Fixed Network Broadband Market is Near Saturation

It almost seems impossible that fixed network broadband Internet access could have become a “legacy product” so soon, but that is what has happened. For the most part, nearly everyone who wants to use broadband already buys it. And for those who want access to the Internet, and don’t want to buy fixed network broadband, mobile broadband, using a smart phone, now is a growing trend.

Leichtman Research Group points out that  the 17 largest cable and telephone providers in the United States, representing about 93 percent of the total market, acquired about 580,000 net additional high-speed Internet subscribers in the third quarter of 2012.

Collectively, these service providers now account for over 80.7 million subscribers. Cable companies have 46.2 million broadband subscribers, and telephone companies have 34.5 million subscribers.

Keep in mind that not all households own or use computers, a primary indicator of potential demand for broadband. At about 80 percent broadband penetration, we already are very close to the percentage of households that own computers, use the Internet at home, and want to buy the product. .

Many studies show that income is directly correlated to PC ownership and broadband usage. Households with annual incomes of at least $75,000 buy broadband at at least an 87 percent rate. Homes with annual incomes of $30,000 to $49,999 buy broadband at a rate of about 64 percent.

That pattern roughly mirrors the TV market, where not all homes own TVs and not all households subscribe to video entertainment services, though most do. There are about 132 million U.S. homes. About 114 million have TVs. And there are about 96 million video subscriptions purchased by U.S. consumers.

Since many households own two or more PCs, it is difficult to determine precisely what percentage of U.S. homes actually are candidates for broadband services to support those devices.



The top cable companies added about 575,000 subscribers, while the top three telephone companies added about 5,000 subscribers, in large part because AT&T and Verizon actually lost customers.

AT&T and Verizon added 749,000 fiber subscribers (U-verse and FiOS) in the quarter, while having a net loss of 799,000 DSL subscribers.

The slow pace of net additions simply reflects a market that is nearly saturated. We will know when the market is completely saturated when net additions hit zero, or very close to it. .

European Mobile Providers Have a Tough 3rd Quarter 2012

SFR's third-quarter operating profit sagged nearly 17 percent, year over year in the third quarter of 2012,  Reuters reports. For the full year, SFRT now expects a decline of annual earnings of about 12 percent.

SFR added only 40,000 new mobile customers on long-term contracts and 24,000 broadband customers in the quarter, compared with larger rival France Telecom's 320,000 new mobile contract customers.

Vodafone Group reported service revenue that fell 1.4 percent in the second quarter ended Sept. 30, 2012.

Deutsche Telekom, the former German phone monopoly, last week reported a 0.1 percent decline  in third-quarter revenue. 

Telefonica, Spain’s biggest telecommunications company, said sales for the same period dropped 1.6 percent.

What Devices Will Tablets Cannibalize?

Tablets are among the fastest adopted consumer devices ever. The only other device that might rival tablets are smart phones. But one wonders: with global economic conditions difficult, are consumers shifting their spending from one device category to another? And are consumers shifting spending from non-technology categories to devices?

The evidence is probably ambiguous at this point. Perhaps the clearest evidence is that users are shifting spending from “high end” to lower-priced value PCs. But if that is true, one also wonders whether tablets might not start to cannibalize the “value PC” category in turn.

PC cannibalization has been the big issue so far. But it stands to reason that that opportunity costs exist in consumer electronics as in any other field of life. In other words, funds spent for one product necessarily cannot be spent for another product.

Gartner analysts have estimated that consumer spending on technology goods will increase to as much as $2.7 trillion by 2016, driving demand for everything from mobile devices to app store products.

In 2012, about $2.1 trillion€” will have been spent on mobile phones, tablets and smart devices to the services that enables these devices to connect to networks, €”a jump of $114 billion over what consumers spent in 2011.

Other changes might be happening, though. One might argue that a consumer structural shift is happening. A growing number of individuals, across all regions, may be placing more emphasis on purchasing, owning and enjoying technology than ever before.

At one time, the rite of passage for becoming an adult may have been buying a car and then a house. However, in 2012 the rising cost of running a car and buying a house may well cause priorities to be reset.

Renting may become more acceptable, and taking public transportation, taxis and renting cars may become preferable to owning them, particularly in cities with highly congested roads, Deloitte analysts argue. Spending less on housing and transportation enables more money to be spent on technology devices.


Consumers continue to favor lower-end desktop PCs and notebook computers over high-performance models, with the top-end systems accounting for only six percent of the market in 2012, according to an IHS iSuppli Compute Platforms Topical Report.

This year, for instance, the mainstream desktop PC category tied with the value PC category in the share of the global desktop PC market, with each segment projected to claim an evenly matched 46.9 percent by year-end. In comparison, performance PCs will be left far behind in third place, with a meager 6.2 percent.

Meanwhile in the notebook computer space, the value notebook segment will take 46.8 percent, compared to 44.0 for mainstream laptops and 9.2 percent for performance models, IHS argues.

The upshot is that it isn’t entirely clear whether demand for tablets is coming at the expense of some other category of PCs, some other category of devices, or whether some other part of consumer spending is being affected. 

But opportunity costs still apply, always. What people are spending on tablets and smart phones prevents spending on other goods and services.

Apple, Samsung Earn 99% of Smart Phone Profits

Samsung is making huge gains in the global smart phone market. But the story is more than a tale of growing market share. In the area of smart phone profits, Apple and Samsung earn about 99 percent of profits from sales of smart phones.

Apple, Samsung and HTC are now the only three profitable companies in the mobile industry. Not just that, Apple and Samsung together combined to grab 99 percent of all mobile profits, according to Asymco.

HTC got one percent of industry profits, according to analyst Horace Dediu of Asymco.

Why Tablets are Important for Fixed Network Service Providers

Tablets are important devices, for virtually all fixed network service providers. Though mobile service providers will do their best to convince users that tablets are more useful when they have their own mobile connections (Verizon Wireless “Share Everything” plans are an example), most people have learned to save money on their mobile data plans by using Wi-Fi for tablet, smart phone, iPod touch and other Internet-capable devices.

That’s a key business development for fixed network Internet service providers. It means the value of a fixed connection now is higher than it used to be, when just one or two PCs were connected. Now the single fixed connection supports multiple users and multiple devices.

Also, given the pricing of bundles, it often makes sense to buy video entertainment plus broadband, instead of only broadband access. Even when this is not the choice a consumer makes, it is easier to justify buying broadband because it enables use of PCs, tablets, smart phones, game consoles, TVs and other devices.

Depending on the number of users or devices that can be supported by a single fixed broadband connection, the justification for buying broadband never has been higher. Where once it only made sense to buy broadband access if a home used computers and the Internet, now it makes more sense to buy broadband because tablets, smart phones and other devices also can take advantage of the single connection.

In fact, the increase in number of devices using the home networks is one reason why “median monthly usage” (half of consumers use more, half use less) on North America’s fixed access networks has increased from 10.3  GB to 16.8 GB in the second half of 2012, some might argue.

Over the same period, “mean monthly usage” (arithmetic average)  grew by over 70 percent increasing  to 51.3 GB from 32.1 GB. Growing subscriber consumption is not limited to North America or fixed networks, either.

Relatively slow growth of mobile data consumption probably is a direct result of the shift to offloading of mobile data demand to the fixed network.

In North America, monthly usage on mobile networks has experienced only minor growth, Sandvine says.  In the second half of 2012, Sandvine has observed mean monthly usage increasing moderately from 312.8 MB to 317.2 MB.

What is the Future of the Fixed Network?

Anybody familiar with the underlying trends in the communications business, and who looks at the business dispassionately, sooner or later has to wonder what the future of the fixed network actually will be. That is not to say the fixed network has no obvious role.

Bandwidth, and affordable bandwidth, is the chief advantage a fixed network has, and always will have, over a mobile or wireless network. But that isn't a terribly comforting thought for a fixed network executive, or any of the ecosystem partners. For saying "bandwidth is the enduring value" is tantamount to saying that "dumb pipe" is the enduring value.

That is not to say that applications are unimportant. Video entertainment and voice are key revenue generators for fixed networks. But the irreducible core of value is the "access to the Internet." At the moment, the U.S. Federal Communications Commission even enforces the "dumb pipe" model by barring fixed networks from providing quality of service distinctions.

In other words, fixed network service providers specifically are prohibited from creating and selling "smart pipe" Internet access that can prioritize voice and real-time applications over others. "Managed services" such as carrier voice or entertainment video thankfully are exempted from those rules, but the point remains: dumb pipe is the unique and enduring value provided by a fixed network.

 No other network--satellite, fixed wireless or mobile--can claim to match the theoretical bandwidth of an optical fiber network. And no other network can match the price-performance of a fixed network at very-high speeds. You don't hear proponents talking about mass deployment of gigabit per second wireless or satellite networks, for example, because it is not technologically or economically possible. 

Some think that could change in some decades, but for the moment fixed networks have the strategic advantage. Some of us would argue that growing use of Wi-Fi-supported devices such as tablets and smart phones will enhance the value proposition for fixed networks.

The increase in number of devices using the home networks is one reason why “median monthly usage” (half of consumers use more, half use less) on North America’s fixed access networks has increased from 10.3  GB to 16.8 GB in the second half of 2012.

Over the same period, “mean monthly usage” (arithmetic average)  grew by over 70 percent increasing  to 51.3 GB from 32.1 GB. Growing subscriber consumption is not limited to North America or fixed networks, either.

Relatively slow growth of mobile data consumption probably is a direct result of the shift to offloading of mobile data demand to the fixed network.

In North America, monthly usage on mobile networks has experienced only minor growth, Sandvine says.  In the second half of 2012, Sandvine has observed mean monthly usage increasing moderately from 312.8 MB to 317.2 MB.

More noticeable change can be seen in the median which has increased to 32.9 MB from 25.5MB just six months ago. But it also is possible that new smart phone consumers account for some of the slower growth of mobile data, as newer users tend to consume less data than experienced users.

As you would guess, consumption of entertainment video and audio remains the largest
traffic category on virtually every network examined. North America continues to lead in adoption of this traffic category, with almost two thirds of downstream traffic during peak period being streaming audio or video.  

Netflix now accounts for 33 percent of peak period downstream traffic, Sandvine notes.

Mobile data consumption increased only slightly, very likely a direct consequence of people using at-home Wi-Fi. From a traffic distribution standpoint, the top one percent of mobile data subscribers account for 23.9 percent of total upstream traffic.  

The top one percent of downstream users account for 18.7 percent of bandwidth consumption.

The mobile network’s lightest 50 percent of users account for only 0.8 percent of total traffic.

So the value of fixed networks is assured. What is not clear is how the economics of operating a fixed network business might have to evolve, though. Video and high speed Internet access are two apps that the fixed network is ideally suited to supply.

The unique value proposition drops sharply after that, as voice and messaging would seem better supported by mobile devices. Fixed mobile substitution therefore is a key issue. But mobile offload is the countervailing development.

If telcos can get their cost structures revamped, broadband would seem to offer the highest profit margin of any potential service, long term.

Video entertainment margins will be lower since gross revenue has to be shared with program suppliers.

Still, the move to use of "untethered" devices does not mean a move to use of "mobile" networks in a linear fashion.

Once upon a time, consumers and businesses primarily used fixed networks for all communications. These days, mobile networks are used as much, or more. But even "mobile" devices are used mostly at home, or at the office, on Wi-Fi networks that are a logical and direct extension of fixed network service.

That provides one obvious clue about the future value of the fixed network. Though mobile broadband and voice might be sufficient for many people, much of the time, the value-price relationship will, in all likelihood, "always" favor untethered use of the fixed network.

Global Telecom Revenue to Grow 6% or More, Annually

According to International Telecommunications Union forecasts, global communications revenue will grow at least six percent annually through 2015. 

Nearly 80 percent of that revenue will be generated by mobile services in 2015. In 2012, perhaps a third of total revenue will be generated by fixed network services. 

In other words, as some of us are fond of saying, communications now is a mobile business with a fixed component.