Cable may enjoy the overall lead in the U.S. broadband race, but it's clear that telcos like Verizon (NYSE: VZ) and Cincinnati Bell are finding that consumers' desire for high bandwidth is outpacing the desire for linear television services.
Verizon has found success in delivering its FiOS TV service--one that grew by 100,000 net subscribers in the second quarter--but broadband gained the upper hand with 139,000 customers signing up for service. It ended the quarter with a total of 6.3 million FiOS Internet customers.
While the telco sees value in delivering its own facilities-based video service, which as of the end of the second quarter reached a total of 5.4 million FiOS video customers, broadband is the bigger seller.
"Broadband is actually a bit more profitable for us than the full linear TV package and going in and offering broadband is another alternative for us," said Lowell McAdam, CEO of Verizon, during the recent Goldman Sachs Communicopia conference.
Such a theme is not all that surprising. Telcos like Verizon, AT&T (NYSE: T), CenturyLink (NYSE: CTL) and Cincinnati Bell may have made ongoing progress with their television services, but the cost of acquiring content remains a large challenge.
As a testament to its bigger-bandwidth-is-better theme, the service provider made all of its FiOS tiers symmetrical in July. Existing and new FiOS customers that reside in an area where the service has been built out have their choice of symmetrical tiers that begin at 25 Mbps and scale up to 500 Mbps.
While the telco maintains it won't expand FiOS into new areas unless they can prove out a compelling business case, the service provider said that it has about 1 million homes left to convert to fiber before it wraps up its entire three-year conversion plan. By migrating more of its problem copper customers to fiber, the telco gains two main benefits: reducing operational and maintenance costs and the opportunity to upsell voice-only customers higher speed bandwidth and even video.
One of the broader triggers that's driving broadband adoption, particularly for younger users, is over-the-top video. Being able to have a larger bandwidth pipe enables Verizon to help consumers feed their show-bingeing desires. In addition to upping speeds, Verizon intimated that it would offer some kind of over-the-top video service that would allow customers to choose the content they want next year.
Verizon is hardly alone in the broadband trend.
No less aggressive is Cincinnati Bell, which is seeing the fruits of its fiber-based Fioptics service suite offering pay off. In the second quarter, Fioptics revenues rose 45 percent year-over-year to $34 million. During this period, Cincinnati Bell added 6,700 Fioptics Internet subscribers and 5,000 Fioptics video subscribers, ending the quarter with a total of 98,300 and 82,500 subscribers, respectively.
Ted Torbeck, CEO of Cincinnati Bell, shared McAdam's thesis during Goldman Sachs event that while having entertainment and broadband coupled together is important, broadband is the more critical piece in its wireline portfolio.
"We think controlling the pipe to the home or the business is critical," he said. "The demand for speed and capacity has never been greater so we think that broadband will be the most integral part of this."
However, Cincinnati Bell is not sitting on its laurels. The telco recently launched a 1 Gbps fiber-to-the-premises (FTTP) service for its residential customers in Cincinnati, a service that far surpasses what its main competitor Time Warner Cable (NYSE: TWC) can offer today. It estimates that it can reach 70-80 percent of the city with its fiber-based broadband service.
A similar trend is taking place in the cable industry where all of the major cable MSOs are seeing their broadband subscriber count surpassing their bread-and-butter video business. According to a recent Leichtman Research report, cable operators had 49,915,000 broadband subscribers in the second quarter versus 49,910,000 TV subscribers.
Comcast (NASDAQ: CMCSA), for instance, reported in its second-quarter earnings that broadband Internet grew 9.7 percent year-over-year to $2.8 billion, with customer growth of 203,000 outperforming the 187,000 adds in the second quarter of 2013.
If Comcast is successful in purchasing Time Warner Cable, consumer data-only revenues will jump from $17 billion at end of 2013 to about $23 billion by end of 2018, according to UBS estimates.
It's clear that cable may still be the broadband lead, but the telco's move to put higher speed broadband into more consumers' hands underscores the desire by consumers to have more control over how they consume content over various devices inside the home.--Sean