Research Notes 3Q 2004 Actionable Research on the Adoption and Impact of Broadband Media

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1 Leichtman Research Group, Inc. Research Notes 3Q 2004 Actionable Research on the Adoption and Impact of Broadband Media In this issue: On-Demand TV Finally Beginning to Emerge J On-Demand TV Finally Beginning to Emerge New England and Far West Lead in Broadband Penetration Winners, Losers and Shades of Grey Broadband Internet Grows to 29 Million in the U.S. Industry by the Numbers ust over 3% of households in the United States have a Digital Video Recorder (DVR), and 10% of all cable subscribers nationwide have used Videoon-Demand (VOD). While these totals are relatively low, they are both more than double the levels from a year ago. These findings are based on a survey of 1,350 households throughout the United States, and are part of a new LRG study, On- Demand TV 2004: A Nationwide Study on VOD and DVRs. This is LRG s third annual study on this topic. Other key findings include: 56% of digital cable subscribers say that VOD is currently available in their area this is up from 41% in an LRG study conducted 14 months ago 45% of digital cable subscribers with VOD available say that they have used it an increase from 28% last year 74% of adults nationwide have heard of DVRs up from 53% last year 14% of adults express strong interest in DVRs a total that is virtually unchanged over the past three years When analyst Bruce Leichtman looks at TiVo, the company that pioneered digital video recorders (DVRs) in 1999, he thinks of Moses. [A]lthough TiVo built this category and led everybody to the Promised Land, the company may not get there with them at least not with the success early fans envisioned. - USA Today July 28, 2004 While on-demand TV has been slower to get out of the starting blocks than many had anticipated, as a result of increased efforts from cable and DBS providers, the services are beginning to hit their stride. By 2008 VOD and DVRs will each be in over 30 million households, with about 15 million digital cable subscribers having access to both services. Page 1

2 New England and Far West Lead in Broadband Penetration A t the beginning of 2004, states in New England and the Far West led the nation in penetration of high-speed Internet service. Overall, broadband penetration was above 27% in these two regions compared to just over 21% nationwide. In the competition between cable and DSL providers, over 70% of New Englanders have cable for broadband service, while in the Far West there is an equal split between cable and DSL. The findings are from a new LRG report, Broadband, Cable and DBS Across the US 2004, that analyzes state-by-state penetration of high-speed Internet, DBS and cable television services. The report is based on recent information culled from a variety of sources, including the Federal Communications Commission (FCC) and others. Twenty-three states have broadband penetration above 20%, while just three states are below 10% In 2003, over 7% of US households added high-speed Internet service Over one-in-five households nationwide now have broadband Internet service. Yet there are distinct differences in penetration levels across the country that are still largely related to household income. Residential Percent Broadband Cable vs Region Penetration* DSL** New England*** 27.8% 71% Far West*** 27.2% 50% Mideast*** 25.1% 74% Southwest 19.6% 62% Great Lakes 18.4% 66% Plains 18.4% 68% Southeast 18.2% 63% Rocky Mountain 17.1% 58% US Overall 21.3% 63% Sources: Federal Communications Commission and Leichtman Research Group, Inc. * Residential and small business subscribers divided by total US Postal Service residential mailing addresses. ** Represents all cable and DSL subscribers (including medium and large business, institutional and government). *** FCC does not break out subscribers by type in DE, HI, or RI. Other key findings include: The top states for broadband penetration in the continental US were: Massachusetts, New Jersey, Connecticut, New York and California Based on an LRG estimate, Hawaii has the highest overall broadband penetration The states with the lowest broadband penetration were: Mississippi, South Dakota, Montana, Wyoming and New Mexico Winners, Losers and Shades of Grey Written by Bruce Leichtman, president and principal analyst for Leichtman Research Group. Reprinted with permission from August 11, 2004 issue of SkyREPORT. F or a few brief moments last year both the Chicago Cubs and the Boston Red Sox were just five outs away from reaching the World Series where one of the teams would finally be able to put curses of the past behind them. Page 2

3 Four years ago, in a rush to be first, many news organizations proclaimed Al Gore the victor in Florida, a state that would virtually ensure Gore becoming the 43rd president of the United States. Ultimately, regardless of the roles played by Grady Little, Steve Bartman, or dangling chads, the Red Sox, Cubs and Gore each went down in history as losers. Sports and politics are all about winners and losers, but too often many use this same mentality in business. Yet business is not as black and white as one company winning and another losing, there are many shades of grey. In this industry (like many others), we are often asked to choose sides: Cable vs. DBS DSL vs. Cable modem DVR vs. VOD Yet in each of these contests it is possible that there could be more than one winner or even more than one loser. In the multi-channel video arena DBS has shown strong success of late in terms The bulk of satellite gains are coming from smaller cable systems, says Leichtman. Rural operators are being decimated by DBS (direct broadcast satellite), he said. - Investor s Business Daily May 10, 2004 of subscriber totals with much of the success coming at cables expense: The DBS industry as a whole accumulated 749,000 net additional subscribers in the second quarter of 2004, while the top ten cable operators reported record cumulative loses of over 325,000 basic subscriber Over the past year DBS has added 2.8 million subscribers while cable s top operators have lost over 335,000 subscribers Over the past two and a half years DBS added 6 million subscribers while the top MSOs lost over 1.1 million subscribers While these figures clearly indicate that DBS is having a profound impact on the cable industry, they should not solely lead to the conclusion that DBS is the winner while cable is the loser. Subscriber totals should not be the only metric to judge success or failure. While DBS continues to add subscribers at a record pace, this is not without a cost: In the second quarter, DirecTV and EchoStar combined had about 1 million subscribers churn equal to about 4.7% of the total base Combined subscriber acquisition cost for the two DBS providers was over $610 an increase from about $550 just a year ago We are firmly in a new era in the multichannel video industry. Basic cable growth will never be what it was before DBS helped to saturate the marketplace. In what is largely a duopoly, the Page 3

4 competition between these two sides becomes more of a prisoner s dilemma than a win-lose battle. While this is not to espouse actual cooperation between the adversaries, it does not have to be seen as a zero-sum game. Competitive zeal driving a win-lose mentality could actually create a loselose scenario if one is not careful. Given the current landscape, it is important for the players involved to reset their sites on the metrics for success. Business is not sports, or politics the contest does not end at one point in time. There could still actually be room for more than one side to emerge victorious. Broadband Internet Grows to 29 Million in the U.S. A s of the end of the second quarter of 2004, the twenty largest cable and DSL providers in the US representing about 95% of the market accounted for over 28.6 million highspeed Internet subscribers. Combined net additions for the second quarter of 2004 totaled 1.7 million subscribers the fewest net additions of any quarter in the past year. Other key findings include: The top DSL providers added nearly 900,000 subscribers, representing 52% of the net broadband additions for the quarter versus cable marking the first quarter ever that DSL has had a greater share of net additions than cable The top cable broadband providers maintain a 6.4 million subscriber advantage over DSL and have a 61% share of the total market versus DSL The top cable broadband providers now have over 17% cumulative penetration of all those who could receive service. This quarter, however, yielded their lowest net additions since the fourth quarter of 2001 Each of the top 20 broadband providers, except Qwest and Mediacom, had lower net adds this quarter than last quarter In the past year the top cable and DSL providers have combined to add over 8 million net new broadband subscribers. While the results from this quarter should not necessarily be interpreted as the beginning of a slowdown, broadband providers clearly need to focus on retaining the customers they already have in addition to acquiring new ones. There are now close to 30 million households with broadband, and that's a pretty robust number, said Bruce Leichtman, president and principal analyst for Leichtman Research. It's not that the market is saturated, but clearly we've gone well past the lowhanging fruit. - MSNBC August 17, 2004 Page 4

5 Industry by the Numbers (as of the end of 2Q 2004) Top 10 Cable MSOs in the U.S. Net Adds Net Adds Passings Subscribers Availability Penetration in 2Q 2004 in 2Q 2003 Basic Cable 106,328,000 58,345, % (327,000) (124,000) Digital Cable 105,654,000 22,521,000 99% 21.3% 550, ,000 Broadband Internet* 100,237,000 17,285,000 94% 17.2% 826, ,000 Telephone 17,624,000 2,577,000 17% 14.6% 95,000 9,000 Sources: The Companies and Leichtman Research Group, Inc. * Broadband Internet data does not include RCN. DBS (as of the end of 2Q 2004) Net Adds Total New Subscriber Average Revenue Subscribers 2Q 2004 Subscribers Acquisition Cost Per Sub/Month DIRECTV 11,595, , ,000 $645 $65.00 Pegasus & Other 1,445,000 (46,000) 40,000 $476 $59.92 NRTC* DIRECTV Total 13,040, , ,000 EchoStar 10,125, , ,560 $576** $53.71 Total DBS 23,165, ,000 1,823,560 Sources: The Companies and Leichtman Research Group, Inc. * SAC and monthly revenue per sub are for Pegasus (only) for the first 2 months of the quarter, total new subs are estimates On 8./27, DIRECTV announced the acquisition of the assets of Pegasus TV, Inc. with the migration of these customers to DIRECTV to be completed in days. ** Includes leased equipment and unreturned box costs. Page 5

6 Top Broadband Internet Providers in the U.S. Broadband Internet Provider Subscribers at end of 2Q 2004 Net Adds in 2Q 2004 Cable Comcast*** 6,005, ,100 Time Warner 3,548, ,000 Cox*** 2,246,109 97,517 Charter 1,711,400 58,400 Cablevision 1,179,040 50,110 Adelphia** 1,167,802 95,864 Bright House Networks* 675,000 25,000 Mediacom 327,000 25,000 Insight 273,000 15,900 RCN* 210,000 5,000 Cable One 152,300 5,000 Total Top Cable 17,495, ,791 DSL SBC 4,277, ,000 Verizon 2,944, ,000 Bell South 1,738, ,000 Qwest 853, ,000 Covad 514,345 (1,437) Sprint 383,000 34,000 ALLTEL 194,534 20,045 Cincinnati Bell 117,000 7,000 CenturyTel 108,820 11,728 Total Top DSL 11,129, ,336 Total Broadband 28,625,250 1,726,127 Sources: The Companies and Leichtman Research Group, Inc. * Bright House Networks and RCN subscriber counts are estimates. ** Adelphia subscriber counts do not include properties owned by the Rigas family *** Comcast and Cox totals are adjusted from last quarter reflecting the closing of some minor transactions Top cable and DSL providers represent approximately 95% of all subscribers. Company subscriber counts may not represent solely residential households. Based on FCC data, about 6% of DSL subscribers, and 0.2% of cable subscribers are classified as non-residential or small business. Leichtman Research Group, Inc. 3 Ellison Lane Durham, NH (603) (603) (Fax) Page 6 Copyright 2004, Leichtman Research Group, Inc. All Rights Reserved