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COVERGENCE, COMPETITION, AND OPPORTUNITY
In our fiscal 2005 report, we described growing capital spending by telephone companies as they began building the infrastructure needed to effectively compete with cable companies. That year, cable companies had just begun to broadly offer voice services across the country, as a complement to their traditional video and data services. In 2006, we went on to describe the concept of “convergence,” the delivery by both telephone and cable companies of video, voice, and data services over wired networks. That year, telephone companies had just begun to offer video services as a complement to their traditional voice and data services. In 2007, we are pleased to report that these trends have strengthened and broadened. They appear increasingly irreversible and are creating meaningful growth opportunities for Dycom.
For cable companies, fiscal 2007 was a year of accelerating Voice over Internet Protocol (“VOIP”) subscriber additions. VOIP technology utilizes the capabilities of advanced hybrid fiber coax networks, networks which Dycom has constructed for cable companies for many years. These networks, in conjunction with the installation of new in home equipment, deliver voice communication in an efficient and cost effective manner to consumers. Aggressively marketed by cable companies throughout the nation, VOIP services expanded rapidly. Among the top four public cable companies, voice subscribers grew to a rate in excess of 1,000,000 per quarter by June 2007. One major cable company has been so successful in
adding voice services that it currently provides the service to over 42 percent of its total customer relationships, a truly remarkable number for a product that essentially did not exist four years ago.
Not to be outdone by cable companies, telephone companies continued to aggressively deploy fiber optic cable based networks, creating the capability necessary to provide very competitive video and data offerings. This movement into video was aided by regulatory developments in many states which enabled telephone companies to commercially launch video services. Historically, providers wishing to offer video services have been required to secure local franchises one municipality or county at a time. This process was generally slow and an impediment to the quick entrance of telephone companies into the consumer video market. However, during 2006 and 2007 many states, such as New Jersey, Virginia, Florida, Texas, and California enacted legislation providing for statewide franchises, speeding effective market entrance, and encouraging continued investments. Regulatory easing fostered significant growth by one leading national provider. From essentially no video subscribers in March of 2006, this telephone company added almost 500,000 subscribers in the subsequent fifteen month period. Even more impressively, quarterly additions accelerated over that time period and total subscribers may exceed 1,000,000 by March of 2008.
With cable and telephone company convergence, consumer high speed data bandwidth has become a key differentiator amongst service providers. Bandwidth is a measure of data network speed as the network delivers content downstream, i.e. from an external source to the consumer, and upstream, i.e. from the consumer to an external recipient. Online gaming, virtual reality ecosystems, social networking websites, and very dense media content from many sources, such as YouTube, all require ample and growing bandwidth for a satisfactory consumer experience. Content is being downloaded or uploaded through the internet in dramatically increasing volumes. In many markets, bandwidth battles have broken out, with one high speed data provider offering superior bandwidth at a striking price in order to attract new customers. This competitive move is then often countered by the other provider, which offers the same or higher data speeds. As a result, residential consumers are being offered speeds of up to 50 megabits per second in some markets, bandwidth which would have been inconceivable five years ago. Perhaps, nothing indicates the marketing importance of bandwidth more than the false advertising claims telephone and cable companies have begun to file against one another regarding bandwidth.
As amazing as these developments have been, further dramatic expansions in network speed and capabilities are on the way, promising further competition. At a leading cable industry trade show in May 2007, one national cable company demonstrated next generation ultra-fast, wideband cable modems. Reportedly, this technology will deliver speeds of up to 25 times current broadband bandwidth. “With wideband, we’re going to unleash a whole new generation of video, voice and data services,” declared one prominent cable executive. He went on to state further, “Cable continues to lead the competition,” “We’ve only just begun, from 6 megabits today to 150 or whatever Megabits tomorrow.” (Multichannel News, May 14, 2007). Not to be overshadowed, a prominent telephone company executive responded to the cable industry at a leading telephone industry trade show in June. He highlighted his company’s deployment of a fiber to the premise network utilizing passive optical technology and declared, “Today, 100 mbps is just the beginning.” He went on to state further, “By the end of the decade, our cable competitors say they’ll be transitioning to DOCSIS 3.0. We’ll be transitioning to…speeds that rival what we deliver today to our most advanced business customers,” (Multichannel News, June 20, 2007).
Accelerating VOIP subscriber additions for cable companies, video franchise successes and new video subscribers for telephone companies, and a ratcheting ever upward of demand for network bandwidth, have created significant opportunities for Dycom. Rapid growth in VOIP subscribers drive demand for in home cable installations as a significant majority of new VOIP subscribers require a technician to be dispatched in order for the service to be activated. In addition, incidental outside plant services are often also required in order to ensure that existing networks are sufficiently calibrated to provide highly reliable service. Franchise successes and real cash flows from new customers confirm the soundness of a leading telephone company’s strategies, driving steady and meaningful revenues from the construction of fiber to the premise networks. New applications requiring ever greater amounts of bandwidth necessitate increased capital spending on network deployments, upgrades, and improved reliability as what was once considered ample network capacity is increasingly exhausted.
Convergence drives competition, fostering new applications and technologies. New technologies create network needs, necessitating capital expenditures. Capital expenditures generate demands for our services. When telephone and cable companies converge in their product offerings and compete with new technologies for customers, opportunities flourish.
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