Moffett: Telco Threat is Over-Hyped

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The competitive threat to cable operators from telephone companies entering the television space has been overstated by the investment community, according to Sanford Bernstein Senior Analyst Craig Moffett. In a conference call with investors Thursday, Moffett took a detailed look at the projected reach of telcos’ TV efforts and outlined the challenges faced by AT&T in providing faster broadband service. Overall, he sees cable being favorably positioned as broadband becomes the "cornerstone product" in a consumer’s decision on telecommunications providers.

Physical reach is a concern for telcos as a whole, says Moffett, as the telco fiber networks will reach just 40% of U.S. households by 2012, according to Bernstein estimates. The two major players, Verizon and AT&T, represent nearly all of that. Verizon is projected to reach 15% of overall U.S. households and AT&T, 23%.

"The telcos, in terms of the size of their footprint, simply aren't a core issue for cable operators," Moffett says.

While Verizon’s FiOS fiber-optic network, which has been trialing 100 megabit-per-second broadband service, compares favorably to cable broadband, its reach will limit its impact on cable market share, says Moffett. Verizon’s competitive overlap of major cable footprints will be modest, by Bernstein estimates: the overlap of Comcast will be 34%, of Time Warner Cable 25% and of Cox 16%. Verizon’s most significant overlap is 79% with Cablevision, which has been successfully penetrating its own voice-over-IP telephone service across Verizon’s existing customer base.

Verizon says that at the end of first quarter 2007, its TV service was available to 3.1 million households and already had 348,000 customers, or an 11% penetration rate. The company just announced its one millionth FiOS high-speed data customer and says it is closing in on 500,000 FiOS TV customers. In the long term, its plan is to make its FiOS TV service available to some 15 million households by the end of 2010. It expects to have 3 million to 4 million television customers by then, which would represent a penetration rate of 20 percent to 25 percent.

Besides overall reach, the ability of existing telco networks to service the ever-increasing consumer demand for bandwidth is a key issue for AT&T, says Moffett, who believes AT&T’s advanced DSL architecture is challenged in comparison to cable’s existing hybrid-fiber-coax architecture.

"It's fair to argue that the bandwidth of the physical layer of that network isn't close to the bandwidth of the cable plant," he says.

For its part, AT&T says that its fiber-to-the-node (FTN) network is exceeding performance expectations and is clocking 25/Mbps at the longest loop lengths and faster speeds at shorter loop lengths. While the company has less than 50,000 subscribers for its U-verse Internet Protocol TV (IPTV) television service, it is now performing up to 600 installations a day and expects to be doing 10,000 installations per week by year-end. The company's plan is to pass some 18 million homes with U-verse capability by the end of 2008.

But while AT&T may upgrade 40% of its DSL plant to fiber in order to bring faster high-speed data service to its customers, some 60% of its network won’t be upgraded, Moffett projects. That means that AT&T will still be competing at a maximum standard DSL bit rate of 768 Kbps while cable operators offer substantially higher bit-rates, a disparity that could become more of a competitive challenge for AT&T as consumers download more video online through services like YouTube.

"DSL just isn't fast enough for a larger and larger part of the population," Moffett says.

Moffett is also dismissive of the potential of so-called "over-the-top" broadband video solutions like Apple TV, which would theoretically allow consumers to get all their programming via the Internet and drop their cable video subscriptions.

"There are technology limitations for over-the-top video as a replacement for cable subscriptions," says Moffett, who notes that cable's broadband pipe would be feeding many of those boxes.

"There isn't enough capacity to support significant numbers of people watching 57 hours a week [through their broadband connection]," says Moffett. "And what's the impetus for them to invest [in capacity upgrades] to enable the disintermediation of their video business?"—With additional reporting by Glen Dickson.