Monday, July 28, 2008

Cable May Have Gained Broadband Share From Telcos In 2Q

NEW YORK -(Dow Jones)- Disappointing high-speed Internet numbers from the two largest U.S. telecommunications companies suggest the cable companies could post surprisingly strong customer growth when they report their second quarter results. The second quarter marks a difficult time for all broadband providers because college students tend to disconnect their lines as they go on summer vacation. The weakened economy and housing problems have also weighed on the service providers. Even with the lowered expectations, the telcos failed to match Wall Street's estimates, suggesting competition was a more worrisome issue than previously thought.

"When the chapter is closed on the second quarter, the cable industry will very likely have garnered the highest share in the history of the broadband market," said Craig Moffett, an analyst at Sanford C. Bernstein & Co. LLC.

The telcos and cable providers are aggressively tustling over broadband customers because the Internet line is seen as the key service for customers. Consumers are more willing to forego phone service, where wireless is an alternative, or even television, which can be replaced by online videos, than their Internet connection.

Cable, however, still has an advantage in speed. While the telcos have been ramping up their faster fiber-optic-powered Internet service, the offering is limited. Cable, meanwhile, has pushed the advantage through aggressive marketing, with players such as Comcast Corp. (CMCSK, CMCSA) increasing the airtime for its Slowsky turtles commercials, which mock slower DSL customers. Moffett envisions a scenario where the cable companies gained as much as 75% to 80% of the net new broadband customers in the second quarter.

Wall Street will know if these trends play out according to his expectations when the cable companies report. Comcast Corp. (CMCSK, CMCSA) releases its results Wednesday. Cablevision Systems Corp. (CVC) reports Thursday. Time Warner Cable Inc. (TWC) reports on Aug. 6. Spokesmen for Comcast and Cablevision weren't immediately available for comment. Time Warner Cable declined to comment.

AT&T, which reported last Wednesday, set the tone by reporting 46,000 net new broadband connections, which analysts considered surprisingly weak. Chief Financial Officer Rick Lindner, speaking to analysts on a conference call, said that the company and its cable competitors have seen a fairly even split of the new customers. He blamed the weakness more on the seasonal factor and weaker economy than competition, but acknowledged the market share picture may have slipped in cable's favor.

"I don't think that's a big factor," he said, noting that AT&T had been ahead of cable in the last few quarters. Verizon, meanwhile, reported 54,000 net new high-speed Internet customers, with a decline of 133,000 DSL subscribers eating into the 187,000 net new FiOS Internet subscribers.

Verizon was more forthcoming on the disappointing figure. Chief Financial Officer Doreen Toben said in an interview with Dow Jones Newswires that in areas where FiOS isn't available, the company is unable to keep up with customers' demands for higher Internet speeds. She noted that a quarter of the DSL losses were from subscribers migrating to FiOS. Verizon has some reason to be optimistic. The company on Monday officially launched its rollout of FiOS TV in New York City. The bundling of television service with Internet is expected to drive growth in the lucrative market.

In addition to the economic issues and the seasonal impact, the companies are facing a maturing market where nearly everyone has a broadband connection.

"When you're starting to push on 90% broadband penetration, the growth rate was going to slow," Toben said. She declined to comment on whether she expects further DSL losses in the coming quarters.

The DSL numbers for Verizon have already been weak for the last several quarters, said William Power, an analyst at Robert W. Baird & Co. He doesn't expect the trend to change because the penetration rate is already at such a high level. Likewise, Moffett is pessimistic about the telcos. He expects the cable industry to continue to win market share in broadband and voice services at an accelerated rate.

"It's important not to get lost in the weeds from quarter to quarter and focus on the broader trend line," he said, which will continue to favor cable. Verizon slipped 1.8% to $33.84. AT&T fell 0.5% to $31.24.

-By Roger Cheng, Dow Jones Newswires