Is Broadband Growth Slowing – 2Q 2019?

Leichtman Research Group recently released the broadband customer statistics for the second quarter of 2019 for the largest cable and telephone companies. Leichtman added Atlantic Broadband and TDS to their tracking list for the first time – both companies now have more customers than Cincinnati Bell, the smallest company on the list. Leichtman compiles these numbers from the statistics provided to stockholders. The numbers are lower than broadband customers counted at the FCC, and I think that most of the difference is to due to the way many of these companies count broadband to apartment buildings. If they provide a gigabit pipe to serve an apartment building they count that as 1 customer, whereas the FCC is likely counting the number of apartment units served.

2Q 2019 Added % Change
Comcast 27,807,000 209,000 0.8%
Charter 25,945,000 258,000 1.0%
AT&T 15,698,000 (39,000) -0.2%
Verizon 6,968,000 (5,000) -0.1%
Cox 5,120,000 20,000 0.4%
CenturyLink 4,750,000 (56,000) -1.2%
Altice 4,168,100 13,100 0.3%
Frontier 3,626,000 (71,000) -1.9%
Mediacom 1,303,000 15,000 1.2%
Windstream 1,034,300 1,900 0.2%
Consolidated 783,008 2,288 0.3%
WOW 765,500 (400) -0.1%
Cable ONE 681,762 3,377 0.5%
Atlantic Broadband 443,696 14,134 3.3%
TDS 433,400 5,800 1.4%
Cincinnati Bell 425,500 (1,200) -0.3%
Total 99,952,266 369,999 0.4%

Currently, these companies are seeing a composite annual rate of growth of broadband customers of 1.6% annually. These largest ISPs will surpass 100 million customers during this current quarter. Leichtman notes that these sixteen companies have added 13.5 million broadband customers over the last five years and 28.9 million over the last ten years.

These numbers raise the question if we are finally starting to see overall growth in the broadband market slow down. Consider the comparison of the second quarter of 2018 and 2019 annualized:

‘                                        2018                 2019

Cable Companies        2,987,721        2,128,844

Telcos                           ( 472,124)        ( 648,848)

Annualized Total         2,425,597        1,479,996

According to the FCC, over 85% of homes now have a broadband connection. Adjusting that statistics for rural homes that can’t get broadband, the penetration rate everywhere else is over 90%.

The growth of broadband customers added by cable company customers is slowing, with Comcast and Charter continue to be the only companies adding significant quantities of customers (over 200,000 each for the quarter).

Loss of telco broadband customers has increased over last year, mostly due to Frontier and CenturyLink losing DSL customers.

There are significant implications for cable companies if broadband growth stagnates because cable stock prices have been fueled by revenue growth driven by new broadband customers. As the number of broadband customers levels off, many industry analysts expect the companies to begin regularly raising broadband rates to meet Wall Street earnings expectations. We’ve seen the first signs of broadband rate increases over the last year, and the above slowdown is bound to rachet up the pressure on the cable companies.

Broadband Subscriptions Continue to Grow

According to the Leichtman Research Group, the biggest ISPs added 945,000 broadband customers in the first quarter of 2019. If sustained that would be an annual growth rate of 4% for the year. That contrasts drastically with the largest cable providers that are now losing cable customers at a rate of 6% annually.

The table below shows the changes in broadband customers for the largest ISPs for the quarter.

4Q 2018 Added % Change
Comcast 27,597,000 375,000 1.4%
Charter 25,687,000 428,000 1.7%
AT&T 15,737,000 36,000 0.2%
Verizon 6,973,000 12,000 0.2%
Cox 5,100,000 40,000 0.8%
CenturyLink 4,806,000 (6,000) -0.1%
Altice 4,155,000 36,900 0.9%
Frontier 3,697,000 (38,000) -1.0%
Mediacom 1,288,000 24,000 1.9%
Windstream 1,032,400 11,400 1.1%
Consolidated 780,720 1,750 0.2%
WOW 765,900 6,300 0.8%
Cable ONE 678,385 15,311 2.3%
Cincinnati Bell 426,700 1,100 0.3%
98,724,105 943,761 1.0%

The two biggest cable companies, Charter and Comcast are growing furiously and added 85% of all of the net industry additions, with Charter growing at an annual growth rate of almost 7%. Mediacom and Cable ONE grew even faster for the quarter.

The cable companies continue to dominate the telcos. As a whole, the big cable companies added over 925,000 customers at an annual growth rate of 5.75%. By contrast, the big telcos collectively added 18,250 customers, an annual growth rate of only 0.2%. We know that telcos are continuing to lose DSL customers, so a slight gain as a group means they are finding new customers to replace lost DSL connections.

The overall net gains for the first quarter of 2018 was 815,000. The increases are larger this year due to smaller losses by the telcos rather than faster growth for the cable companies. Perhaps a few of the telcos are finally seeing some upside by the rural CAF II builds.

The surprising statistic is how much Comcast and Charter continue to grow. They are obviously winning the broadband battle in the major cities and continue to take customers away from telco DSL on copper.

There has to be something else behind this kind of growth. A few years ago, there were analysts that predicted that the broadband market was topping out. It seemed like everybody who wanted broadband had it and that there were not a lot of potential customers left in the market. In the last two years we’ve seen continued growth similar to this last quarter.

It’s always hard to identify trends when looking at a nationwide trend, but one of the few ways to explain this continued growth is that more households are deciding that they must have broadband. That might mean homes with occupants older than 65, since that demographic always trailed other demographics in broadband acceptance. It might mean more houses with low incomes are finding a way to buy broadband because they’ve decided it is a necessity. At least some of this growth is coming by the effort to extend broadband into rural America, although that effort is largely being done by ISPs that are not on the above list.

The National Broadband Penetration Rate

My firm CCG Cinsulting recently completed residential surveys in three cities where I found broadband penetration rates of between 92% and 93%. Those are the highest broadband take rates I’ve ever seen. If I only encountered one city with a penetration rate that high, I would assume that there is some reason why more people in that city have broadband. But now that I’ve seen three cities with the same high penetration rate I started to ask myself different questions. How unusual is it for cities to have penetration rates at that level? What penetration rates should I expect to see today in cities?

I first thought through the survey process. I’ve always found a well-designed survey to produce reliable results for questions like quantifying the market share of the major ISPs. I’ve worked with a few cities that had detailed customer penetration data from franchise fee reporting and in those cities our surveys closely matched that data. I’ve also worked in a few cities where we’ve done several surveys in a relatively short period of time and got nearly the same results from multiple surveys. I’ve come to trust survey results – as long as you follow good practices to make sure the survey is conducted randomly the results seem to be reliable.

I then turned to published industry statistics on the number of broadband customers to see what those told me. The two most cited statistics come from USTelecom and Leichtman Research Group (LRG). As of the end of 2017 US Telecom claimed that 79% of homes had a wired broadband connection, defined as any connection that is faster than 200 kbps, which eliminates dial-up. Leichtman Research Group claimed that 84% of homes had a wired broadband connection at the end of 2017 based upon a nationwide survey. Those numbers are significantly different. Luckily both groups also publish counts of national broadband subscribers, providing a second way to compare the two.

In the USTelecom Industry Metrics and Trends report from March 2018, US Telecom said there was 100 million residential broadband ‘connections’ at the end of 2017. They claim total broadband connections of 109 million when adding businesses.

Leichtman Research Group counts broadband ‘subscribers’ every quarter by gathering the statistics from the financial reports from the largest ISPs. LRG includes all of the big ISPs from Comcast down to Cincinnati Bell with 300,000 broadband customers. LRG claims these large companies represent about 95% of the whole broadband market. LRG counted 95.8 million total broadband customers at the end of 2017 – a count that includes businesses. Adjusting to add the remaining 5% of the market, LRG shows 100.8 million total broadband subscribers, including businesses – over 8 million less than what USTelecom counts.

That’s an astounding difference, and it’s obvious the two groups aren’t counting broadband customers the same way. There must be a difference between ‘subscribers’ and ‘connections’.

I’ve only come up with one reason why the counts would be that different. A lot of apartment complexes and business high rises today are served by a big data pipe provided to the landlord, who then provides broadband to tenants. I’m guessing that the LRG numbers considers the big data pipe to be one broadband customer. In most cases the LRG numbers come from quarterly financial reports to shareholders, and my guess is that ISPs consider a subscriber to be an entity that recieves a bill for broadband service.

I further postulate that USTelecom counts the number of tenants in those same buildings as ‘connections’. We know that big ISPs often do that. For example, AT&T agreed with regulators to pass 12.5 million new residences and businesses with fiber as part of their merger with DirecTV. It’s been clear that one of the big components of those new passings comes from units in apartment complexes. If AT&T was to build a fiber past an apartment complex they could count them as passings to satisfy the FCC without having had to get them as a customer.

The other component of the penetration rate equation is the number of US households. That number is just as confusing. I found a lot of different estimates of the number of US households. For example, the US Census says there was 137.4 million total living units at the end of 2017, with 118.8 million occupied living units. Statistica estimates 127.6 million households at the end of 2018. YCharts shows there are 122.6 million households at the end of 2018. That’s a wide range of ways to count potential residential customers in the country.

Finally, when trying to estimate the broadband penetration rates to be expected in cities, you have to back out the rural homes that can’t get broadband from the equation. That’s also a difficult number to pin down and I can find estimates that range from 6 million to 12 million homes with no broadband alternative.

The bottom line is that I don’t really know what I should expect as an urban broadband penetration rate. I can do math that supports a typical urban penetration rate of 92%. Mostly what I learned from this exercise is how careful I need to be when citing national broadband statistics – if you play it loose you can get almost any answer you want.