High Speed Access Soon Will Be Biggest Revenue Source for Cable TV and Telcos

High-speed data subscriber numbers will surpass video subscribers for Moody's-rated cable companies in the next year, says Karen Berckmann, Moody’s senior analyst.

The longer-term revenue and profit impact is a bit unclear at the moment. Video average revenue per customer is higher than that of high speed access--nearly double--but net revenue after paying content costs is nearly the same.

Assume a monthly average of about $80 a month for a video subscription. Content providers typically $35 of the billed amount. So “net” revenue for the distributor is about 56 percent, or roughly $45 a month, before operating and marketing costs, depreciation and amortization or taxes.

By way of comparison, a typical monthly high speed access account might generate $45 or so, monthly.

The point is that both revenue streams are roughly equivalent, on a per-account basis, even if video generates more gross revenue.

The other issue is the strategic importance of high speed access as the future revenue driver for any provider of fixed network services. For a cable operator, voice remains a distant third as a driver of revenue, behind video and high speed access.

For most telcos, voice still represents more than half of total revenues, but is declining steadily, while high speed access and video revenues are climbing. At some point, it seems inevitable that voice becomes the smallest of the three anchor services (high speed access, video, voice) for either telcos or cable TV providers.

Ability to substitute other video providers also arguably is easier than switching high speed access providers, as satellite is not competitive.

“An operator that loses a customer to FiOS or uVerse is likely to lose that customer entirely, whereas one losing a customer to Dish Network or DirecTV could still maintain a broadband relationship,” Berckmann says.

That is another way of illustrating the strategic importance of high speed access: it is a service satellite providers, or most fixed wireless providers, will not be able to replicate, as speeds climb to gigabit levels.

“Fewer video customers means lower programming costs (which are paid on a per subscriber basis) and servicing the video product tends to be the most challenging and costly part of the business, so margins could benefit from the mix shift,” Berckmann says.

The downside is the loss of scale, which could lead to higher per-customer costs in the video segment.

Any way one looks at the matter, high speed access is emerging as the anchor product for cable TV and telcos. Video entertainment will emerge as the second largest revenue source for both cable TV and telcos, while voice is the smallest revenue source.

Several trends are responsible for those changes. Voice has shifted decisively to mobile, shrinking the total fixed network voice market. And mobile-enabled texting and messaging apps have displaced demand for voice sessions, as well.

At the same time, over the top product substitututes are displacing voice, and eventually video entertainment, increasing the value of a high speed access connection.

At the same time, Wi-Fi has become a key access method for computing, mobile apps and other content, including video entertainment. That means more of the value of a fixed high speed Internet access connection is driven by the ability to enable content and communications apps.

Fundamentally, the only key service not expected to see either wholesale displacement or significant reductions in demand is high speed access.