DSL Beats Cable in 2Q? Think Again

[Gregg Lengling]

More than 1.9 million new broadband connections were activated during the second quarter, and during that three-month period DSL providers added more broadband net additions for the first time when compared to customer additions for major cable operators.

However, Craig Moffett of Bernstein Research said he disagrees with an industry-wide notion that the Bells have "pulled ahead" in the consumer broadband race. He cited three reasons for his conclusion:

*RBOCs get a higher share of DSL subscribers from small businesses. In the residential market, cable still appears to control the majority of gross and net additions, Moffett said, though the gap has continued to slowly close between the two services. After adjusting for the business/residential split with DSL, the analyst estimated that cable took 54 percent of net additions and 62 percent of gross additions for the three-month period.

*Second, second quarter seasonality leads to higher churn rates, in the form of seasonal disconnects. "Although both cable and DSL showed similar signs of seasonality in second quarter, the churn-based seasonality effect is naturally greater for the cable operators due to their larger broadband subscriber bases," Moffett said. After adjusting for seasonal churn, the share of gross additions appears to have remained sequentially flat from the first quarter, he said.

*And finally, a narrowing of the "availability gap" ? the availability advantage of cable versus DSL ? appears to explain much of the past year's narrowing of market share between the two broadband technologies. Cable's availability "advantage" has narrowed from 24 percent in first quarter 2003 to 17 percent in second quarter 2004, the Bernstein analyst said.

"If one adjusts for cable's wider availability to create a proxy for the contestable market, there has been almost no change in gross addition share over the past year," Moffett said. "With availability now reaching a plateau for both cable and the RBOCs, share of gross additions should remain relatively stable."