Broadband Adoption Slows Among U.S. Providers

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Broadband adoption among U.S. consumers seems to be slowing, with the three largest broadband providers in the U.S. posting the lowest subscriber increases in years during the second quarter of 2008.

AT&T and Verizon, in particular, reported increases in broadband subscribers that were a small fraction of numbers in past quarters, with growth in the tens of thousands instead of hundreds of thousands. Comcast reported a less dramatic drop-off. The three providers deliver service to more than half of the broadband subscribers in the U.S.

Providers and analysts blamed the slow growth on a number of factors, including the slumping U.S. economy and a seasonal drop-off due to college students cutting off service and retirees leaving their winter homes in southern states. There was a lot of disagreement on the causes.

Bruce Leichtman, president of Leichtman Research Group, discounted economic concerns, saying the drop-offs appear to be more related to marketing low-end DSL (digital subscriber line) service and to a maturing of the broadband market.

"Sixty-five million people [in the U.S.] have broadband," he said. "It can't go on forever. We've reached our zenith in net additions." The U.S. broadband market can probably grow by an additional 30 million subscribers in the next few years, and broadband grew faster than expected in past years, he added.

In addition, Verizon and AT&T appear to be shifting their focus away from marketing the slower DSL to their faster fiber-based services, Leichtman said. Verizon reported a loss of 133,000 DSL subscribers during the second quarter, coupled with an increase of 187,000 subscribers to its Fios, fiber-based Internet service.

Until recently, the two large telecom carriers had focused on pushing the low-end DSL, but marketing the slower service meant high turnover rates, Leichtman added. The two carriers now seem to be focused more on profitability than on growing their raw broadband numbers, he said.

Verizon this week reported 54,000 new broadband subscribers in the quarter, compared to more than 200,000 new subscribers in each of the previous four quarters, and more than 400,000 new subscribers in each of the six quarters before that.

Last week, AT&T reported an increase of just 34,000 consumer broadband subscribers in the second quarter of 2008, compared to an increase of more than 365,000 in each of the three previous quarters.

On Wednesday, Comcast, the nation's largest provider of cable modem service, also reported slower-than-normal growth, although the drop-off wasn't nearly as pronounced. Comcast reported 278,000 new broadband subscribers in the second quarter of 2008, compared to 492,000 new cable modem subscribers in the first quarter and 330,000 in the second quarter of 2007.

Still, it was Comcast's slowest growth in more than three years.

A Comcast spokeswoman suggested the company's broadband numbers were largely related to a seasonal dip. Comcast has a high number of subscribers in college cities and in Florida, where many retirees spend the winter before returning north to their homes, said D'Arcy Rudnay, senior vice president of corporate communications at Comcast.

Two-thirds of the new Comcast broadband customers came from DSL, she said. Comcast picked up more than 770,000 new cable modem subscribers in the first half of 2008, and "that's very strong growth," Rudnay added.

Rudnay also suggested the slow U.S. economy may have contributed to the slow growth.

An AT&T spokesman pointed to seasonal drop-offs and to the U.S. economy. AT&T doesn't provide separate subscription numbers for its U-verse fiber and its DSL services.

Verizon officials pointed to a number of factors. DSL customers are switching to higher-speed service, and Verizon ended a promotion that gave away a new flat-screen television set to new fiber-based Fios Internet and TV subscribers.

Verizon spokesman Bob Varettoni discounted the effects of the U.S. economy or a mature broadband market. "We do not see customers disconnecting or dropping to lower-priced broadband alternatives due to the economy," he said. "Broadband penetration is high, but we are seeing demand for higher speeds and bandwidth continuing to increase."

Verizon's numbers should go up in the third quarter, with the company rolling out its Fios service in New York City last week, officials there said.

AT&T, Verizon and Comcast provide broadband service to about 35 million of the approximately 65 million U.S. residents who subscribe to broadband.

AT&T has about 12.6 million consumer broadband connections, including DSL and its U-verse fiber service, but not counting 2.2 million satellite subscribers. Comcast has 14.4 million cable broadband customers, and Verizon has 8.3 million subscribers of its DSL and Fios services.

Bernstein Research analyst Craig Moffett pointed to seasonal lulls in broadband adoption, as well as large-scale abandonment of DSL. "Fundamentally, what we are seeing is a tectonic shift away from DSL to cable, and, to a much, much lesser extent, to telco fiber," he said.

The slow growth can probably be blamed on a number of factors, including the U.S. economy and a limited number of people who still want broadband but don't have it, added Jeff Kagan, an independent telecom analyst. "At some point you're going to run out of new customers," he said.

Some people may see broadband as a luxury during a time of economic uncertainty, he said. "People are only willing to do what they've been doing until the economy gets stronger," he said.

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