Is U.S. Home Broadband on Cusp of Major Change, or Not?

The U.S. home broadband market has been dominated by cable operators for two decades. Depending on the source, cable operators have held close to 70 percent of the installed base of accounts and have had up to 100 percent of net new additions (market share) in many years. 

Many believe that now will change, though there is disagreement about how much change is possible. 

U.S. telco fiber-to-the-home (FTTH) lines will pass 82 million American households by 2027, nearly double the 44 million households passed today, Cowen predicts. 

Led by AT&T, the four biggest telcos (AT&T, Verizon, Frontier and Lumen) will account for the lion's share of those deployments, together passing more than 71 million homes with fiber.

source: S&P Global Market Intelligence

U.S. cable operators will pass another five million homes with fiber lines over the next six years as well, largely deployed by Altice USA. Cable operators have deployed five million FTTH lines already, says Cowen. 

By 2027, telcos will get adoption by about 43 percent of homes passed by the FTTH networks, Cowen predicts. The issue is the percentage of those new FTTH lines that are market share neutral upgrades by existing telco digital subscriber line customers, and what percentage will come from market share taken from other providers. 

Cowen believes relatively small amounts of market share will actually be taken from cable operators. Cable operator market share is expected to decline from 61 percent today to 58 percent in 2027.

Telco share, meanwhile, will climb from 25 percent to 27 percent in 2027. The magnitude of the shift is where there is disagreement. - 

Some might call the Cowen share forecasts too conservative. Moffettnathanson, for example, believes a 50-50 split of the installed base between telcos and cable operators is possible. 

Telco executives, for example, believe they will do better than Cowen suggests. Frontier, for example, expects to reach about 45 percent of the installed base when it completes its FTTH upgrades.

Some telco executives also believe  fixed wireless will play a role in their share gains. Altogether, observers predict some shift of installed base and market share as telcos go up tempo on FTTH upgrades and 5G fixed wireless gets marketed. How much change could happen is the issue.

What No Fixed Network Telco Exec Will Ever Say; and What they Will Say

You are likely never to hear the CEO of any large U.S. telecommunications company with a fixed network, and serving consumers, ever admit that the fixed network actually has no hope of reversing the lead cable operators have in fixed network broadband.

What you will hear are mobile executives, and executives from firms with both fixed and mobile operations, talking up the ability to use 5G networks as a functional substitute for a fixed network. There is a reason that happens. There arguably is no chance telcos now can recapture market leadership in fixed network broadband.

And the simple fact is that cable companies have been the market share and installed base leaders for more than 20 years, with a lead that likely cannot be reversed by the leading telcos, and possibly not sustainably by many other fixed network competitors at scale, operating without public subsidies of some sort.

U.S. mobile operators are optimistic about both 5G and future networks past 5G because their futures rely on expanding the range of use cases for mobile connectivity and the extent to which mobility can become a platform of sorts. For legacy providers AT&T and Verizon, both of which have mobile and large fixed footprints, 5G matters because it drives revenue growth for each of them. 

Consider that a global strategic imperative as well. By 2020, mobile accounted for more than half of all of Internet access revenue in more than 75 percent of countries, researchers at PwC said early in the year. Some analysts noted mobile Internet access revenues already had surpassed fixed network broadband revenue as early as 2013 or 2014.

That trend is expected to continue. By 2024, consultants at PwC say, mobile revenue will account for 68 percent of global Internet access market revenues. In other words, more than two thirds of all internet access revenue globally will be generated by mobile internet access. 

source: PwC 

For attackers such as Dish Network and new incumbent T-Mobile, 5G and future platforms will matter for a couple of reasons. Both Dish and T-Mobile are “mobile-only” providers, while AT&T and Verizon have both fixed and mobile assets. So the ability to leverage 5G and future networks to create substitutes for fixed network services is a major opportunity to enter a whole set of markets previously unavailable to them. 

There is more. At this point, there seems little chance for telcos to actually reverse their fortunes in the fixed networks broadband business. As they continue to lose market share, the economics of the broadband business get worse, as more assets are stranded, forcing the recovery of capital investment from an ever-smaller number of customers. 

And since broadband now has become the single most important service offered by any fixed network, for business or consumer customers, the largest fixed network providers are in something of a box. 

To compete with cable operators would require more capex than they can hope to recoup. In other words, in the U.S. market, it appears too late to regain leadership from the cable operators in broadband services offered by the fixed network. 

There is a bit of an analogy in the U.S. fixed network internet access market. U.S. cable operators have 70 percent of the installed base or market share, telcos and all others just 30 percent, according to researchers at Leichtman Research. 

Moreover, cable continues to get virtually all the new net account or subscription gains, and cable operators have been the market share growth leaders (net additions) and installed base leaders (total accounts) since at least 1999. 

source: NTIA

source: NTIA 

In other words, U.S. cable operators actually have been the market share leaders (growth) and installed base leaders (total accounts) for more than 20 years. Put another way, telcos and others have been searching for some way to create a platform that could compete with cable sustainably. 

One might think the answer always is “fiber to the home,” but that is where the business model becomes an obstacle. Given the lead cable has, it is unclear whether telcos could ever catch up, as cable continues to grow and invest in features of the hybrid fiber coax network that competes well with what FTTH provides, and does not have an insurmountable business sustainability issue.

And all that is why both legacy and attacking mobile service providers are betting so heavily on 5G and beyond. Having lost the ability to catch up with cable in fixed network broadband, they are forced to hope that the wireless and mobile platforms can emerge as functional substitutes for fixed network broadband.

Verizon Home Broadband Share "In Region" Has Not Moved Much

If Verizon now has seven million fiber access accounts, what does that imply about household penetration rates? It is not so easy to say. For starters, Fios accounts serve small business and larger business accounts, not just homes. 

Verizon homes passed might number 18.6 to 20 million. We must estimate as Verizon never seems to publish a “homes passed” figure. At seven million accounts, Fios would represent 35 percent to 38 percent of homes passed. That seems in line with Verizon’s past reporting, but it is not clear whether business accounts are included in those figures. 

My guess is that business revenue--and therefore the accounts and lines--are reported elsewhere. Given the amount of time Fios has been available, that penetration rate testifies to the amount of competition in the home broadband market, where, by and large, it is cable operators who have 60 percent or higher levels of the installed base, and may have higher market share rates (net new accounts added), at least for most of the past two decades. 

Most other incumbent AT&T executives have speculated that they might ultimately get about half the installed base of accounts. 

Long term, MoffettNathanson sees cable having a 50 percent broadband market share in markets in which they compete with fiber-to-home facilities. That implies a shift of 20 percent of the installed base from current levels: telcos gain 10 points while cable operators lose 10 points of share. 

Not all observers agree with that analysis. S&P Global Market Intelligence, for example, does not expect stepped-up telco FTTH investment to change share statistics very much, in the near term. 

But S&P Global Market Intelligence does believe new competition from mobility suppliers using fixed wireless (T-Mobile, for example) will gain about six percent share of the U.S. residential broadband market with about 7.19 million subscribers. 

It is not yet clear how much of that share gain will be claimed by upstarts in the home broadband market such as T-Mobile, and how much will be gotten by fixed wireless operations conducted by incumbents such as Verizon. 

S&P Global Market Intelligence also estimates there will be about 1.52 million satellite customers by the end of 2021, accounting for just one percent of the installed base of home broadband accounts. 

Many observers expect telcos and independent providers  to gain share. The only issue is how much and how long it takes. Historically, most telcos have found their installed base share tops out at about 40 percent of homes passed.

Fixed Wireless Finally Becomes a Material Financial Matter for Verizon

Fixed wireless has been touted as a possible strategic enabler in the U.S. home broadband business, and it does now appear deployments at scale, with customer gains large enough to note on earnings calls, has begun. Verizon and T-Mobile are the leading firms to watch, as both firms have the most to gain from widespread fixed wireless deployments.

The implications for the home broadband market are highly significant. T-Mobile has had zero share of that market, while Verizon has been sharply limited by its limited footprint outside its New England and Mid-Atlantic states focus.

Since the U.S. home broadband market is nearly saturated, most account gains by any provider will come at the expense of an existing provider. That, in turn, is important because fixed wireless is one platform telcos can use to reverse a 20-year pattern of cable operators leading in installed base and market share.

In addtion to stepped-up fiber-to-home activity, fixed wireless is a primary tool that could change the U.S. home broadband installed base from a 70 percent cable lead to a more-balanced 50-50 market, with cable and telcos each eventually holding about half the installed base share.

Since home broadband now is the foundation service for any fixed network services provider, such a shift would be highly significant.

Verizon now says it will pass 15 million homes with its fixed wireless services, using both 4G and 5G, while total fixed wireless accounts at the end of the third quarter 2021 were 150,000, of which 55,000 were added in the third quarter alone. 

In the past Verizon has talked about a fixed wireless footprint of about 50 million homes as a planned-for goal as the C-band assets are turned up, possibly by the end of 2021. 

Most of that coverage will occur in areas outside the Verizon fixed network territory. At the moment, about half the Verizon fixed wireless customers represent new accounts, while half are existing Verizon customers. 

“I would say, there are probably, roughly, half and half,” said Hans Vestberg, Verizon CEO. “Half meaning coming from our existing base and half we're taking from other suppliers.”

Significantly, Verizon also reports that fixed wireless average revenue per user is “similar” to a mobility account. That suggests that most of the installed base is on 4G or lower-speed 5G at the moment, and also suggestive of pricing suggesting that most customers also use Verizon for mobility service ($40 a month for Verizon mobility customers, $60 for non-customers). 

Some of us would expect ARPU to begin climbing as more of the customer base adds services using millimeter wave and mid-band spectrum. The pricing for those plans runs from $50 a month (Verizon mobility customers) up to $70 a month (non-mobile subscribers). 

As will be the case for 5G generally, Verizon fixed wireless might come in three flavors. Some customers might only be able to buy 4G versions, which are the most speed-constrained, and generally topping out somewhere between 25 Mbps and 50 Mbps. 

Most customers will be able to buy mid-band 5G fixed wireless, which likely will be able to support the 100 Mbps to 200 Mbps services most households buy at the moment. Some lesser percentage of locations will be able to buy the wireline-equivalent millimeter wave services operating up to a gigabit per second or so. 

Over the last year, though the fiber-to-home footprint grew by 500,000 locations, the fixed wireless footprint added 11.6 million locations. 

In fact, fixed wireless now accounts for about 41 percent of Verizon’s home broadband passings. 

source: Verizon 

It remains to be seen how many customer accounts will be driven by fixed wireless, to be sure. In the past, many observers have suggested fixed wireless suppliers can get take rates in the 15 percent to 20 percent range.

In a saturated market, those gains largely represent market share taken from another supplier. So the market share implications are quite significant, representing a change between 30 percent to 40 percent in overall share. 

The expansion of millimeter radio and C-band radio assets will be important. Roughly half the U.S. home broadband base has been content to buy service in the 100 Mbps to 200 Mbps range. 

C-band will help boost fixed wireless into those ranges, while millimeter wave will enable speeds approaching the top tier of consumer demand (gigabit service).  

Such lower-speed home broadband might appeal to customers content to purchase service operating at the lower ranges of bandwidths at or below 50 Mbps. That still represents 10.5 percent of the market, according to Openvault. 

Notably, the third quarter 2021 earnings report was the first ever when Verizon actually began reporting fixed wireless subscriber growth. That is normally an indication that a firm believes it has an attractive story to tell, with volume growth expected. 

To my knowledge, T-Mobile has not reported its fixed wireless account figures. In light of Verizon's reporting, T-Mobile might soon have to respond.

How Much Share Does 5G Fixed Wireless Have to Shift to be Meaningful?

How much market share does 5G fixed wireless have to shift before it affects the profitability of the fixed network consumer internet access market? Not much. 

In recent quarters, for example, U.S. fixed network internet access net additions have totaled about six tenths of one percent of the installed base, with cable gaining eight tenths of one percent while telcos lost about two tenths of one percent. 

In other words, a shift of about two-tenths of one percent per quarter halts the telco decline. A shift of perhaps six-tenths of one percent--from cable to telco--actually causes cable share to begin a decline. 

That is what the stakes realistically are: a chance for telcos to halt, and perhaps reverse, the long-term decline of their market share in internet access. 

Cable TV executives in the U.S. market naturally express as much skepticism about the dangers 5G fixed wireless services pose for their consumer broadband business as telco execs say they are optimistic. Basically, it will no scale, or will scale too slowly to keep up with cable’s own planned bandwidth plans, cable execs tend to say. 

There is reason for the cable views. The threat of optical fiber to the home has existed for a few decades, but has not dented cable’s emergence as the leading supplier of consumer internet access connections using fixed networks. Cable has about 67 percent of the installed base and has essentially gotten more than 100 percent of the net new account additions for a couple decades. 

In fact, over the last 20 years, it would be hard to find a single year where cable broadband net account gains were not about 60 percent to 70 percent of all net gains. 

source: NTIA 

source: Broadband Trends 

source: Leichtman Research Group

But the impact of 5G fixed wireless is not that it dramatically upsets the market. 5G fixed wireless might be the only way telcos collectively can halt a long-term decline of their market share. 

It might be prudent not to envision any scenario where 5G fixed wireless actually upends the market share structure. Instead, 5G fixed wireless probably is relevant because it might shift just enough share to choke off the cable growth model, reverse the telco share loss trend, and then change profit margins.

It is very subtle stuff. Verizon, for example, only has to gain about 7,000 5G fixed wireless accounts per quarter to halt its customer losses. T-Mobile US and Sprint have virtually zero fixed network market share, so even smallish gains represent new accounts with average revenue possibly double what they get from mobile internet access accounts.

T-Mobile Sprint Merger Means More Fixed Wireless Competition

How much market share 5G fixed wireless might actually get in the United States is a highly-contentious matter. Incumbents say fixed wireless is not a threat to cabled network market share and revenue. Attackers believe 5G fixed wireless will be material. Some have called 5G fixed wireless an existential threat to cable operators. 

The recent approval of the T-Mobile merger with Sprint boosts prospects for aggressive new competition, in a couple of years. And though T-Mobile has indicated it could capture 9.5 million fixed accounts by about 2024, for example. That alone would potentially reduce cable market share by nine to 10 percent, a huge shift. 

source: T-Mobile US 

Add in competition from other providers and a nine-point shift in market share is a reasonable expectation. 

Both sides could be right about the relatively small market share shift, and yet the impact could be quite substantial. There are several reasons. incremental sales--at the margin--that often provide a disproportionate share of profits. So fixed wireless could be highly relevant if it shifts accounts at the margin. 

One example might be that fixed wireless slows cable operator revenue growth in the business or customer segments. Fixed wireless might capture enough share to slice incumbent growth rates or cap growth rates. 

There are roughly 99 million fixed network internet access accounts active in the U.S. market. If fixed wireless manages to shift about 12 million accounts, that is a potential gain of 12 percent.

If 80 percent of that shift is from cable operators to telcos, implying a shift of 9.6 million accounts, that would mean a loss of 15 percent cable TV market share in internet access. 

To the extent that internet access is the cable operator  growth engine, that could have outsize financial and strategic impact. 

Another potential issue is possible average revenue per account hits, as incumbents attack cable services on the price dimension. So it might not be only the lost direct revenue loss but the impact on overall ARPU that emerges. 

source: Bain and Company

In recent quarters, for example, U.S. fixed network internet access net additions net additions have totaled about six tenths of one percent of the installed base, with cable gaining eight tenths of one percent while telcos lost about two tenths of one percent. 

In other words, a shift of about two-tenths of one percent per quarter halts the telco decline. A shift of perhaps six-tenths of one percent--from cable to telco--actually causes cable share to begin a decline. 

That is what the stakes realistically are: a chance for telcos to halt, and perhaps reverse, the long-term decline of their market share in internet access. 

Cable TV executives in the U.S. market naturally express as much skepticism about the dangers 5G fixed wireless services pose for their consumer broadband business as telco execs say they are optimistic. Basically, it will no scale, or will scale too slowly to keep up with cable’s own planned bandwidth plans, cable execs tend to say. 

It is very subtle stuff. Verizon, for example, only has to gain about 7,000 5G fixed wireless accounts per quarter to halt its customer losses. T-Mobile US and Sprint have virtually zero fixed network market share, so even smallish gains represent new accounts with average revenue possibly double what they get from mobile internet access accounts. 

The point is that skeptics and proponents alike can be right that 5G fixed wireless only shifts a small amount of market share. But it is precisely at the margin that fixed wireless could be significant. Fixed wireless could halt a 20-year decline in telco fixed network internet access share; choke off the cable operator growth engine and attack cable profit margins.

Mobility is the New Battlefield in War Beween U.S. Telcos and Cable TV Operators; Home Broadband the Current Issue

The U.S. cable industry has fared relatively better in the competition with telcos for at least some logical reasons, aside from arguable industry culture advantages. In the competition for fixed network voice and mobile services, cable has been the attacker, starting with zero market share and winning accounts from the incumbents. 

In home broadband, cable has benefitted from the relative slowness of telco adoption of fiber-to-home platforms. Simply, cable has leveraged its lower-cost hybrid fiber coax platform to radically boost performance at much-lower cost than telcos have been able to do. 

In video services, where cable was the incumbent, there was a slow attrition of some market share to telcos. The big share held by non-cable providers was in the hands of the satellite providers, and AT&T at one point owned all of DirecTV, immediately making AT&T one of the largest providers of linear video subscriptions in the U.S. market. 

That stake in DirecTV has been spun out to private equity group TPG, but AT&T retains a 70-percent interest in the venture. 

Still, terrestrial fixed network market share held by telcos was relatively small. 

source: Cable Compare 

In recent decades, competition between telcos and cable has shifted. Video share has remained relatively constant, with the overall market gradually shrinking. The fixed network voice market is declining, for all leading providers. 

Home broadband has emerged as the revenue growth driver. And while cable has held close to 70 percent of the installed base in that market, many observers--perhaps most--now expect telcos to take more share as FTTH becomes more common. 

Nationally, telcos have about 30 percent share of the home broadband installed base. The issue is how much additional share telcos can gain as they ramp up FTTH platforms and as 5G fixed wireless becomes a factor for Verizon and T-Mobile. 

All that likely means that mobility will become the new growth battlefield between cable and telco.

Comcast, European Cable Operator Growth Strategies Diverge

Virtually all existing communications and video entertainment businesses are in a time of transition from older revenue patterns to new business models that inevitably will include a mix of products, often sold to different customers than in the past.

Beyond that, it remains unclear what revenue contributions might in the future be made by entirely new lines of business. But Comcast’s second quarter 2012 earnings report suggests the upside potential and downside risks.

Also, the latest Solon Survey of European cable operators illustrates a couple salient points about the near term growth drivers for North American and European cable operators. Wireless appears to be a bigger factor for European cable operators, while Comcast’s approach now suggests content will be a bigger source of revenue for the larger U.S. cable providers.

In the near term, European cable operator growth now comes from broadband access, mobile services and business-to-business services.

The key trends are the importance of mobility and services aimed at business customers, which In the 2009 survey were not firmly embraced by cable operators in Europe.

By 2011, sentiment had changed, with operators across Europe highlighting the importance of
commercial and mobile segments in driving near term revenue growth.

On average, cable operators expect to double the share of revenues generated through mobile offerings, while the revenue contribution from business and wholesale activities is forecast to increase by approximately 33 percent. For a business historically serving the consumer segment, the expansion of services to business and enterprise customers is significant.

By 2014, a typical European cable operator will be earning 12 percent of its revenues from business customers. Some cable operators, though, already earn more than 30 percent of total revenues from B2B services.

European cable operators surveyed expect revenue growth of over five percent per year until 2014 and further EBITDA margin expansion by two percentage points up to 48 percent, on average, to 2014.

In large part, that is due to gains in broadband access revenue, which remains the main source of revenue growth for European cable operators, the report suggests. In fact, Solon attributes broadband access revenue for a rebound in operator average revenue per user, which had been dropping.

Revenue earned by offering or higher access speeds, at an average broadband access ARPU of approximately 20€ per month, is the primary reason ARPU now is stable, the Solon report indicates.

Comcast’s revenue, on the other hand, now has tipped towards content. Comcast video revenues have shrunk to about 52 percent of total Comcast revenue, while other access network services now contribute 48 percent, and are growing.

At some point, Comcast will earn less than half its revenue from its legacy video entertainment business. And that is to focus only on Comcast’s “local access” business.

In fact, including the NBC Universal contributions, it already is true that Comcast earns less than half its total revenue from cable TV distribution. In fact, cable TV video distribution operations now account for only 33 percent of total Comcast revenue.

For anybody who has followed the U.S. video entertainment market for some decades, that U.S. cable operator video penetration is as low as 44 percent of TV homes is a shocking statistic. There was a time when penetration was as high as 70 to 80 percent of homes in some areas.

Competition from satellite and telco competitors is the reason for the sharp reversal.

Some 97 percent of U.S. homes own a TV, and about 90 percent of all U.S. homes buy a subscription TV service.

Telco IPTV penetration on a global basis, measured agains the installed base of worldwide broadband subscribers, reached 15 percent in the first quarter of 2012, representing  67 million subscribers and eight percent of the world’s 812 million video entertainment service subscribers, according to TeleGeography.

North American telcos, led by Verizon and AT&T, have succeeded in selling IPTV service to almost 40 percent of their broadband subscriber base. That is not to say telco TV now reaches 40 percent of homes. That statistic means the tier one telcos are selling video entertainment to 40 percent of their customers who buy broadband access.

Since telcos have almost half of all broadband customers, and since broadband is purchased by about 80 percent of U.S. households, you can roughly estimate that telcos now sell video services to perhaps 20 percent of U.S. households.

But keep in mind that telcos are not able to sell video to many locations, using their fixed networks, for technology reasons. Where they can do so, market share could be in the 30 percent range.

Generally speaking, getting a video customer means taking that customer away from a cable TV or satellite TV provider who already had the customer, as household penetration of subscription TV is over 80 percent. The market, in other words, is saturated.

There are some important implications. You might well argue that 40 percent video penetration of a service provider’s own customer base is “about as good as it is going to be,” when strong cable TV and satellite TV competitors own the rest of the customers, and when taking a customer therefore is tough.

In any market with three dominant and well-heeled contestants, you might expect an ultimate market share distribution that could easily be split three ways, with any single contestant getting 20 percent to 40 percent share.

If telcos have 20 percent share, could that share double? In principle, yes. If telcos get 30 percent share, could share then double again? Probably not, if the other two contestants (satellite and cable) continue to perform at a high level. 

But there is one big change in potential market share structure that long has been speculated, namely a purchase of both U.S. satellite companies by one of the tier-one U.S. telcos. That, in principle, could mean telcos then would have as much as 60 percent share of video service customers.

For the moment, telcos are doing about as well as they can, using only their fixed networks.

IPTV and Pay-TV Penetration Rates, Q1 2012

Source:TeleGeography