Listen: MediaTalk | Season 2 Ep. 10 Broadband by the Numbers: Adds, Losses and Closing the Digital Divide

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Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with S&P Global Market Intelligence Tech, Media and Telecom News team. Welcome to Media Talk, a podcast hosted by S&P Global, where the news and research staff explore issues in the evolving media landscape. Today, I'm joined by S&P Global Market Intelligence Kagan senior analyst John Fletcher, who specializes in the multichannel distribution realm. How're we doing today, John?

John Fletcher: Doing great, Mike. Thanks for the invite.

Reynolds: John's going to share his thoughts on where broadband is today and address some of the opportunities and challenges that lie ahead for cable, telco, satellite and fixed wireless providers. He's also going to discuss how the US plans to further close the digital divide. So let's get to it, John.

It's more and more a streaming world, and it runs on broadband. We can't watch the NFL championship game on Paramount+ or all the content on Netflix Inc., Amazon.com Inc., Disney+, Max, Peacock or Apple TV without connectivity at good speeds. Where does the overall [US] broadband industry stand these days in terms of subscribers and revenue?

Fletcher: So there's about 130 million broadband subscriptions, including businesses and homes. If we just look at the residential piece, it's about 119 million. And you think if there's 134 million occupied homes, that's about nine out of every 10 homes has a broadband connection. We look at this in the four different technology types. You've got cable coax, which is the Comcast Corp. and Charter Communications Inc. and Cox Communications Inc.'s of the world, they're about 82 million, about a 64% share. Telco broadband — that's including DSL and fiber — is about 28%. Satellite is 2%, and fixed wireless is about 7%. And in terms of revenue, everything, all-in combined is about $120 billion in revenue annually. So it's not exactly a small industry.

Reynolds: You're 88%, 90% there. How about getting to 100% deployment? How does that happen?

Fletcher: Yeah. The low-hanging fruit has been picked, so to speak. In the last 10%, it's going to be the most difficult, but I do see that gap closing over the next decade. I think three things in particular have me optimistic. No. 1, fixed wireless access, and [No. 2], satellite, in particular, Space Exploration Technologies Corp.'s Starlink. Between those two technologies, they're well suited to connecting rural environments with broadband speeds. And then the third and most important variable is, we're going to get some government funding to help pay for that infrastructure buildout.

Reynolds: I got you. Again, at 90% we're a far cry from the early days going back to '98, '99 — less than 1% of Americans were connected.

Fletcher: Yeah, that's right. I remember back in '98. I got a 56k modem, and I didn't know what I was going to do with all that speed. I was going to be able to download my email so fast.

Reynolds: I guess we've gone from nice to have to necessity for many to utility. The pandemic served as an accelerant — everybody worked and entertained at home. But as we said here, there's still a ways to go. Does the digital divide remain mainly in rural areas?

Fletcher: It's a great question. It's not asked very much, and I look at the broadband deserts in two different areas. So yes, the rural areas for sure, but there's also a lack of access to broadband in a lot of lower-income urban areas in terms of household affordability. So I think, I'm an optimist and 90% penetration — it's a great success story. But, my thesis is that broadband is like electricity. It's like water. Imagine if 10% of our homes didn't have electricity and water. I think that's going to be important to close that. And I think, looking at how we're going to close it and how much it's going to cost, we did an analysis a couple of years ago on using the different technologies by location, and running a fiber or cable wire to location requires a lot of digging — there's actual wire involved, a lot of labor — it's about $3,000 per location.

Reynolds: Wow, okay.

Fletcher: By comparison, if you look at fixed wireless access where I just put an antenna on my house, as long as it has line-of-sight to the tower, there's just some gear you need to put on my house. And that cost to pass a home is only like $700. That's another reason why we think fixed wireless is going to lead the way there. And that's also why a lot of the Tier 1 operators have avoided [deploying universal fiber or cable] for now, because the return on investment is really difficult when you have to run a wire out to a farm for two miles with one fiber line, for example. So fixed wireless, by comparison, is pretty quick and cheap.

Reynolds: I gotcha. So how quickly can the US make up the remaining gap?

Fletcher: If you've ever been to the DMV and got your license renewed, the government's not usually as efficient and as fast as you want it to be, so it's going to take a little longer than everybody thinks. But I'm still optimistic in the next decade, we should get pretty close to closing it with all the money coming online. I think one of the variables right now is that there's just frankly a shortage of labor. If you and I wanted to start a fiber company, we put some ads out for fiber splitters and ditch diggers, etc. There's not a lot of expertise in this space, so they're having a hard time just finding the expertise to just build these out right now, and that's also going to slow things down.

Reynolds: Talk about Broadband Equity Access and Deployment, or BEAD. I love that acronym. Those funds are being deployed, and do we see BEAD's impact coming a little further down the road?

Fletcher: Yeah, it's early days, but there's a lot of moving pieces there. It's part of the 2021 Inflation Reduction Act that earmarked about $40 billion to build out the physical infrastructure and close that digital divide. And we're still in the initial proposal stages with funding distribution, but money is going to start to come out later this year. They're doing it on a state-by-state basis. And the [National Telecommunications and Information Administration] expects about 80% of those funds will be out by this by next summer, which is really quickly to get out almost $40 billion in money.

They're doing it at the state level, which I think makes sense because local jurisdictions — county and city — they have the best insights to where these gaps are and where the money is going to move the needle the most in terms of closing it. And I think in addition to the federal money coming, you've got a lot of state and other local tax dollars that are going to be used to help close the gap. There's something in California called the California Middle-Mile Broadband Initiative, where they're running fiber along all the freeways and highways. And they're going to run their own wholesale network that other people can connect to.

Taking a local view, we have a product called MediaCensus that looks at broadband at the zip code and [Census] block level. I think taking a look at it from that perspective — I think that's the right way to do it. Some people are just going to want to live in the mountains and fish and paint a picture and read a book. They don't want broadband. But I still think we're going to get to about 98% to 99% [deployment] over the next 10 years. And I think we should probably set up another podcast in March of 2034 to see how we did.

Reynolds: I'm getting it on the calendar right now.

Fletcher: All right. Deal.

Access to updated data segmentations such as video by DMA®, network carriage, channel lineups by headend, and package subs by operator and by network are all available at the MediaCensus Homepage along with Broadband & Video Operators by Geography.

Reynolds: Anyway, cable, as you mentioned, is a broadband leader — over 60% get their service from Comcast, Charter, Cox, Altice USA Inc. and Cable One Inc., among others. But cable's growth has slowed, and broadband adds are slipping, right?

Fletcher: That's right. It was surprising. I picked up the US broadband space about two years ago. And for the last seven quarters, cable broadband growth has actually slowed down, and it's basically flatlined at 82 million, and this is after 20 or so years of just net adds. And the culprit is fixed wireless. T-Mobile US Inc. [and] Verizon Communications Inc. launched their fixed wireless services in late 2019. But just to back up a little bit and give a little bit of history on fixed wireless access — that technology has been around.

Say, Mike, you and I lived on farms out in the countryside. You had a friend in town who had a fiber connection. You put some equipment on your house to connect to your friend's fiber connection and you could watch your cat videos. And then I come by to give you a basket of cherries from my farm. And I say, "Hey Mike, how are you watching these cat videos?"

And he says, "Oh, I cobbled together this wireless service." And I said, "I would like that too." And light bulb goes off — you can charge me $30 a month and I'll connect to yours and I can watch my dog videos and everybody's happy. These are called WISPs, wireless internet service providers.

Obviously, that's a pretty extreme example I just gave. There are a lot bigger WISPs out there. But that business has treaded water at around 2 million subscribers for about a decade. So really slow growth, really organic growth. But then Verizon and T-Mobile came with a big splash right before COVID. And, if you've been covering this space a long time, there was Clearwire 15 years ago with WiMAX. These two technologies were gonna demolish DSL. They were going to take all the DSL customers and use this new fixed wireless thing. It came and went, and it didn't do well at all. But Verizon and T-Mobile figured it out. Verizon's going to end this year with 3 million fixed wireless subscribers, and T-Mobile's going to end with 5 million. So all in, the fixed wireless space has 11 million subscribers.

Back to your question — cable execs are acknowledging it. They're saying, yes, we're losing some business to these fixed wireless providers. They are convinced that they're going to switch back. They're going to say, "Oh, you know what? This fixed wireless thing, this is an inferior broadband experience. And let's go back to getting cable again." The interesting thing is, we do a survey and we ask about ISP satisfaction, and our surveys don't support that belief. We ask the whole survey base, "How satisfied are you with your ISP?" About 80% of everybody says, "Yeah, I'm pretty satisfied by my ISP." The top three by satisfaction are Verizon Fios, Starlink, and all the fixed wireless operators — 88%, 87% and 86%.

I think Verizon has got fiber really fast, so that's great; Starlink, in the satellite space, is also relatively fast compared to their satellite competitors; and fixed wireless, surprisingly, is a lot higher than pretty much everybody else out there.

Reynolds: Gotcha. Interesting. Interesting. Let's stick with cable for a minute. A lot of smaller cable operators — owing to the ever increasing costs of video content acquisition — have dropped those packages and they are de facto broadband companies these days.

Fletcher: Yeah. A lot of the smaller operators have been running video at a break-even or a really thin margin for years. But streaming is putting the consumer back in control of their cable bundle. And one example, I think, highlights this trend really well is an operator called CableOne. They have about 1 million subscribers that they threw in the towel on their video bundle about 10 years ago. They saw cord-cutting come and they said, you know what, we'll do it if you want it, but let's just be a broadband-first operator. And if you picture a line chart in your head of EBITDA margins across all the cable operators, most of them are in the 40% range. And this is like a cash flow metric. So most of the cable operators are in a 40% range of profitability — CableOne is more like 55% as of the most recent quarter. So just offering broadband and moving away from video is going to create a lot better profit margins for these cable operators.

Reynolds: It's a high margin play there. You've talked about the telcos a bit in the fixed wireless space. What about from purely from where Verizon, AT&T Inc. and T-Mobile fit into the broadband picture?

Fletcher: Yeah, I do look at them each individually. Verizon has fiber DSL and fixed wireless. And then you've got AT&T. They have fiber and DSL. They also have a fixed wireless business. They've had it forever. They just started marketing it heavily recently. T-Mobile, they're basically a pure-play wireless company. However, they've been getting into fiber as well. They've just launched fiber in 13 markets. So it's a mishmash of everything, but ultimately, AT&T has 8 million fiber subscribers, Verizon has about 7 million, and what we've seen in the last few years is each of these operators has a DSL business that's shrinking. People are canceling DSL, and it's flatlined. So they're losing DSL subs at the same rate they're adding fiber. So the growth hasn't been there, but they are treading water in terms of growth.

Reynolds: I gotcha. You'd mentioned Starlink before. Give us a quick summary on where the satellite guys stand here.

Fletcher: Yeah, I think you gotta look at satellite in two different buckets. You got the traditional old guard, which is Hughes Communications Inc. and Viasat Inc. They, each of them, have a handful of satellites. They're 20,000 miles high. Hughes has nine, Viasat has 21. Viasat is launching a new satellite. So this is the traditional satellite — what's been there forever, pretty slow, but with great rural coverage. Then you have the satellite operator Starlink that launched in the US in 2020, and they have a different approach to satellites. They don't put them 20,000 miles up. They put them 300 miles up. Instead of a handful of them, they have over 5,000 satellites in the sky. So just by being closer to the earth, they can offer faster speeds, better latency. And so total satellite subscribers in the US, they're around 2 million now, and already half of them we estimate are Starlink despite their relatively late launch in 2020.

Reynolds: All right, you've likened broadband deployment in some respects to the railroad business and the interstate highway systems as vehicles that connect the US.

Fletcher: Yeah, I think the 1800s, the US connected the railroads coast to coast. In the 1940s, it was the interstate freeway system. Once these things were done, the economic benefit of both of those was pretty phenomenal. And we're still benefiting from that today. Most of the stuff we buy, it comes from one of those two systems. I think broadband is the 21st century of that. Getting to full broadband home penetration is gonna help our economy grow in ways we haven't imagined yet. Whether it's virtual reality or remote surgery, decentralized GPU — who knows what it is? And maybe someone living in one of those one-in-10 homes right now that doesn't have broadband is the next Steve Jobs. So the sooner we can get them broadband, the more we're all gonna benefit.

Reynolds: All right. That concludes this episode of MediaTalk. I just wanted to thank John for spending a lot of time sharing his insights on the broadband industry and its changing position in the media world. Appreciate it, John.

Fletcher: Anytime, Mike. That was fun.

Reynolds: This is Mike Reynolds. Thanks to all of you for listening. We'll catch up soon on the next edition of MediaTalk.