Broadband growth plummets in Q2

Cable operators and phone companies signed up about half the number of subscribers in the second quarter of 2008 that they signed up during the same quarter in 2007.

Twenty of the largest cable operators and phone companies in the U.S. only signed up about 887,000 new subscribers during the quarter, the Leichtman Research Group reported Monday. This was the lowest level of new subscribers the research group has seen in the seven years it's been reporting on the broadband market.

Phone companies appeared to be the hardest hit by the slowdown, only adding about 23 percent of the customers they added during the same quarter a year ago. Bruce Leichtman, president of the firm, said AT&T and Verizon Communications have been emphasizing higher speed and more expensive services to customers over their entry-level DSL services.

"While the relative number of quarterly broadband adds has certainly peaked, the decline in additions this quarter compared to the same period last year was exacerbated by Verizon and AT&T's emphasis on selling higher speed Fios and U-verse bundled services, often at the expense of the traditional DSL service," he said in a press release.

This change in strategy appears to be an attempt to sign up more valuable customers who won't drop their service when the one-year promotion ends.

Meanwhile cable operators managed to sign up around 85 percent as many subscribers as they had during the second quarter of 2007. In the past, cable and phone companies have evenly split the number of new broadband additions. But during the second quarter, cable pulled ahead with a whopping 76 percent of the new business.

While the phone companies' change in strategy could play a role in the lopsided breakdown of new broadband additions, I think it's also worth noting that the market is more saturated. Roughly 90 percent of active Internet users today already subscribe to broadband service. This means that there is a smaller pool of people using dial-up who may switch to broadband services.

Of course, there is still a good proportion of the population that has no Internet connectivity at all, which could provide future growth for the broadband industry. But these customers are likely more price sensitive and some may actually live in areas where broadband service isn't currently available.

What's this mean for broadband providers? I think it means that phone companies and cable operators will have to compete even more on price and value. I doubt the phone companies will drop the pricing of their ultra high-speed services much. Instead, I think they will price their bundled services more aggressively to encourage consumers to sign up for broadband services as well as their phone and TV services. They may even try to link their wireless services in with these packages, creating a quadruple play value package that the cable companies won't be able to compete with.

I also predict that the phone companies and cable operators will be forced to extend their promotional offers. Consumers have gotten savvy enough to know that they can cancel their service (or at least threaten to leave) when the promotion is over and move to another provider.

Cable companies now have 35.3 million broadband customers. And phone companies have 29.7 million subscribers. AT'T has the largest number of subscribers with 14.7 million customers. Comcast, the largest cable operator, has 14.4 million.