One of the most interesting things revealed by Cisco’s latest Annual Internet Report is the extent to which North America is now largely a mature broadband market. In this case, North America is the combination of the US and Canada and Cisco does not provide the data for each country.
Consider the following statistics for North America between 2018 and 2023:
- The percentage of people using the Internet in 2023 will grow to 92% (345 million users) up from 90% (328 million users) in 2018.
- The percentage of people using cellphones in 2023 will grow to 88% (329 million users) up from 86% (313 million users) in 2018.
This paints a picture of North America as a mature broadband market. While there are still new customers to land, ISPs collectively will not be winning many new customers. The growth of landline users from 328 million to 345 million over 5 years represents an annual growth rate of only 1%. In economic terms that’s a mature market.
There will likely continue to be movement within the market. In the year ending in the third quarter of 2019, the big cable companies took at least 2 million customers from telcos – a trend that is likely to continue. However, some telcos are fighting back by building fiber, such as the 12 million fiber passings built by AT&T over the last few years.
Cisco is painting the same bleak future for cellular customers and is predicting the same slow 1% annual growth for North America. The cellular companies have been waging a marketing war and stealing customers from each other – a largely zero-sum game. The cellular market is getting tougher as Comcast and Charter continue to win cellular customers and Dish Networks is poised to enter the market in a few years.
The mature nature of the broadband and cellular industries exposes the FCC’s fiction that carriers will be spending a lot more capital due to relaxed regulations. It’s hard for any ISP to justify spending a lot of capital in a stagnant and slow-growing market. Any capital spending is being done to upgrade to newer technologies, but there is not a lot of capital needed due to customer growth.
Equipment manufacturers aren’t focusing on North America. While the US will add a net of 17 million people to the Internet over 5 years, Asia Pacific will be adding a billion new people, the Middle East and Africa will be adding 230 million people, and Latin America will be adding 83 million people. Europe is also a mature market and will only be adding 25 million people to the Internet over 5 years.
These numbers show why the administrations attempt to somehow squelch Huawei is likely doomed to failure. Huawei doesn’t need North America or Europe to succeed and can far outstrip European and American vendors by concentrating on Asia and Africa.
This slow growth also highlights the dilemma of the publicly traded ISPs. With a 1% annual growth rate the big ISPs start to look like electric utilities in terms of growth potential. Comcast and Charter are still meeting Wall Street expectations due to taking customers from DSL, but even that growth has to slow and shrink away at some point. All of the other big cable companies are faced with trying to please Wall Street with stagnant customer counts – something that only can be done by raising rates, cutting costs through mergers, or introducing new revenue streams.
The industry doesn’t have far to grow after 2023. Numerous surveys have shown that most of the people that don’t buy Internet access either can’t afford it or live in a rural market where it’s not available. Since the big ISPs aren’t chasing either of those customer segments they are already collectively at their peak. Growth now comes only from general population growth – and even that news is not great as the US birth rate keeps dropping and immigration has been curtailed.
There is nothing wrong with a mature market from an economics perspective. Unfortunately, the high growth of broadband customers over the past twenty years has created an expectation on Wall Street that telecom companies have fast growth potential. I look at the basic numbers and wonder how long it will be until Wall Street resets that expectation. We’d all be a lot better off if the big ISPs didn’t feel huge pressure to grow the bottom line.