Ms. Josephine Scarlett
Office of the Chief Counsel
National Telecommunications and Information Administration
Room 4713 HCHB
1401 Constitution Ave., NW
Washington, DC 20230
Re: NTIA Docket No. 011109273-1273-01; Comments of ARS, Inc.
December 19, 2001
Dear Ms. Scarlett:
On behalf of ARS, Inc., I respectfully submit this letter and the attached supplemental materials to assist NTIA in developing the focus and direction of national broadband policy.
About ARS: As a technology research and analysis firm that closely monitors the broadband industry and counts many of the nation’s most prominent broadband providers as its clients, ARS specifically would like to comment on three issues relating to broadband policy: broadband adoption rates, broadband price levels for consumers and broadband market share. ARS will also spell out a recommended course of action to hasten the nationwide adoption of broadband services.
Broadband Adoption Rates: ARS published a report in early December 2001 that found that the quarterly growth rate of new broadband subscribers throughout the U.S. in the third quarter of this year fell to its lowest level since ARS began tracking such data. For the third quarter of 2001, the nation’s broadband providers increased their subscriber bases by 14.2%. This number was down from 14.9% in the second quarter of 2001, 25.8% in the first quarter of 2001, 34.1% in the fourth quarter of 2000, 34.2% in the third quarter of 2000, 34.3% in the second quarter of 2000 and 39.5% in the first quarter of 2000. ARS attributes this decline in broadband subscriber growth rates to a combination of the sagging U.S. economy, rising broadband prices (see below) and a lack of compelling content offerings for consumers.
Rising Consumer Broadband Prices: ARS released a study in October 2001 showing that basic consumer cable broadband Internet service prices have risen 11% since the beginning of the year, from an average of $40.07 in January 2001 to an average of $44.17 in October. Basic consumer DSL prices increased 10% over the same period, rising from an average of $47.18 in January to an average of $51.68 in October. Overall, 76% of the industry’s major broadband service providers offering services in both January and in October increased their monthly rates. Furthermore, 60% of all broadband service offerings had higher monthly rates in October than in January. Finally, 27% of the DSL providers and resellers tracked by ARS that provided service in January were acquired, bankrupt or otherwise out of the DSL business by October.
It is clear that the economic downturn that has resulted in a tightening of the financial markets has led to consolidation in the broadband industry. This consolidation has left broadband consumers with fewer choices and, ultimately, higher monthly prices. ARS expects that this trend of increasing prices will slow the widespread adoption of broadband services, and that the vast majority of users will continue to access the Internet via dial-up connections for the foreseeable future.
Broadband Market Share: An ARS analysis of third quarter 2001 subscriber numbers from the broadband industry’s major providers showed that cable broadband Internet providers had a larger overall percentage gain in subscribers than DSL providers. This marked the first time in over a year that cable providers beat out their DSL counterparts on a quarterly percentage basis.
Cable providers have long held an overall lead in high-speed Internet access subscribers. However, DSL providers have registered higher percentage gains quarter by quarter throughout the two years. Data from the third quarter of 2001 show that the top five largest cable companies (Time Warner/Road Runner, AT&T Broadband, Comcast, Cox and Charter) increased their combined broadband Internet subscriber base by 14% in the third quarter. The top five largest DSL providers (SBC, Verizon, BellSouth, Qwest and Covad) showed an overall increase of 13% in the same period. By contrast, data from the past year show that the top five DSL providers increased their subscriber numbers by 14% in 2Q01, 27% in 1Q01, and 45% in 4Q00. The top five cable providers showed increases of 13%, 24%, and 26%, respectively. These findings reverse a two-year trend and common assumption in the broadband industry – that while cable has an overall lead DSL is gaining. Additionally:
· The five largest cable providers added 624,000 broadband Internet subscribers in the third quarter of 2001. This was up from 519,000 added in the second quarter, and down from 770,000 added in the first quarter. The five largest cable providers now have over 5.1 million broadband Internet subscribers, up from 4.5 million at the end of the second quarter and 3.98 million at the end of the first quarter.
· The five largest DSL providers added 392,000 broadband Internet subscribers in the third quarter of 2001. This was up from 354,000 added in the second quarter, and down from 551,000 added in the first quarter. The five largest DSL providers now have 3.3 million customers, up from 2.95 million at the end of the second quarter and 2.6 million at the end of the first quarter.
· The five largest cable providers had a 1.38 million subscriber lead over the DSL providers at the end of 1Q01. That lead now stands at 1.8 million, an increase of 30% since the first quarter.
· The five largest cable providers control about 51% of the total U.S. broadband market. The five largest DSL providers control about 33%.
· With the exception of AT&T Broadband, each of the top five cable providers registered more new customers in the third quarter than in the second. Of the top five DSL providers, only SBC and Verizon signed up more new customers in 3Q01 than in 2Q01.
The bottom line is that cable continues to lead DSL in the broadband wars, and in fact, cable has actually increased its lead as of late. Whether this increase can be attributed to the unregulated nature of the cable industry or some of the telephone companies’ decision to slow the build-out process for DSL (or most likely both), it is clear that cable is coming out ahead in signing up new customers for broadband Internet services.
Hastening Broadband Adoption: The announcement of the AT&T Broadband and Comcast Corp. merger, along with the recent problems of Excite@Home, has focused much attention on the future of the cable broadband industry. As public and regulatory scrutiny of the cable industry increases, ARS recommends that the nation’s cable providers immediately implement tiered pricing for their cable broadband Internet services. (DSL carriers should also implement tiered consumer pricing, but the relatively slow build-out of DSL services represents a serious competitive disadvantage in favor of the cable providers.) There should be multiple tiers, but the most important for this discussion is the lowest and most basic. Cable companies should offer 384Kbps download and 128Kbps upload broadband Internet service for $25 to $30 per month.
By ARS estimates, there are roughly 50 million dial-up Internet subscribers in the United States who pay approximately $20 per month for their service. Industry estimates project that about two-thirds of the nation’s 105 million households should have access to cable Internet service by the end of 2001. ARS can reasonably extrapolate, then, that two-thirds of the 50 million paid dial-up subscribers in the U.S. are also capable of receiving cable broadband Internet service. More precisely, that number comes to about 33.5 million paid dial-up subscribers. If those 33.5 million dial-up subscribers who are capable of receiving cable broadband Internet service are currently paying $20 per month for 56Kbps (or slower) Internet access, ARS firmly believes that nearly all of them would sign up for basic-level broadband Internet service if it were just a few dollars more per month. ARS estimates that there is an available $10 billion to $12 billion nationwide in annual revenue from dial-up subscribers waiting to be switched to basic-level broadband Internet service.
A problem for some providers, such as AOL Time Warner, is that any gains in broadband subscribers switching from dial-up come at the expense of the core dial-up subscriber base. However, companies such as AOL clearly already realize this fact, as AOL’s reselling of Bell company DSL lines and Time Warner Cable broadband Internet services indicates. The simple truth, of which service provider executives doubtless are aware, is that dial-up is an industry destined for extinction. It will take several years, but eventually there will be no dial-up Internet access market. Service providers thus have two choices: to quickly migrate as many dial-up subscribers as possible to broadband Internet service or to wait and let their rivals beat them to it. Many providers’ actions suggest that they have decided to pursue the former option, although the migration is at present not occurring at a very rapid rate.
ARS believes that a sizeable percentage of basic-level broadband access customers would switch to a higher-tiered service once they began experiencing the content eventually made available to them. A two-hour video on demand, for example, would be a much easier download at 1.5Mbps than at 384Kbps. But the point of this proposal is that providers must first convert dial-up subscribers to broadband at a very small increase in their monthly cost and then amaze them with the content they can receive. There will certainly be costs associated with such a massive influx of broadband subscribers to cable networks, but those costs will be miniscule compared to the potential revenues available. It should be pointed out that Charter Communications, the nation’s fourth largest cable provider, has implemented tiered broadband services and pricing in many of its markets, but ARS believes that Charter’s lower-tiered cable broadband Internet services are priced much higher than they should be (e.g. $39.90 per month for the 256K download and 64K upload “Value Package” service).
Broadband Internet access can continue to be a service considered by the mass market to be a luxury item, particularly in these times of economic difficulty. Or it can be a service that provides value, information and entertainment to its users and financial windfalls for its providers. The choice should be an easy one.
Regulatory Policy: While there is no shortage of potential regulatory options that will be presented as solutions to the lack of widespread broadband adoption in the U.S., ARS takes no formal position on issues such as the Tauzin-Dingell bill currently pending before Congress. However, ARS does believe it to be somewhat unbalanced that cable broadband providers that presently control roughly two-thirds of the broadband market are completely unregulated by the government, while telephone companies that control less than a third of the broadband market are regulated rather heavily.
ARS believes that broadband should either be regulated or unregulated, but that the current government regulatory policy concerning broadband is fragmented. If it is the government’s goal to allow the marketplace to determine the future of broadband, then the Bell companies should be deregulated to the same level as the cable providers with regards to broadband Internet service. If the government’s goal is to control broadband pricing and mandate “broadband access for all,” then the cable companies should be regulated at similar levels as the large phone companies. The current government regulations with respect to broadband are clearly tilted in favor of the cable providers.
Having said that, ARS believes that broadband will best served through as little government regulation as is possible. If a complete deregulation of the Bell companies is not politically feasible, then the government should consider such measures as deregulating long distance data traffic over Bell company networks. The recommendations ARS makes above, however, should first be given a chance to work without heavy government intervention, perhaps through the use of regulatory or tax incentives for providers to make low-cost, basic-level broadband service available to all Americans. Substantial government regulation of broadband should only occur as a measure of last resort.
Conclusion: In the final analysis, the Administration of President Bush must develop a cohesive national broadband policy. With nascent industries such as video-on-demand, interactive gaming and home networking dependent upon widespread broadband adoption for their survival, it is clear that the government must decide what role it will play in broadband’s future. Ultimately, ARS believes it imperative that overall consumer broadband prices come down, tiered broadband services and pricing be implemented, and low-cost basic-level broadband service be made available to all Americans. It is only through applying market based, common sense practices such as these that broadband will flourish in the years to come.
Mark L. Kersey
Broadband Industry Analyst