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Number Of Online Customers Drops 2.7 Million During Third Quarter

High Speed Access Reorganizations, Refocus Slow Growth
Dial-Up Service Category Sees Erosion

 (WASHINGTON, D.C., November 15, 2001) – The number of U.S. households subscribing to online services declined nearly four percent during the third quarter of 2001, marking the second time this year – and the only two quarters ever – that there has been a decline in the number of online subscribers, according to the findings of TR’s Online Census. The survey, compiled by Telecommunications Reports International (TRI), the leading telecommunications information publisher and a unit of CCH INCORPORATED (CCH), found that 67.9 million U.S. customers subscribed to online services as of 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 TR’s Online Census a 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."

Overall, TR’s Online Census found that of the six access methods tracked, only two – cable modem and digital subscriber line (DSL) – showed any sizable increases in subscribers during the third quarter. Paid dial-up service also saw a slight gain of 2.1 percent. However, the number of subscribers to free Internet Service Provider (ISP) services continued to nosedive as this ad-supported business model goes by the wayside, and Internet TV, which has struggled from the start to be a viable online alternative, lost about one-third of its overall customer base during the third quarter.

Online Growth By Category

Source: TR’s Online Census,
Telecommunications Reports International

 Dial-Up Access Market Stalls

Though accounting for more than 78 percent of the overall online market, paid dial-up service is showing signs of slowing growth, with a slight increase of just over 2 percent for the third quarter.

One of the biggest indicators of the segment’s potential difficulties comes from industry giant America Online (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 dial-up ISP, with 6.5 million subscribers, was the only one 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.

With significant consolidation continuing in the industry, TR’s Online Census reports the five largest paid dial-up ISPs are now AOL, MSN, EarthLink, CompuServe and Prodigy.

The free dial-up 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.

High-Speed Access Moves Ahead

High-speed access is the only segment of the industry showing any significant increases in market share. DSL and cable modem combined now represent 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.

DSL continued to show 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, according to the survey.

However, the high-speed market was not without its problems during the third quarter as reorganizations and refocuses dominated the landscape. Among the industry issues slowing growth in the DSL market were Covad’s reorganization of its wholesale business to try to gain customers from the recently defunct NorthPoint Communications and Rhythms NetConnections, and the continued slow pace of DSL deployment by the local phone companies as some, like SBC, reconsider plans of offering DSL in smaller communities.

On the cable modem front, the bankruptcy and collapse of Excite@Home shook the industry, and has sent cable operators relying on @Home in search of alternatives for their customers.

Internet TV and Satellite Stall

The Internet TV market appears to be on its last leg, with only 812,000 subscribers nationwide, a decline of 33.6 percent during the third quarter, according to the survey. When MSN-TV officially reports its subscribers with the dial-up subscribers of MSN Internet Access, the category will decline further unless AOL TV takes off.

In the satellite market, there was no significant change in subscribers as the nascent industry continues to form. DirecTV, now being acquired by EchoStar Communications Inc., 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.

To Obtain TR’s Online Census

Annual subscriptions to the quarterly online census are available for $149 by calling 1-800-822-6338.

About TRI and CCH INCORPORATED

Telecommunications Reports International, based in Washington, D.C., is the most respected provider of telecommunications industry news and analysis. Since 1934, executives and policy-makers have relied on TRI’s comprehensive coverage and analysis of major industry issues and events. TRI is part of the Business and Finance Group at CCH INCORPORATED, a leading provider of tax and business law information and software. The TRI web site can be accessed at www.tr.com.

CCH has served more than four generations of business professionals and their clients, covering a wide range of legal and compliance topics including securities, insurance, banking, telecommunications, trade regulations and government contracting. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at www.cch.com. The CCH Business and Finance Group web site can be accessed at http://business.cch.com.

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EDITORS NOTE: For members of the press, a complimentary copy of TR’s Online Census is available by contacting Leslie Bonacum at 847-267-7153.