RBOCs GIRD FOR BROADBAND BATTLEGROUND

After years of lagging behind the phenomenal growth curve of the cable industry in broadband data, DSL providers showed definitive signs of a major comeback in the first quarter. Led by SBC Communications, three of the four Bell companies reported their strongest quarters of DSL growth ever.

While cable operators by no means turned in shoddy numbers, the RBOCs claim they are poised to overtake their competitors and reverse the broadband trend in the U.S.

SBC reported the largest number of subscriber additions in RBOC history with 447,000 net additions, a 13% increase in its total subscriber base. Verizon recorded the largest percentage growth of any broadband provider, adding 345,000 subscribers, a 15% increase in total customers. BellSouth added another 156,000 DSL lines, representing an 11% increase.

“We don’t look at this as a turnaround quarter for SBC—we’ve had nine straight quarters of growth—but for the industry as whole, we have definitely turned the corner,” said Ed Cholerton, vice president of DSL product management for SBC. “Our share positions are improving against cable, and it looks like we’re going to see a fair amount of growth in the future from all providers.”

SBC’s results firmly locked the company in position as the second largest U.S. broadband provider with 3.9 million lines in service, behind Comcast’s 5.7 million. It also was the first carrier to begin tiering its service and cutting prices over the last few quarters, which is one of the main factors driving its numbers, Cholerton said.

“Cable had a pretty big head start, but we’re continuing to make good share gains, and we’re continuing to close the gap,” he said. “I can’t say that we’re going to bypass cable in the next two quarters, but if this keeps going, who knows?”

Verizon Communications, by contrast, has been fine-tuning its product the entire year, boosting average download speeds, building out its footprint and simplifying its ordering and installation processes, said Judy Verses, senior vice president of marketing for Verizon.

“That laid the foundation for us to explode out of the chute this year,” Verses said. “We topped everything off with an aggressive marketing campaign that focused on the difference between cable and DSL from both a price and service point of view, and we went head-to-head with cable providers.”

BellSouth credited its gains to its recently added tiered DSL services. Its 256 kb/s FastAccess Lite service accounted for 30% to 40% of BellSouth’s new sales since its launch, said Michael Bowling, the carrier’s vice president of broadband services. The service allowed the carrier to lure thousands of on-the-fence dial-up subscribers to DSL while offering a broadband service that undercuts cable modem service and its own standard 1.5 Mb/s product in price.

“We’re really beginning to hit our stride in our markets,” Bowling said. “We’re pinpointing the right package that will bring dial-up customers over to broadband.”

But while RBOCs gains were impressive, cable operators’ net adds were by no means mediocre. Comcast added 394,000 customers—certainly not its best quarter, but still an impressive gain. Time Warner and Cox—the only other major cable operator to report Q1 numbers as of last week—added 204,000 and 161,000 net data subscribers, respectively.

However, RBOC executives pointed out that cable operators’ monthly adds are either flat or trending down, while their own DSL net adds have consistently recorded sequential growth for the last four quarters. The Bell companies also cited February data from the PEW Internet Project that claims that 42% of all residential broadband connections in the U.S. are DSL connections, compared to cable’s 54%.

“Both cable and DSL have benefited from the fact that the broadband industry is still growing, but the momentum is definitely shifting from cable to DSL,” said Verizon’s Verses.

The cable industry isn’t so convinced. The PEW study is one of the many reports that relies on survey data instead of reported numbers. Convergence Consulting, for instance, reported that at the end of 2003, cable’s lead in residential broadband was far greater at 16.27 million connections vs. DSL’s 7.9 million. But those numbers do not factor in business lines, which are far more significant for DSL than cable. Convergence estimates 20% to 25% of DSL’s customer base are business compared to only 3% to 4% for cable.

Regardless of the data, one outstanding quarter does not represent a wholesale reversal in industry dominance, said an official with the National Cable and Telecommunications Association officials.

“Statistics show that cable still has a healthy lead in overall number of subscribers, and DSL is still not available as widely as cable modems,” the NCTA spokesman said. “This is generally healthy broadband competition, but cable has not lost any ground.”

While DSL certainly is re-energizing itself as a competitor, its success hasn’t necessarily been at the detriment of the cable operators, said Brahm Eiley, an analyst for Convergence. Broadband demand in general is at an all-time high, driven by new computer sales and the growing popularity of capacity intensive applications such as digital music, photography and streaming media.

Both the RBOCs and the MSOs are feeding off of that demand, Eiley said, but the aggressive tactics of RBOCs are giving them a larger share of the market.

“The MSOs certainly aren’t suffering,” he said. “They had good numbers last quarter, and their penetration levels in their markets are far higher than the RBOCs’.

Eiley pointed out that Cox is winning seven out of every 10 residential subscribers where it is competing directly with DSL. Cable is definitely still winning the battle, Eiley said. In fact, he said the battle hasn’t really begun, since both RBOCs and MSOs generally are going after the large pool of dial-up customers and not competing head to head. Convergence estimates there were 46.5 million dial-up subscribers in the U.S. at the end of 2003. That number will be cut in half by 2007. At that point, when the broadband market can be considered saturated, the real competition will begin, Eiley said.

“At the rate they’re going now, there’s still a lot of dial-up to cannibalize,” Eiley said. “The head-to-head competition will begin in 2006, and the game will be the bundle. The RBOCs are going to satellite video, and the cable operators are going to voice. Whoever has the most enticing bundle will win.”