Cable Operators are Broadband Operators. And they're better at it than you are

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Leichtman Research recently announced that the US cable operators now have more broadband subscribers than they have TV subscribers. The difference is not much - 49,915,000 broadband subscribers on cable in Q2 versus 49,910,000 TV. A gap of 5,000 subscribers in a 100 million-strong market might seem like a quirk that might well be put down to statistical noise, but this has been coming for some time. The following chart shows customers by product at Comcast since Q1 2011.

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And the real news is in the net-adds numbers.

In Q2 2014, the cable industry net-added 385,000 broadband subscribers, while the telcos managed 2,000. It might be more accurate to say that the telcos' net-adds were statistically indistinguishable from zero. Although AT&T and Verizon between them signed up 627,000 net adds for either U-Verse or FiOS service, this wasn't enough to soak up the 636,000 net subscribers who churned away from their DSL products. And the shift is accelerating; the Q2 2014 net gain was higher by one-third than that recorded in Q2 2013.

This shouldn't be news to anyone, though. The years when cable operators were TV-centric businesses that could be considered separately from telcos are long in the past. Thinking of cable operators as TV networks makes as much sense as thinking of Verizon or AT&T as companies whose core business is telephony. These days, they share a common product: broadband. And they've been heading that way for years. This chart, taken from our Triple Play in the USA executive briefing, makes the point. Non-video revenue - i.e. broadband and VoIP - has grown much faster than video for years.

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Broadband is especially important because it is becoming the foundation product in the triple- or quad-play bundle. It is unlikely that anyone will churn their total communications spending in order to get more content. This is especially true in the United States, as the content rightsholders tend to either go for a "distribution first" strategy, breaking the new movie on as many screens as possible, or else to develop a direct-to-consumer relationship. If, however, a customer changes broadband provider, they are much more likely to change phone, mobile, or TV provider. The following chart shows broadband and triple-play customers at Comcast over the past six quarters - the correlation is very close indeed.

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Broadband is also important because it's a product that an ISP produces in-house, without paying tribute to rightsholders. AT&T says it pays as much as 60% of its TV sales right back to content owners.

We expect broadband net-adds to gravitate to whoever provides the most speed and capacity at typical price points, and this is precisely what is happening in the US market. The following chart, using data from the FCC's Measuring Broadband America, shows that the cable MSOs and Verizon FiOS tend to under-promise and over-deliver on both uplink and downlink speed, while the DSL operators (including AT&T's VDSL-based U-Verse) are doing the precise opposite.

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Better performance in the access network also translates into better prices on a per-megabit basis. The following chart illustrates pricing per advertised, downlink megabit, based on AT&T, Verizon, and Comcast's published offers. Although Verizon's ultra-fast FiOS plans are better at the very top of the market, the cableco wins on price between 25 and 125Mbps, where most of the customers are.

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The cable triumph is reflected in AT&T's official filings justifying the bid for DirecTV. Their arguments shed much light on the interdependence between video and broadband. For example, AT&T CSO John Stankey and SVP of Home Solutions Lori Lee admit that nobody takes the video service on its own merits, but only as an upsell if they've already taken broadband.

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Because the video service lacks scale, its margins suffer due to its poor negotiating position with Hollywood rightsholders.

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And why does the service lack scale? AT&T argues that it can't roll out more broadband because it can't sell enough TV on top to make it worthwhile:

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But they also argue that they can't roll out more TV because they don't have the broadband infrastructure to deliver it:

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And despite that, they've cancelled further U-verse buildout. This may mean they've reconsidered the TV-via-VDSL strategy and they are dropping it in favour of more GigaPower broadband, or it may mean they're doubling down on TV via the DirecTV deal.

Content is an important part of the bundle. Nobody disagrees with that. But it relies on the broadband infrastructure as much as it finances it, probably even more so. The cable operators seem to have realised that they are in a single ISP market, no matter what the access technology, and that content is an upsell to the core product, broadband. Cable operators have more of it.

In the UK, for example, Virgin Media recently reported that 40% of its net-adds are taking speeds of 100Mbps or higher, and 15% are taking the 152Mbps top whack.

The upshot is that despite all the "superfast broadband" hype and the BDUK funding, OFCOM's Communications Market Report shows that Virgin Media accounted for 17% of the total growth in "superfast" connections in 2012-2013 just because it doubled the download speeds for existing customers as a customer-retention giveaway. Is that the inflection point in this curve?

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Also, BT may have received all the BDUK money, but that doesn't mean BT Retail has benefited from it with its content-heavy, football-driven strategy. The following chart, also from the CMR, shows that the indie ISPs, more broadband-focused, have increased their market share at BT's expense while the upgrade money has been flowing and FTTC rolling out. Virgin Media has naturally lost share in "superfast" because it didn't get any. That said, its success in selling 150Mbps plans will no doubt make it feel better.

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So, our conclusions. Cable operators are benefiting from the recognition that broadband, not TV, is the core product in the triple play, and their commitment to continuous improvement in the technology. Content is a great add-on to the bundle, but it cannot substitute for broadband, not least because both your own content and OTT content is dependent on broadband for delivery. And having pushed the limits of the DOCSIS 3 technology again and again, the cable operators still have a strong roadmap ahead from 150Mbps through 300 and 600 to gigabit speeds with manageable amounts of incremental investment. Watch out.