Carl Weinschenk spoke with Bruce Leichtman, president and principal analyst, Leichtman Research. The firm last month released research that said the major cable operators and phone companies set a record with more than 10 million new subscribers in 2006.
Weinschenk: It seems kind of odd that cable and DSL set a record for additions, since the two forms of broadband have been around for so long. Where is the growth coming from?
Leichtman: The majority is coming from people moving from dialup to broadband. You've got to keep in mind that just over 80 percent of households have a home computer, and over 70 percent are online. There still is a gap between the 70 percent that are online and 50 percent on broadband. There still is an opportunity. The market continues to grow each year as well. Last year, 10.2 new people signed up for cable and DSL. This year, providers could hit that number again, depending on how they price it.
Weinschenk: Should they go after the record again?
Leichtman: My thought is that they have to be prudent at this point. That should be true of both the provider side and Wall Street. It may not be prudent if they are just pouring subscribers in the top of the funnel to make up for those siphoning out the bottom. It may be better adding 9 million instead of 10 because you are getting a better subscriber. The high-value subscribers are already gone. What to find now are stable subscribers. You want to find the best of the rest. You have got to be a little cautious on how to price and package. You don't want to pick up subscribers just temporarily.
Weinschenk: How do you do that, if you are a provider?
Leichtman: I think the secret is to not just sell the deal. Be prudent in what you are selling, not just add numbers to add numbers. The satellite television industry learned what happens when you just try to add subs. It's not just adding subs, it's adding the right subs. Wireless has gone through that as well.
Weinschenk: Which industry is winning?
Leichtman: I hate to make it too much of a horse race because both can win and both are winning. Phone companies, which are offering broadband, not just DSL, are adding a little more than cable. About 54 percent net adds are from the phone companies. That said, cable still had a record year in 2006. So nothing says that both sides can't win. I'd say the phone companies are catching up. [Cable] got the early subs, which is the real key. It's clear that the cable subs are paying more money. Cable was out there first, getting two of the three early subs. This means they got the higher-end subs, whereas DSL and phone companies got more [value-conscious] customers.
Weinschenk: The wild card will be the telcos' move to fiber. How does that factor in?
Leichtman: I think what we will see are a lot of DSL subscribers moving to [Verizon's] FiOS. But it and [AT&T's] U-verse are more important to business accounts than consumer accounts. It's more for the SMB base. The real benefit is securing the business accounts.
Weinschenk: What about technologies such as broadband over powerline, which we are hearing a lot about?
Leichtman: The longer we go with it just being talk without a reality, the more the opportunity diminishes. We might see pockets where there are offerings, but it's very hard at this point in time to be a third player in the market. How fast it grows also depends on Wall Street.
Weinschenk: So the bottom line is that it's a good environment for operators, but they have to play their cards right.
Leichtman: If Wall Street insists on the same numbers, providers will give them the numbers. But ultimately that's not a good thing. Cable companies generally were leveling off, but still did set a record. I think one thing you have to look at is why consumers are getting these services. It's not about games or music videos online. It's just about an improved experience. A lot of providers in their ads feature music, games, video. We're talking about the 55 millionth subscriber. They are switching because they have a two-cylinder car and know there are four-cylinders out there.
Weinschenk: Bundling is a key. Who is doing a better job, the telcos or the cable operators?
Leichtman: You've got to say cable has done a better job of bundling. The phone companies are using someone else's TV. That said, the telcos have a very nice bundle that they are not marketing, and that is their wireless services. Nobody said bundles have to be identical. To me, it makes more sense to bundle with wireless. It seems to me that Verizon and AT&T are just starting to play that card. They have [corporate access to] AT&T wireless, Verizon wireless. They are beginning to say, "Let's put that in the bundle." Not everyone wants everything in their bundle. What consumers want are things that make sense. Obviously, bundling AT&T wireless with AT&T phones makes a lot of sense.