond 2009. For the cable players in the near term, WiMAX-based services represent a relevant and missing wireless service element to take on the likes of incumbent local wireline providers such as Verizon and AT&T who already have a quadruple play and integrated wireless / wireline services strategy.
• DIRECTV and DISH Network should continue to highlight to potential customers the large variety of HD channels, because cable competitors will struggle with their network limitations to match DBS HD channel lineup in the short term. DIRECTV and DISH also need to the phone companies’ wireline video offerings (Verizon FiOS TV and AT&T U-verse TV) for the position as HD leader, since these telco competitors are quickly ramping up to offer an equivalent number of HD channels.
Recommended User Actions
• ARPU increases across the board suggest consumers are willing to pay more to service providers for digital home services. However, value shoppers can still find bargains—especially when buying bundles since bundles offer the best overall discounts. For example, Verizon introduced new promotional offers in January 2009 including $79.00 monthly triple play and $49.99 double play bundles.
• Consumers should pit one competitor against the other when choosing digital home services since most providers will eventually offer a better deal to persistent shoppers who threaten to churn to the competition. However, customers also need to be willing to sign up for a longer term contract if they want the best possible prices.
• Consumers who cut off their cable TV services because they prefer online video services must be conscious that the large amount of bandwidth they use monthly through their broadband connection already is or could soon be limited. Service providers fear that if the majority of consumers prefer downloading movies in the future, these movie downloads could create a crippling bandwidth crunch. Until the issue of rate limiting and usage caps is resolved, consumers will likely need to rely on traditional pay TV for most of their video entertainment.
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