Broadband Competition: Same As It Ever Was

Yesterday, I talked about the 60 percent of Americans who have a choice between two broadband providers with the capacity to handle any services they might use. The picture isn’t as rosy for the other 40 percent. Most of them (30 percent of U.S. households) will also have access to broadband at speeds that can now handle any services currently available, but only from the cable company. The remaining 10 percent will not have access to these enhanced speeds from anyone.

Before we go further, we should recognize that this situation does not represent a sea change in the competitive landscape. While it is true that cable broadband is now several times faster than the fiber-to-the-node service from telecoms (100 to 25 mbps), cable modem service has always been 3 or 4 times faster than telecom broadband:

Year	Cable Broadband Speed	Telecom Broadband Speed
1997	1 Mbps	0.38 Mbps
2000	2 Mbps	0.77 Mbps
2003	3 Mbps	1.5 Mbps
2006	6 Mbps	1.5 Mbps
2009	10 Mbps	3 Mbps

The real difference is that the telecom speeds are now sufficient to handle any services customers use. That wasn’t true in the past, when the speed differences had a real-world impact. In the ‘90s, cable customers could download music in a reasonable time and watch YouTube videos, while many DSL customers could not. A few years later, cable broadband customers could watch TV shows on Hulu, while many DSL customers could not. More recently, the same was true for HD videos and movies. Now, for 60 percent of Americans, both cable and broadband services are more than adequate for streaming HD movies.

And the fact that a large percentage of Americans can only get the top speeds from one provider isn’t new. In the early days of broadband, most households had access to service from only one provider (usually the cable provider). As speeds increased, many households had the choice of only cable service that could handle streaming video, while telecom broadband was well below 1 mbps.

The cable companies used this speed advantage in the marketplace, and in the past they had a larger share of broadband customers than they do now. The most recent statistics from the FCC are as of the end of 2010, when 56.3 percent (43.3 of 76.9 million) of broadband connections were via cable modems. That number has been increasing in the last few years, but cable’s percent of total broadband consumer connections still is not as high as it was in the 90s, when they had nearly two-thirds of the market.

Cable companies are again increasing market share, but it will be several years before they reach the levels they had in the ’90s. The FCC year-end 2010 report showed that the cable companies added 2.4 million broadband customers that year, while telecom companies added only 1 million. In other words, the cable companies gained 70% of the net broadband residential adds.  The cable companies did even better last year. According to the Leichtman Research Group, the cable companies gained 67% of the new broadband wireline customers in the first quarter, 77% in the second quarter, and 83% in the third quarter.  That sounds like a lot, but the focus on net adds is deceptive, because as broadband penetration has increased, the number of net adds has started to decline.

Why is this significant? Because the fact that net adds have decelerated means that if the cable companies gain a large percentage of net adds, their share of total broadband residential connections will grow slowly. Assuming that net adds level out at the 2010 level of 3.5 million per year, and the cable companies’ rate of gain increases to 90% of new customers, their share of residential customers will increase to 62.6% in five years.

	Cable Broadband	Total Fixed Broadband	Percent Cable
Start of 2011	43.27 million	76.88 million	56.3%
Added Over 5 Years	15.83 million	17.59 million	90%
Start of 2016	59.1 million	94.47 million	62.6%

That would be a significant gain, but the cable share of the wireline broadband market would still be lower than it was in the ‘90s. Even that number is likely overstated. It is more likely that net adds will continue to decline, which is only natural as the number of households with broadband increases to 70, 80 and 90 percent. Based upon current trends, the cable companies will probably add a couple of points to their percentage of total fixed broadband connections over the next half-decade.

It is possible that a fundamental change in the market is underway, and the 2011 net add numbers indicate that cable’s rate of gain is accelerating. But a fundamental change in market structure will not happen unless the telecom companies start loosing a significant number of customers. Whether that will happen is yet to be seen.

The fact that the competitive level of the broadband market hasn’t changed does not answer the ultimate question: is this level of competition good enough? And is is good enough for the 30 percent of Americans who have only one choice of very high speed broadband? That will be the subject of tomorrow’s post.

Posted in: Broadband