Building broadband past the saturation point

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Michael Kennedy, ACG Research

Kennedy

U.S. broadband has reached the end of its growth phase, and the industry is now shifting from building infrastructure and acquiring customers to creating sustainable business models.

The U.S. fixed-line broadband market appears to have reached the saturation point. The most recent FCC broadband report with data through 2011 indicates that about 80% of U.S. households are served by fixed-line broadband. It also shows the classic S shaped market development curve with the last inflection point in the S occurring in 2007. This data, when combined with year-end 2012 data from the largest fixed-line broadband operators, confirms market saturation. Fixed-line broadband connections for 4Q12 compared to the previous year showed little change: AT&T (NYSE: T) 0.3%, CenturyLink (NYSE: CTL) 3.5%, Comcast (Nasdaq: CMCSA) 6%, and Verizon (NYSE: VZ) 1.4%.

Mobile wireless subscription sales also have saturated the market. The CTIA, the mobile wireless industry association, estimates that there are 1.01 mobile connections per person in the United States. Mobile wireless broadband is also pervasive. The FCC reports that 142 million mobile broadband connections were in service at the end of 2011 compared to 88 million fixed broadband connections. The broadband industry, consequently, is now focused on increasing the speed of its broadband connections and creating sustainable business models.

The FCC defines broadband as being a data service with a speed of at least 200 Kbps in at least one direction. However, rapid technological progress has driven the FCC to define "modern" broadband as having at least a 3 Mbps downstream speed and at least a 768 Kbps upstream speed. Using this definition there were approximately 82 million total broadband connections with cable owning 42% market share, followed by mobile with 38%, aDSL 13%, and FTTP 7% respective shares at the end of 2011.

Mobile broadband undoubtedly has surpassed cable to become the number one modern broadband service in 2012. Wireless operators have been aggressively deploying LTE technology that offers performance nearly equal to the most popular cable modem speeds. As a result, smartphone sales have exploded in the last year; for example, AT&T reported 10.2 million smart phone sales in 4Q12 with 47.1 million postpaid smart phones in service at year end.

Fixed broadband operators also are upgrading their infrastructure to support higher speed services. The cable industry's movement to DOCSIS 3.0, AT&T's U-verse, and Verizon's FiOS are the most prominent initiatives. The capability to support HD video is an essential element of these modernization programs.

In spite of this market growth, wireless and wireline revenues have not kept pace with the increase in broadband connections or usage (traffic). The wireless market has sustained annual traffic increases in excess of 50% per year over the last several years, but ARPU has not. For example, for AT&T wireless ARPU increased 1.9%, and for Verizon Wireless 2.6% in the fourth quarter as compared to the previous year. The revenue picture is more complex in the wireline segment, with steady revenue losses in legacy services such as circuit switched voice and TDM-based business services. Though new services such as IP-based business services and broadband are being widely adopted, they are not producing net overall revenue growth. For example, 4Q12 wireline revenue of AT&T, CenturyLink, and Verizon declined by 0.5% to 1.7% compared to 4Q11. Comcast's cable communications business had somewhat stronger revenue growth of 7% over the same period.

Wi-Fi offloading of mobile broadband traffic has become an important strategy for improving the profitability of mobile broadband, increasing the stickiness of wireline broadband and delivering value to smartphone and tablet users. Most wireless data plans have a monthly data limit of 2-4 GB, whereas wireline broadband has much higher limits. The Comcast plan, for example, has a 250 GB data limit. By employing Wi-Fi offloading subscribers can avoid surcharges on their mobile wireless data plans.

Mobile wireless operators also benefit from Wi-Fi offloading because the revenue lost by shedding traffic is less than the cost of increasing wireless backhaul capacity and adding new cell sites. Wireline broadband operators benefit because nearly all Wi-Fi access points use wireline broadband to backhaul traffic, making wireline and wireless broadband complementary services. This win-win-win solution has gained widespread acceptance; one National Science Foundation study estimated that 55% of mobile device traffic is handled by Wi-Fi offloading.

The cable industry might provide one useful case study on how to prosper in a saturated market. Cable television video subscriptions have been falling annually at 1% since 2001. However, over this same period video revenue has risen by 5% annually, and all other revenue has grown by 15% annually according to the NCTA.

Saturated and mature markets require differentiated service offerings and bundling to sustain revenue growth and maintain customer relationships. Implementation of networking technology such as IP policy engines and SDN network analytics tool farms can aid service differentiation. However, diversification into related markets and development of new relationships with device manufactures and content providers will also be needed.

Michael Kennedy is a regular FierceTelecom columnist. He can be reached at mkennedy@acgresearch.net.