Dissecting the DSL Sub Rate

Sep 6, 2004  •  Post A Comment

Is DSL’s success at adding customers being overblown?

For much of the past year a great deal of attention has been paid to the efforts by the Regional Bell Operating Cos. to grab a piece of the growing demand for high-speed data services and to how a series of price cuts for their digital subscriber line services has significantly driven subscriber growth and helped narrow the gap between the phone companies and more established cable operators.

While cable had largely won the net subscriber additions race, the tables were reversed in the most recent quarter. Of the more than 1.9 million new high-speed data customers reported in the second quarter, DSL providers booked more additions than the cable operators-leading some analysts to declare that the phone companies are winning the high-speed data race after arriving late to the sector.

However, one need only peel back the layers just a bit to reveal that such declarations are premature, asserted Bernstein Research analyst Craig Moffett.

Though overall DSL growth surpassed cable’s high-speed data growth in the second quarter, the composition of the DSL customers creates an important distinction that can’t be ignored, Mr. Moffett said.

DSL providers generally attract a higher number of small-business customers than cable operators do, though cable is pushing its own high-speed data offering for small business as well. When small business customers are stripped out of the DSL net additions total and only residential customers are considered, Mr. Moffett estimated, cable accounted for more than 54 percent of net new customers booked in the quarter.

Another factor that contributed to DSL’s performance is churn, Mr. Moffett said. The churn rates of cable modem and DSL were fairly comparable in the second quarter, but because there are more cable modem subscribers than DSL subscribers, in terms of sheer numbers, cable’s performance looked worse.

Finally, the increased availability of DSL across the country is an issue as well. After having the high-speed data market largely to itself, cable operators are finding that DSL service is available in more and more markets, which has blunted cable’s ability to snatch up customers as easily as it once could.

Those kinds of distinctions are important for the cable operators because the perception that DSL growth is outpacing cable-modem additions is one of a slew of factors depressing cable stocks this summer.

Cable shares have been languishing for the past several months as investors cool to the sector amid stiffening competition from the RBOCs in the high-speed data arena and the surge in subscribers to video services being offered by the satellite companies.

Making matters worse for multiple system operators: RBOCs and satellite operators have joined forces in several cases, offering a bundle of video, data and voice services that rival that of the MSOs, often at cheaper prices.

Cable’s ability to add customers is crucial to the company’s growth plans. With the video business maturing and prospects for growth fairly dim, MSOs have turned to a series of new services-high-speed data, telephony and video add-ons such as video-on-demand and digital video recording devices-to help grow the revenue line.

Yet even as DSL becomes more ubiquitous, analysts see cable retaining an advantage over DSL-at least in the near term.

Michael Goodman, an analyst at The Yankee Group in Boston, noted that even with the greater penetration of DSL, cable-modem service is simply available in more markets, has greater consumer awareness and by virtue of being a purveyor of entertainment content, can easily sell to consumers the merits of broadband’s role in entertainment.

Further, Mr. Goodman believes word of mouth among consumers has helped the cable operators sell their high-speed data service.

Those factors are a strong enough influence not to have led cable operators to engage in a price war with the RBOCs, Mr. Goodman said.