A Real Economy publication

2022 telecommunications industry outlook

Jul 22, 2022

Telecommunications industry outlook key takeaways

Cable broadband providers still control the majority of market share, but external pressures and consumer preferences present a significant challenge. 

The market is showing it is receptive to changing service offerings, and cable broadband providers must find ways to limit churn.

Satellite providers have a unique business case, providing avenues for growth.

FWA technology presents significant opportunities for both cable and telco providers, but network expansion takes time. 

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Telecommunications Economics

The broadband shift: Changing market share by service type

Cable broadband providers control the majority of the market share—66% of U.S. subscriptions in 2021, according to Bloomberg—as they have for over a decade. However, cable is increasingly challenged by a number of external pressures and consumer preferences, coupled with comparable or superior data speeds offered by other technologies.

Cable broadband providers and telecom carriers, or telcos, have long benefited from a strong, established infrastructure, capable of providing reliable, high-speed internet connectivity and video. With nearly 100 million pay TV households in 2016, cable and telecom TV providers were well positioned to bundle broadband internet service with existing customers’ TV subscriptions, providing a valuable and sticky supplemental revenue stream. Technical advantages regarding the data transmission capabilities of coaxial cable relative to telephone lines gave cable providers a competitive edge over telecom carriers’ DSL offerings, though expanding TV options allowed telcos to remain somewhat competitive.

Middle market insight:

However, as of Dec. 31, 2021, the United States had 39.6 million paid cable TV connections, according to Bloomberg, compared to 75.2 million Netflix, 42.9 million Disney+ and 40.9 Hulu subscribers. As consumers have increasingly shifted toward streaming content, their reliance on bundled TV and internet services has diminished. 

According to the Pew Research Center, the share of Americans who say they watch television via cable or satellite plunged from 76% in 2015 to 56% in 2021. That drop does not directly correlate to a decrease in cable broadband subscribers; however, it significantly affects the stickiness of the bundled cable service offerings. That is, if a customer is no longer interested in the cable TV offering and can get faster, more reliable, or less expensive internet service from fiber, fixed wireless access, or satellite, they are more likely to change providers.

That same Pew study also showed that younger generations are disproportionately in favor of shedding cable or satellite TV service, primarily because they can go online to access content they want to watch. The percentage of 18- to 29-year-olds who receive TV via cable or satellite dropped from 65% to 34% in the last six years. For ages 30 to 49, the drop was similarly drastic: 73% to 46%. That shift indicates competitive differentiation will be increasingly driven by the value of providers’ data offerings, and the decrease in pay TV subscribers is likely to continue as younger generations control more of the market.

So, what are the alternatives?

Cable:

The first alternative is promising for cable providers—it is simply for customers to eliminate their paid TV and maintain their internet subscription. Cable net adds are still higher than the competing service types, but the growth rate is decreasing relative to fiber. Cable will need to maintain its cost advantage and make capital investments to increase speed, network capacity and reliability. In key markets, cable companies may want to invest in fiber overbuilds to defend themselves against emerging fiber competition.

Broadband subscriptions by service type chart
chart - Broadband subscriptions by service type

Fiber:

Fiber has seen the biggest uptick among service types. Like the technical superiority coaxial cable offered against traditional telephone lines used to provide digital subscriber lines, or DSL, fiber optic cable has superior data transmission capabilities than its predecessor. The biggest barrier is cost; fiber, especially fiber to the home, can be prohibitively expensive for certain geographies, whereas much of the front-end cable infrastructure is already in place. 

Q4 2021 net broadband adds - by service type chart

The fiber rollout is also slow. According to the Federal Communications Commission, only 22% of the country had access to one or more fiber providers offering speeds of 1,000 megabits per second (Mbps) download and 100 Mbps upload (i.e., the speed at which fiber noticeably outperforms cable) in December 2020, the date of the agency’s most recent analysis. Even in locations where fiber speeds are comparable to cable (i.e., 250 Mbps download and 25 Mbps upload), fiber is available for only 36% of the population, compared to cable’s 85%.

U.S. population with access to one or more providers chart

Fixed wireless access (FWA):

The emergence of 5G technology over the past several years has presented a viable alternative to cable or fiber. FWA has the potential to harness many of the strengths of fiber and/or cable lines that will ultimately support the back end of its network, while avoiding many of the barriers. FWA can provide high-speed internet directly to a small receiver in a user’s home, and it can bypass the costly challenges of running expensive fiber to the home. However, providers still face technical challenges with network capacity and geographic constraints (i.e., distance and obstacles between a tower and the end user).

Satellite:

The technological advances of satellite internet, particularly low Earth orbit satellites, present a flexible option that may benefit a sizable portion of the country without high-speed internet access—particularly in remote areas of the country where running cable or fiber may be too costly or FWA towers may not be reachable. Due to cost constraints and technical practicality, satellite may be a highly valuable niche provider that will continue to gain modest market share without significantly disrupting the market.

Takeaways for the middle market:

  • Cable broadband providers must continue finding opportunities to bundle services to minimize churn. When possible and practical, capital investments in fiber overbuilds may create a valuable barrier to competitive threats.
  • Telcos with expanding fiber networks should view 2021 data as a positive sign that the market is receptive to changing service offerings.
  • Satellite providers still have a way to go in terms of market share, but their distinct business case (particularly their superior rural service offerings and ease of access for underserved markets) provides them with a niche opportunity to gain customers.
  • FWA presents opportunities for cable and telco providers alike, as well as for new entrants and public-private partnerships. However, it may take time for the use cases to develop as 5G technologies continue to expand.

 

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