Cable: High-Speed Sales Slow
Telcos report slower growth for Internet access service
By John M. Higgins -- Broadcasting & Cable, 8/3/2003 8:00:00 PM
Telephone companies' price-cutting on their high-speed Internet service hasn't inflicted a lot of damage on their cable rivals, but the rapid growth of cable-modem service is showing signs of abating. All four cable operators posting second-quarter results last week reported slower growth.
| Changes From 2Q '02 | ||||
|---|---|---|---|---|
| Charter | Comcast | Cox | Insight | |
| Source: Company reports |
||||
| Revenue | 13.3% | 9.2% | 14.9% | 11.1% |
| Cash flow | 16.7% | 35.7% | 20.4% | 5.8% |
| Basic subs | -3.8% | 0.1% | 0.5% | 0.4% |
| Digital subs | 9.4% | 19.4% | 18.0% | 22.0% |
| Cable modem | 62.5% | 50.6% | 50.2% | 73.0% |
But, while telco SBC had a modest quarter in DSL sales, Verizon's pace of new customers was weak, leading analysts to question not so much the effects of the price attacks but whether high-speed data is simply starting to mature as a growth product.
Other highlights from the earnings reports include Comcast's continued success in reviving the ailing AT&T Broadband systems acquired last year. The AT&T systems added basic subscribers during the quarter after losing 122,000 units during the same period last year. That's a much faster rebound than expected. Comcast's older systems, however, lost subscribers.
Comcast also disclosed, however, that it has cut far more employees than expected, eliminating 7,000 positions in recent months vs. the 5,000 announced earlier. Some of those positions were contractors rather than full-time employees. The company now has 55,000 workers.
Insight Communications posted an anemic 6% increase in operating cash flow, despite a healthy 11% increase in revenues. The company attributed the abrupt slowdown to a pause in the growth of its telephone business.
Investors have been anxious about telcos' newfound aggressiveness in high-speed data. SBC, Verizon and BellSouth have been particularly aggressive in slicing prices for DSL service, touting promotional rates of $20-$30 monthly and settling in around $35 after the first few months. That's $10-$15 cheaper than a year ago.
Meanwhile, cable operators have been raising prices, from $35-$40 for customers also buying video service, to $40-$45.
High-speed Internet service has been critical to cable operators, representing half or more of their cash-flow growth in the past few years. MSOs have grabbed about 70% of the residential broadband market, so they don't want to engage in a price war.
Cable executives attribute the slowdown in part to seaonality. Basic-subscriber counts traditionally suffer when snowbirds leave their second homes in warm climates and college students go home for the summer.
"DSL is not the root cause of cable-modem weakness," said Fulcrum Capital analyst Richard Greenfield. "We believe that seasonality in an increasingly well-penetrated product is the key driver."
But cable executives also broadly defend their Internet business as healthy.
"In markets that overlap with Verizon, Cox high-speed Internet [connects] were up 32% versus second quarter last year," Cox COO Pat Esser said. "Connects in San Diego and Orange County, both SBC markets, were up 18%." Customer churn, however , increased just a tenth of a point of 3.2% monthly. "So you do the math."
Comcast Cable President Steve Burke echoed Esser's stance: "So far, we don't see anything on the horizon that changes our excitement for our business or that we feel necessitates a change in our strategy." He called Comcast's 351,000 data additions "a strong showing … that is significantly ahead of the budget that we set for ourselves."
SBC posted a relatively strong 304,000 increase in DSL customers for the quarter. That's up from 203,000 during the first quarter ended March and far better than the 213,000 quarterly the telco was generating a year ago.
But Verizon was weak, adding just 100,000 units during the quarter. That's a big drop from 160,000 during the first quarter and the 150,000 in the year-ago quarter.
There are signs that things are slowing for cable.
Comcast added 351,000 data subs, down sharply from 417,000 during the first quarter but up from 263,000 a year ago. Charter Communications added just 77,000 subscribers in the second quarter, down from 134,000 in the first quarter and 158,000 a year ago.
In the first quarter, Cox signed up 118,000 high-speed Internet subscribers. That dipped to 112,000 in the second, below the 114,000 the MSO signed up in second quarter '02.
Insight was mixed. The MSO added 12,000 subscribers in the second quarter vs. 9,000 a year ago. But the company added 23,500 during the first quarter.
"We saw a little less uptake in the second quarter," acknowledged Charter CEO Carl Vogel, blaming it on disconnects by college students. But he said that Charter isn't planning on discounting, but rather focusing on "tiering," selling a relatively slow, DSL-speed connection and then moving subscribers up to higher speeds at a higher price. "We're playing for the revenue growth, not necessarily just the unit growth in this business."
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