The US credit crisis: cable operators are coping better than telcos

Transcription

1 Trends paper The US credit crisis: cable operators are coping better than telcos By Cesar Bachelet (Senior Analyst) October 2008 Providers of information, communication and entertainment services are starting to feel the effects of the economic slowdown in the USA, but their impact varies markedly between market segments. This paper compares the second quarter results for 2007 and 2008 from the two market-leading telcos AT&T and Verizon and those from two key cable operators Comcast and Time Warner Cable to highlight the differences between the credit crisis s impact on these two operator types. Despite the differences between the performance of the individual operators, we feel that a comparison of these four operators results is fairly representative of the market s key players. AT&T and Verizon s retail switched access lines account for more than two thirds of total fixed lines, and Comcast and Time Warner Cable account for almost 60% of cable TV subscribers. Fixed-line operators have to contend with several challenges Line substitution continues, but is decelerating overall Fixed operators have already endured the worst of the line substitution trend. The rate of decline in their number of retail switched access lines continues to be high: the two major telcos lost 6.4% of their lines in the year to June However, the rate of decline seems to be slowing despite the worsening economic climate. AT&T and Verizon lost 2.7% of their lines during the second quarter of 2007, but only 2.4% of lines during the second quarter of 2008 (see Table ).

2 The US credit crisis: cable operators are coping better than telcos 2 Table : AT&T and Verizon s retail switched access lines, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Number of access lines Change in the number of retail switched access lines during the quarter AT&T Verizon Combined Verizon s 2Q 2008 figures have been adjusted to take into account its sale of operations in New England to FairPoint Communications. The evidence suggests that the impact of key factors such as fixed mobile substitution and the abandonment of second lines as broadband penetration increases is diminishing, and that most customers who were likely to abandon fixed services have already done so. Cable operators progress in the voice services market is losing momentum Cable operators have secured a considerable share of the fixed voice market, but their share s growth rate is slowing. Their voice service subscriber base grew by an impressive 5% in the year to June These gains account for almost 50% of the telcos fixed-line losses over this period. However, this growth has been losing momentum: whereas growth in subscriber numbers amounted to 29% in the second quarter of 2007, this rate had more than halved to 4% during the second quarter of 2008 (see Table 2). This has had a positive impact for the telcos, by reducing their fixed-line losses. Table 2: Comcast and Time Warner Cable s voice subscribers, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Number of voice service subscribers Change in the number of voice service Comcast Time Warner Cable Combined The slowdown in broadband market growth has had a greater impact on telcos Telcos have suffered more than cable operators as growth in the number of broadband subscribers declines a trend which is typical of a mature broadband market. AT&T and Verizon s number of broadband connections increased by 2.% in the year to June However, quarterly growth declined from 2.3% in the second quarter of 2007 to only 0.5% in the second quarter of 2008 (see Table 3).

3 The US credit crisis: cable operators are coping better than telcos 3 Table 3: AT&T and Verizon s broadband connections, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Number of broadband connections Change in the number of broadband connections during the quarter AT&T Verizon Combined Verizon s 2Q 2008 figures have been adjusted to take into account its sale of operations in New England to FairPoint Communications. The effect of the slowdown has been less severe for cable operators. They achieved a marginally greater growth rate than the telcos in terms of number of subscribers in the year to June 2008, at 2.6%. More critically, they have proved much more resilient during the economic downturn: the two cable operators subscriber base grew by 2.7% in the second quarter of 2007, and this growth rate declined only slightly, to 2.4%, in the second quarter of 2008 (see Table 4). Table 4: Comcast and Time Warner Cable s broadband subscribers, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Number of broadband subscribers Change in the number of broadband Comcast Time Warner Cable Combined Pay-TV services seem unaffected by the downturn The rate at which subscribers are abandoning their cable TV provider appears to be stabilising despite the worsening economic conditions, and telcos continue to achieve spectacular growth rates with their IPTV services. Comcast and Time Warner Cable lost.2% of their combined cable TV subscriber base in the year to June 2008, as the.7% increase in digital service subscribers failed to offset the 20.5% decline in the number of analogue service subscribers. However, the overall rate of pay-tv subscriber loss is slowing down slightly, from subscribers in the second quarter of 2007 to during the second quarter of 2008, which represents 0.4% of the operators subscriber base in both quarters (see Table 5). The rate of decline in the number of analogue service subscribers decreased from 6.8% of the base in the second quarter of 2007 to 4.% in the second quarter of Correspondingly, the growth rate for the number of digital service subscribers almost halved during the same period (it declined from 4.8% to 2.3% of the subscriber base), because subscribers that decide to upgrade their analogue service, rather than new customers, account for many of the digital service net additions.

4 The US credit crisis: cable operators are coping better than telcos 4 Table 5: Comcast and Time Warner Cable s TV service subscribers, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Service type Number of TV service subscribers Change in the number of TV service Comcast Combined Analogue Digital Time Warner Cable Combined Analogue Digital Combined Combined Analogue Digital AT&T and Verizon have been reselling satellite TV services for approximately 5 years, but their IPTV services have generated the greatest growth rates in terms of take-up. The two telcos share of the pay-tv market continues to increase, and their overall TV subscriber base grew by 60.5% in the year to June 2008 (see Table 6). Most of this growth has been driven by take-up of IPTV services: the number of IPTV subscribers grew by a staggering 24% during the same period. By comparison, the number of satellite TV resale subscribers grew by a much more modest 2.4%. Overall quarterly growth in the number of pay-tv subscribers decreased from 9.7% in the second quarter of 2007 to % in the second quarter of 2008, because of the sharp decline in the growth rate of the satellite resale services subscriber base. Nevertheless, IPTV services continue to achieve vigorous growth rates as the number of deployments increases; the quarterly growth rate for the number of IPTV subscribers increased from 57% in the second quarter of 2007 to 6% in the second quarter of Table 6: AT&T and Verizon s TV service subscribers, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Service type Number of TV service subscribers Change in the number of TV service AT&T Combined Satellite IPTV Verizon Combined Satellite IPTV Combined Combined Satellite IPTV Verizon has not yet released figures for the number of subscribers to its satellite TV service in 2Q 2008, so we have assumed that the subscriber base has remained unchanged since Q We have classified Verizon s FiOS TV as an IPTV service, even though it uses a hybrid QAM/IPTV infrastructure.

5 The US credit crisis: cable operators are coping better than telcos 5 The operators revenue continues to grow, but at a declining rate Growth in the mobile sector has boosted the telcos revenue AT&T and Verizon s core revenue, which consists of the fixed division voice and data revenue for both operators, declined by.6% in the year to June 2008 (see Table 7). However, although their revenue for the second quarter of 2007 was 0.3% down on the previous quarter, they registered a marginal quarterly growth rate of 0.% in the second quarter of The two telcos total revenue increased by 5.3% in the year to June 2008, but quarterly growth has declined from.8% in the second quarter of 2007 to.3% in the second quarter of Mobile services have been the key driver for total revenue growth; the two operators number of mobile subscribers increased by.% in the year to June Table 7: AT&T and Verizon s revenue, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Revenue type Revenue (USD million) Quarterly revenue growth (%) AT&T Core Total Verizon Core Total Combined Core Total Verizon s 2Q 2008 figures have been adjusted to take into account its sale of operations in New England to FairPoint Communications. Cable operators core business revenue is growing The two large cable operators core revenue continues to grow by 2.6% in the year to June 2008 despite the slight decline in cable TV subscriber numbers (see Table 8). The operators are able to generate more revenue from digital services than analogue services because they can provide a wider range of offerings, including HD and VoD content. This has more than compensated for the decline in analogue service revenue. However, the decline in the number of subscribers that are upgrading from analogue to digital services has driven a reduction in the quarterly rate of core revenue growth. Comcast and Time Warner Cable registered a 2.6% quarterly growth rate for core revenue in the second quarter of 2007, but only a 0.7% rate in the second quarter of Growing demand for the cable operators other services, such as programming (for example, Comcast has various national programming networks, such as E! Entertainment Television) and increasing take-up of additional services, such as broadband and voice services, have helped to drive growth in the operators total revenue, which increased by 9.6% in the year to June However, as is the case with core revenue, total revenue growth has is decelerating. Comcast and Time Warner Cable achieved a 4.3% quarterly growth rate in the second quarter of 2007, but this rate had declined to 2.6% in the second quarter of 2008.

6 The US credit crisis: cable operators are coping better than telcos 6 Table 8: Comcast and Time Warner Cable s revenue, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Revenue type Revenue (USD million) Quarterly revenue growth (%) Comcast Core Total Time Warner Cable Core Total Combined Core Total Cable operators are better positioned than telcos to endure the downturn The cable TV business is less vulnerable than the fixed telecoms business Two factors suggest that the cable operators core business is more stable than that of the fixed telecoms operators. The two leading cable operators lost.2% of their cable TV subscriber base in the year to June 2008, but the two leading telcos lost 6.4% of their fixed lines during the same period. The rate of customer loss is declining in both sectors, but the telcos core business is unlikely to be as stable as that of the cable operators for the foreseeable future. AT&T and Verizon have managed to reduce the rate of revenue decline in their core business, but the low level of quarterly growth that is, 0.% in the second quarter of 2008 compared with 0.3% in the second quarter of 2007 suggests that the situation is fragile. The cable operators rate of core revenue growth is also in decline, but their 0.7% quarterly growth rate in the second quarter of 2008 is much more positive than the telcos 0.% rate for the same period. As a result of these factors, Analysys Mason anticipates the following trends. Cable operators will continue to lose TV service customers, because some subscribers to analogue services will choose to adopt alternative services rather than upgrade to digital cable. However, the cable sector has not suffered significantly despite the strong growth in IPTV service take-up. The telcos achieved a.9 million increase in the number of TV service subscribers in the year to June 2008, of which 7% took up IPTV services, but the cable operators net losses over the period amounted to a mere Satellite-based TV services will be more vulnerable to market share loss than cable services as IPTV operators continue to increase their coverage. Cable operators can offer multi-play bundles that match those offered by the telcos without relying on third parties, but it is not possible for satellite to do so. Cable operators TV service revenue will continue to grow despite the slight decline in the size of their subscriber base, as more subscribers take up higher-priced digital services. Comcast and Time Warner Cable have a combined analogue TV subscriber base of more than 3 million customers, which provides them with significant upselling opportunities. Analysys Mason believes that the switchover to digital TV services, which is due to take place in February 2009 in the USA, will provide an impetus for digital service take-up that will compensate to some degree for the economic downturn.

7 The US credit crisis: cable operators are coping better than telcos 7 The rate of fixed-line loss seems to be stabilising, but telcos will continue to be vulnerable to competition from mobile and other alternative voice services, such as VoIP services particularly those from cable operators. The total number of subscribers to cable-based voice services increased by a factor of ten in the six years to December 2007 in the USA, from.5 million to 5. million. In addition, fixed-line voice products and services provide relatively few upselling opportunities. Consumers are unlikely to reduce spending on TV services significantly during an economic downturn, because they are perceived as good value for money as a source of entertainment. At the Goldman Sachs Communacopia Conference which took place in New York in September 2008, senior pay-tv executives emphasised the resiliency of the business Chase Carey, Chief Executive of DirecTV Group, stated that consumers cut out restaurants, they cut out theaters, but television is something they can hang on to in tough times. However, cable operators cannot afford to be complacent, because various consumer surveys (such as those from J.D. Power) indicate that the telcos tend to have superior levels of customer service, and therefore achieve higher levels of customer satisfaction. Although this has not triggered an exodus among cable subscribers to date, it could well prove to be the cable operators Achilles heel. It is easier for cable operators to enter the fixed telecoms market than for telcos to enter the TV market Cable operators also have advantages over telcos in terms of expanding into market segments that are outside their core business. We believe that it is much easier for them to offer fixed telecoms services than it is for telcos to enter the pay-tv market, for several reasons. Telcos need to make substantial investments to enter the pay-tv market. In addition to deploying network infrastructure that will enable them to deliver video streams to multiple TVs within consumers homes, they need to install video equipment such as head ends and video servers. Telcos also need to spend a significant amount to acquire content, to ensure that their offers can compete with other pay-tv propositions. Telcos have been reselling satellite TV packages for the past 5 years or so (AT&T since 2003, Verizon since 2004), but are novices in the pay-tv business in comparison with cable operators, which have been in the business for decades. Cable operators are more experienced in selling entertainment services, are experts at negotiating with content owners and have a lot of leverage with them because of their large established, rather than potential, TV subscriber bases. Some cable operators, such as Comcast, produce their own content. By contrast, most cable operators in the USA have a bi-directional network and can easily enter the fixed voice and broadband access service markets by deploying VoIP and broadband services, using PacketCable over DOCSIS. Cable operators also have several advantages that enable them to compete effectively with telcos in their core business segment and the fixed telecoms market. Cable services in the USA are largely digital and include many value-added services, such as HD, PVR and VoD offerings, unlike some markets where cable TV is delivered as a utility service with little in the way of advanced features. As a result, it more difficult for alternative pay-tv service operators to gain a competitive advantage when entering the US market. Cable operators can compete with telcos on access speed in the broadband service market (see Table 9). In areas where telcos have yet to deploy fibre, they are heavily constrained by the distance limitations of DSL because of the long average local-loop lengths in the USA. Their DSL-based services tend to achieve downstream speeds of

8 The US credit crisis: cable operators are coping better than telcos 8 6Mbit/s or less, whereas cable operators can deliver speeds of up to 5 20Mbit/s using first-generation DOCSIS technology. Cable operators can respond to telcos fibre deployments by selectively upgrading local infrastructure to DOCSIS 3.0, which is a much quicker and less expensive process than rolling out fibre. In the fixed voice market, cable operators will typically compete on price. For example, Verizon s Freedom Essentials package, which includes unlimited calls within Canada and the USA and various value-added services such as voic , costs USD49.99 per month, whereas Comcast s Unlimited package also includes calls to various US dependencies such as Puerto Rico and the US Virgin Islands for USD39.95 per month, thus offering more coverage for a lower price, to undercut the telco. This strategy should enable cable operators to steadily increase their share of the voice service market during an economic downturn because the value for money aspect will appeal to consumers that are attempting to reduce their spending. Table 9: Selection of US operators broadband service prices by access speed [Source: Analysys Mason, 2008] Price per month for broadband access speed (USD) 768kbit/s.5Mbit/s 3Mbit/s 6Mbit/s 0 2Mbit/s 6Mbit/s AT&T Verizon Comcast Time Warner Cable AT&T and Time Warner Cable s sample prices are for services available in Beverly Hills, CA. Comcast and Verizon s sample prices are for services available in Philadelphia, PA. The mobile sector could be the last battleground Ownership of mobile networks has given AT&T and Verizon a significant advantage: it has enabled them to offer quadruple-play packages and, more importantly, has acted as a growth driver that has compensated for declines in their fixed telecoms businesses. The two integrated telcos number of mobile subscribers increased by.% in the year to June 2008 (see Table 0). However, the rate of growth has declined; the telcos achieved a quarterly growth rate of 2.2% in the second quarter of 2008, compared with 2.3% in the equivalent period of Telcos are likely to find it more difficult to attract new subscribers as the market matures and the effects of the economic crisis become more severe. Table 0: AT&T and Verizon s mobile subscribers, 2Q 2007 and 2Q 2008 [Source: Analysys Mason, 2008] Number of mobile subscribers Change in the number of mobile AT&T Verizon Combined AT&T s 2Q 2008 figures have been adjusted to take into account the operator s acquisition of Dobson Communications in 4Q 2007 and Edge Wireless in 2Q Verizon s 2Q 2008 figures have been adjusted to take into account the operator s acquisition of SureWest Communications mobile business in Q 2008.

9 The US credit crisis: cable operators are coping better than telcos 9 Cable operators have been attempting to enter the mobile market so that they can develop quadruple-play propositions, but with little success. Pivot, a joint venture between mobile operator Sprint and the cable operators Comcast, Cox Communications and Time Warner Cable, failed in April 2008 barely a year after it was launched. Comcast and Time Warner Cable continue to investigate alternative methods of entering the mobile market, such as a strategic investment in Clearwire, an ISP that aims to create a nationwide WiMAX network. This would give them a stake in high-speed wireless broadband services, which would create a range of new possibilities. The markets for traditional mobile services are approaching saturation, but European mobile operators have experienced a surge in the take-up of mobile broadband services. This trend could easily be repeated in the USA particularly in areas that are poorly served by fixed broadband. The cable companies are likely to find themselves competing with telcos for a share of this new growth market.