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Tracking the Couch Potato Wars

The next couple of years look pretty sweet for cable operators, according to a major new study of the cable and telecom markets. But Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) may still wind up turning the tables on cable over the next decade.

In its latest "North American Couch Potato" report, The Convergence Consulting Group Ltd. predicts that MSOs will rack up new broadband, high-definition TV (HDTV), digital video recorder (DVR), and VOIP subscribers over the next two to three years, leaving both telco and satellite rivals in their dust. The report also projects that cable video-on-demand (VOD) revenues will climb steeply as MSOs plug on-demand services more aggressively.

Specifically, the study forecasts that U.S. residential cable modem subscribers will jump from 30.8 million at the end of last year to 40.8 million at the close of 2008, while telco broadband customers will rise a bit less from 20.9 million to 29.9 million. By the end of next year, the Toronto-based research and consulting group also sees cable HD subs more than doubling to 22.2 million, cable DVR subs more than doubling to 18.4 million, and cable VOIP users more than doubling to 20.0 million.

Thanks to such strong customer gains, Convergence Consulting predicts that cable triple-play subscriptions will also soar over the next two years. Plus, the consulting group sees cable VOD revenues nearly doubling to more than $2 billion by the close of next year.

"The initial wins in this area are all cable," says Brahm Eiley, head of Convergence Consulting. "Until the telcos catch up with their TV offering, they're going to be playing second fiddle to cable. That's the uphill battle the telcos face in fighting cable."

Don't count out the two big telcos too soon, though. Despite their slow start in the TV business, Convergence projects that Verizon and AT&T will begin signing up video subscribers by the millions next year. The group's forecast calls for the two Bells to hit 5.8 million video subscribers by the end of 2009, up from 500,000 at the close of last year and enough to start cutting into cable's dominance.

In particular, the research house sees Verizon scoring big by next decade because of its "cable-plus" FiOS network and services. The group suggests that AT&T will eventually have to follow Verizon's fiber-to-the-premises (FTTP) model because its current fiber-to-the-neighborhood (FTTN) approach won't deliver nearly enough bandwidth to the home.

"Verizon is doing to the cable guys what the cable guys have done to the telcos," Eiley says. "Verizon is going to have its day in the sun ultimately."

— Alan Breznick, Senior Analyst, Heavy Reading

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