November 18, 2004

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Internet Service Providers and broadband suppliers in the US added a record 2.3 million subscribers in the third quarter of 2004, according to the Leichtman Research Group (LRG).

LRG notes that this record gain comes as a surprise amid signs that broadband growth would be slowing down from past quarters.

LRG President and Principal Analyst Bruce Leichtman attributes the gain to the efforts of providers: "Cable and DSL providers responded to the slight downturn in the market last quarter by aggressively marketing broadband services with discounted introductory offers to woo new subscribers and returning college students.

The seasonal variations in the broadband market that have taken place this year are likely to continue in the future, but without further slashing of prices, total net additions similar to this quarter may be difficult to replicate."

In the third quarter of 2004, cable drew more new subscribers than DSL, with almost 1.3 million net adds for cable compared to just over 1 million for DSL.

This slightly expands the 6 million subscriber lead cable holds over DSL. At the end of Q3 2004, LRG has determined there are almost 18.8 million cable Internet subscribers in the US, compared to about 12.2 million DSL subscribers.

Comcast bolstered its large lead over Time Warner in the cable Internet market by adding 549,000 new subscribers to Time Warner's 168,000.

Overall, Comcast has about 2.8 million more subscribers than its competitor. The two companies have indicated that they will make a joint bid for Adelphia, which filed for Chapter 11 bankruptcy in 2002 and put itself up for auction.

If their bid is successful, it could have a large effect on the two companies' subscriber numbers, depending on how Adelphia's almost 1.3 million customers are divided up.

SBC is the top DSL provider, with about 1.4 million more subscribers than its nearest competitor, Verizon.

Meanwhile, as the number of broadband subscribers grow, AOL has given further indications that it will be phasing out its broadband service.

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Such a decision would be in favor of just offering a dial-up service, a surprising move considering its dial-up service has been losing customers who opt for broadband.

The company stopped accepting new customers into its AOL broadband service in February 2004. Last week, AOL customers in southern US states were informed that they should find a new broadband carrier by January 17, 2005, at which point their AOL broadband service will stop, replaced by dial-up.

Few AOL customers use the company's broadband service, with dial-up customers comprising the vast majority of the company's 23 million subscribers.

It appears that AOL made the strategic decision that offering its own broadband service was not effective. The $54 per month price tag was a major deterrent, failing to attract many AOL dial-up subscribers, consumers who used other broadband services or those consideing broadband.

The company will continue, for the time being, its "AOL for Broadband" service, which allows users of other broadband ISPs to access AOL's portal services and special content. This continues a trend noted by eMarketer Senior Analyst Ben Macklin in the Broadband Value-Added Services report, released earlier this year:

Both MSN and AOL are losing dial-up subscribers rapidly to telecom and cable operators offering broadband and they are not attracting enough broadband subscribers to make up for the loss of dial-up subscribers.

To maintain a relationship with any and all Internet subscribers they are offering exclusive portal content and services, something cable and telecom operators are traditionally not experienced at doing.

The future of Internet access is plainly in broadband, and as LRG's latest statistics show, it continues to grow above expectations.

The success of AOL's gamble — counting on consumers agreeing that it's worth paying a little more to add AOL functionality to its existing broadband service — is somewhat less clear.

The service costs about $25 a month, on top of the customers' existing service.

And, considering price was a major roadblock to attracting subscribers to AOL's own broadband service, it's hard to see how this choice will be much more attractive for users.

Source: eMarketer