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Cable Technology Feature Article

July 26, 2010

Do Cable Cos. Have More Motivation Than Telcos in All Fixed Services?

By Gary Kim, Contributing Editor

To the extent that a rural telco with no wireless spectrum has more riding on all its decisions related to wired plant, can we surmise that cable companies generally have more incentive and focus on their wired networks than do telcos with significant wireless operations?

AT&T (News - Alert) revenues totaled $30.8 billion for the second quarter, and wireless, wireline data and managed services (most significantly enterprise and business services) represented 71 percent of revenues, up from 66 percent a year ago. 

You might note that AT&T gets about half its total revenue from business customers, not consumers. On the wired network side of its business, AT&T would build and operate a different sort of network if all it wanted to do--or was allowed to do--was serve business customers. 

At Verizon (News - Alert), second quarter consumer revenue represented $3.8 billion of revenue, enterprise $4 billion and wholesale $2.2 billion. To the extent that wholesale is "business-to-business" revenue, Verizon gets $6.2 billion of business revenue and $3.8 billion of consumer revenue. That means Verizon generates 38 percent of total revenue from consumers and 62 percent from business sources. 

The point is that both AT&T and Verizon, though especially Verizon, have more to gain from business customers than from consumers, and likely more to gain from wireless than wired network services. 

In fact, it would not be off the mark to say that, over the past decade, AT&T and Verizon both have shown the greatest strength in wireless and business customer services. Over that period, cable companies have become more-important providers of consumer services, including voice and h8igh-speed Internet access. 

About 46 percent of AT&T revenue comes from wireless services, and though AT&T had strong growth of its video entertainment services in the quarter, overall it is wireless that accounts for most of AT&T's revenue growth. 

Verizon, for its part, added 174,000 FiOS (News - Alert) TV customers and 196,000 FiOS Internet customers, offsetting continued declines in its traditional DSL business. Essentially, Verizon is swapping out copper-served DSL customers and replacing them with fiber-served connections. 

In fact, one way to look at second-quarter results is that AT&T is doing better on the video services front, though modestly so, while actually losing ground on the high-speed Internet access front. 

At the end of the second quarter, AT&T had 16 million total wired broadband connections, up 404,000 over the past year but down 92,000 from first-quarter 2010 levels. 

At Verizon, broadband connections totaled 9.3 million at the end of the second quarter 2010, a 2.5 percent year-over-year increase. This is a net increase of 28,000 from the first quarter 2010, as the increase in FiOS Internet connections more than offset a decrease in DSL-based High Speed Internet connections.

AT&T said it posted its first ever billion-dollar revenue quarter for its U-Verse services (which includes Internet).  It added 209,000 U-Verse TV subscribers and now has 2.5 million in total. Meanwhile Verizon said it added 174,000 FiOS TV subscribers and now has 3.2 million in total.

Together the telcos, after launching their competing services less than five years ago now have a more than five percent share of U.S. pay-TV homes. To be fair, each firm has had to gradually build facilities and slowly release network assets for actual sales effort. 

Analysts at Bernstein Research point out that both phone companies lost a combined 65,000 Internet access subscribers (after netting out additions from U-verse/FiOS and losses of DSL customers).

That isn't to say either firm can afford to neglect consumer wireline services. But one can question whether the heavy growth profile for wireless and importance of enterprise services is matched by similar effort or concern about consumer wireline services, at a strategic level. 

The simple fact is that neither firm gets as much profit or revenue from consumer services (voice, video and data) as it does from wireless and business customers. For cable operators, most revenue comes from consumers, and nearly 100 percent from wired network services.

That is of importance for formation of public policy. To the extent that Verizon and AT&T are going to face pressure to invest more heavily in consumer access facilities, executives and analysts will have questions about the wisdom of such investments, overall. 

To be blunt, if policymakers want Verizon and AT&T to invest in the arguably least important parts of their businesses (wireline consumer services), there is a clear incentives problem. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Marisa Torrieri