Cable is Cornering the Broadband Market

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Includes: CHTR, CHTRQ, CMCSA, DISH, T, VZ
by: Larry Dignan

The second quarter results are out and it appears that the cable industry is winning share in broadband, phone and TV connections and handily thwarting encroachment by the likes of Verizon (NYSE:VZ) and AT&T (NYSE:T). In fact, TV and broadband service is meant to be a monopoly and cable appears to be the winner.

That’s the big conclusion by a Bernstein Research note penned by Craig Moffett.

Moffett writes:

In the harsh glare of second quarter seasonality, the telcos’ wired  businesses  suddenly  look  not  only  like  they  are  weakening…  they  look  like  they  are  positively  collapsing. Access line losses have accelerated to an almost 10% annual  rate  at  AT&T,  and  to  an  almost  12%  rate  at  Verizon.  Broadband  growth  has  virtually  stopped,  with  DSL  customers  abandoning  the TelCos  for  cable’s  higher  speeds and bundled prices.  Cost reduction efforts are beginning to meaningfully lag volume declines, pressuring margins. The second quarter has been unkind, too, to the satellite TV operators.   Dish Network’s (NASDAQ:DISH) 2Q  subscriber  loss was  the  first  ever for a major U.S. satellite operator.  And while DirecTV (DTV)  made  its number, overall  subscriber growth  for  the  satellite category is down 65% year on year.   Gross additions were down 5.9% YoY for the two companies combined.  DirecTV is  holding  its own,  but  it  is  doing  so by gaining  share  of  a shrinking pie.  Suddenly, the satellite category looks… well,  wobbly.

Bottom line: Cable is grabbing 80 percent of new broadband connections. Here’s the tally:

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Moffett notes that cable’s broadband connections have been on the rise since the end of 2005 and appears to be a natural monopoly in the making. The biggest surprise is that cable has been taking its time becoming a monopoly. He notes:

The telecommunications  market  is,  after  all,  a  true  natural monopoly market  –  that  is,  the  capital  required  to  build  a network  is  simply  too  great  to  support  more  than  one operator (just like the railroad business before it).  And more than  ever,  it  appears  that  Cable  is  poised  to  be  that  one network.

Moffett then goes into a little history (that we all know by know). Once upon a time there was a monopoly telephone provider–Ma Bell. Ma Bell was regulated and then broken up. Then there was the Telecommunications Act of 1996 and cable and Ma Bell’s telecom offspring went at each other. Then Ma Bell began merging again with two main providers–AT&T and Verizon. However, cable–an uber network for video–kept gaining. Today, you can reasonably argue that AT&T and Verizon are primarily wireless phone companies. In the end, it’s monopoly time. After all the shuffling in the broadband industry the market characteristics, which favor a natural monopoly, remain.

Moffett’s take is most likely on target, but it’s quite a buzzkill for those of us that would like a little more competition in the broadband marketplace. I’m fortunate in that I have Verizon’s FiOS and Comcast (NASDAQ:CMCSA) going at it, but that’s not the norm in many regions. Meanwhile, if that natural order for telecom/video/broadband service is monopoly that hints at more regulation in the future and puts the FCC’s Comcast ruling in a different light as a precedent.

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