Residential Broadband Market Usa

Summary

In the United States, consumers and small businesses have adopted broadband, also known as high-speed Internet (HSI) access, at a rapid rate over the past three years. At the end of the 2Q04, more than 30M subscribers connected to the Internet utilizing broadband connections Cable television and local telephone companies dominate the residential broadband market with nearly 85% market share. Comcast is the nation's largest broadband provider with more than 5M subscribers. Comcast's subscriber growth and market share leadership can be attributed to its first-mover advantage, acquisition of AT&T's cable customer base and aggressive marketing strategies targeting dial-up Internet access customers. The standard Comcast HSI offer includes install, free hardware and deeply discounted monthly recurring charges for a specified time period. From a cost perspective, cable HSI is high-fixed, low-marginal cost business. Only recently has Comcast seen its subscriber growth slow as local telephone companies began to match HSI feature functionality at lower price points. Sluggish HSI subscriber growth presents significant challenges as Comcast attempts to launch voice-over IP (VOIP) completing the "triple-play" of voice, video and data services. In order to maintain subscriber growth and maintain competitive advantage over local telephone companies, Comcast should be more aggressive on HSI price.

Residential Broadband Market Overview

In terms of sheer subscriber numbers, consumer high-speed Internet service should be considered a success. In 2Q04, cable and telephone companies have combined to add more than 3.5M net subscribers; however, for the first time DSL service providers garnered more new HSI subscribers than cable television competitors. Leading DSL providers added 895,336 net new broadband subscribers in the second quarter, almost eight percent more than the major cable companies, which gained 830,791 new subscribers. Overall, cable HSI 2Q04 new subscriber results declined 26% from 1Q04. The 2Q04 net customer difference between cable and DSL providers could be attributed to increased DSL availability and continued aggressive pricing strategies. DSL providers have deployed new technology allowing them to reach more potential customers. In addition to expanding the footprint, DSL providers have been very aggressive on price and marketing message bundling HSI with local telephone and long distance calling plans

In addition to cable and local telephone companies squaring off for new broadband subscribers, AOL and MSN also have aggressively marketed their own content as an incremental service to broadband. Both AOL for Broadband and MSN Premium retail for $24.95 and $9.95 respectively and are additive to HSI monthly recurring charges. EarthLink broadband offering consists of reselling cable, DSL and satellite HSI services from broadband access providers. It is important to note that Comcast does not operate in a perfectly competitive market as there are few suppliers supplying a non-homogeneous product. Cable, DSL, dial-up and even satellite communication are not always considered substitute products due to their lack of availability and speed differences, but for our analysis, we have considered them to be substitutes.

Broadband Supply & Demand

Supply Drivers

On the supply-side, cable companies and local telephone companies are the primary providers of broadband Internet connections. As previously mentioned, cable led US broadband deployment; however, broadband demand exceeded supply as the local telephone companies delayed investing in its network to provide two-way data connections. Broadband service availability is no longer the great inhibitor to broadband growth as the local telephone companies upgraded their network and matched cable companies aggressive marketing programs.

Key factors increasing high speed internet supply include the following:

- multiple service providers- local telephone companies and competitive local exchange carriers (CLEC) offer competing HSI technology leveraging existing telephone infrastructure;

- broader channel distribution- consumers can purchase HSI in major electronics' retailers like Best Buy and Circuit City. Also, consumer's can check broadband availability and actually order HSI online. Channel expansion has reduced acquisition costs;

- productivity improvements- online ordering, welcome kits, self-install guides and online help have simplified and automated HSI ordering, registration, provisioning and support reducing customer installation and technical support costs. In addition, DOCSIS modems are "plug and play" into Ethernet or USB ports further simplifying installation; and,

- broadband tax moratorium- Congress continues to debate extending the ban on state and local tariffs on Internet connections. Internet Access Tax moratorium expired in November, 2003. The bill under debate would prohibit any further taxes on DSL and gives the 10 states currently taxing data connections two years to wean themselves off the revenue. The extension would ban Internet connections for 4 more years.

Demand Drivers

Since 1999, broadband demand has increased as more consumers and small business found to the Internet critical to their day-to-day activities. Items such as software, books, newspapers, music CDs, and DVDs are no longer exclusively packaged and delivered to "brick and mortar" stores. These items can now be purchased online and some products can be delivered electronically over the Internet. From 1999 to 2003, Comcast high speed internet customer base increased from 362K subscribers to 5.3M subscribers. Even though many analysts predict broadband growth to slow from its torrid pace, Comcast is still projecting 6.9M subscribers at the end of 2004.

Key factors increasing high speed internet demand include the following:

- acquisition programs- service providers aggressively discount monthly recurring charges, offer free CPE, and waive set up charges for new subscribers;

- marketing presence- service providers continue to aggressively use direct mail and e-mail campaigns to reach mass market consumers;

- dial-up migration- As Internet usage increases, customer bandwidth need also increase, making broadband the next logical choice for Internet connectivity. In July 2004, more than half of US Internet users connected through broadband services. It was the first time HSI connections surpassed dial up services;

- bandwidth-intensive applications- photo-sharing, music