Free ISPs are losing so many U.S. subscribers that the total number of Internet subscribers has declined even though dialup, DSL, and cable all reported increases.

by Michael Pastore of cyberatlas.internet.com [November 19, 2001]

The number of U.S. households subscribing to online services declined nearly 4 percent during the third quarter of 2001, according to a report from Telecommunications Reports International (TRI), the second decline this year—and the second decline in the history of the record.

TR's Online Census found that 67.9 million U.S. customers subscribed to online services at the end of the third quarter of 2001, down from 70.7 million three months prior, or a loss of 2.7 million subscribers.

Compared to figures from the report one year ago, the current online customer base is about 7.4 percent higher than the 63.2 million users tallied at the end of the third quarter of 2000. However, the 3.9 percent decline for the third quarter of 2001 compares to a 1.5 percent rate of growth during the same period last year and 10.7 percent growth rate during the third quarter of 1999.

"In the 21 years that we've been surveying the online market, this is the first year that we have seen quarterly declines in the number of users," said Amy Fickling, managing editor of TR's Online Census. "While there were some pockets of growth in high-speed access, this growth couldn't keep pace with the loss of customers in other segments of the industry. And, when you look at the industry as a whole, it may be that the home online audience has now reached its peak."

Of the six Internet access methods tracked in the report, only two—cable modem and DSL—showed any sizable increases in subscribers during the third quarter. Paid dialup service also saw a slight gain of 2.1 percent.

One of the biggest indicators of the dialup segment's potential difficulties comes from industry giant AOL, whose 1.2 million new users during the third quarter represent one of the company's smallest quarterly additions of subscribers since the spring of 1998, according to the survey. With 31.3 million subscribers, AOL has a growing percentage of foreign accounts among the new users it reports quarterly.

MSN Internet Access, the second-largest dialup ISP with 6.5 million subscribers, was the only to report any sizable increase in subscribers during the quarter. Its 18 percent boost may be due in part to an aggressive ad campaign it began earlier this year based on price benefits of its service, aimed at winning over AOL customers unhappy with AOL's rate hikes.

The free dialup ISP market has all but disintegrated. According to TR's Online Census, the free ISP market had more than 14.8 million subscribers at the start of this year. However, within the last nine months, it's lost nearly 10 million customers, down to just 4.85 million subscribers at the end of the third quarter of 2001. United Online, which was created in late September by the merger of NetZero and Juno Online, remains the only significant free service provider in business, with 1.25 million paid subscribers included in its 6.1 million active users.

The Internet TV market also appears to be on its last leg, with only 812,000 subscribers nationwide, a decline of 33.6 percent during the third quarter. The report also notes that when MSN-TV officially reports its subscribers with the dialup subscribers of MSN Internet Access, the category will decline further unless AOL TV takes off.

The satellite Internet access market saw no significant change in subscribers as the nascent industry continues to form. DirecTV launched its high-speed access service, DirecTV DSL, late in the third quarter. DirecTV DSL, formerly known as Telocity, is partnering with retailer Circuit City to sell the residential DSL service.

High-speed Internet access is the only segment of the industry showing any significant increases in market share. DSL and cable modem combined now represents about 13 percent of the overall online consumer market, compared to around 7.5 percent of the overall market a year earlier, according to the survey.

TR's Online Census found DSL had the strongest growth, reporting a 13 percent growth rate during the third quarter, while the number of consumers subscribing to cable modem services grew 7.7 percent.

A study by ARS, Inc. found that cable modem service providers had a larger overall percentage gain in subscribers than DSL providers in the third quarter of 2001. This marked the first time in more than a year on the ARS survey that cable providers have beat out their DSL counterparts on a percentage basis.

According to ARS data from the third quarter of 2001, the top five cable companies (Time Warner/Road Runner, AT&T Broadband, Comcast, Cox, and Charter) increased their combined broadband Internet subscriber base by 14 percent in the third quarter. The top five DSL providers (SBC, Verizon, BellSouth, Qwest, and Covad) showed an overall increase of 13 percent in the same period (the same percentage TRI recorded).

"These findings are startling because they reverse a year-long trend and common assumption in the broadband industry—that while cable has an overall lead, DSL is gaining," said Mark Kersey, broadband industry analyst at ARS. "And with some DSL providers recently announcing their intentions to slow rollouts of their DSL services, we can only expect that cable providers will further increase their lead in broadband subscriber rates in the coming months."

The five largest cable providers had a 1.38 million subscriber lead over the DSL providers at the end of 1Q01, ARS found. That lead now stands at 1.8 million, an increase of 30 percent since the first quarter. The five largest cable providers control about 51 percent of the total U.S. broadband market. The five largest DSL providers control about 33 percent.

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