The telephone giants — principally AT&T and Verizon — reported some impressive second-quarter subscriber additions for their respective video services. Meanwhile, the two largest cable MSOs, Comcast and Time Warner Cable, reported larger declines in net subscribers for the quarter. We spoke to A.G. Edwards analyst Kent Custer about what the latest quarterly numbers say about the cable-telco battlefield.

Was the growth in telco video services a factor in Q2 cable subscriber losses?

Kent Custer: While Verizon has 515,000 video subs — I think they added 167,000 in the quarter — those are spread across a number of different cable companies, and some of them are coming from satellite. I’m not saying it’s not a factor in some of the cable losses, but those numbers, relative to the number of people who move and switch video services, they’re just not that big. So while it is important to Verizon, it’s not yet having a material impact on the cable companies. Is it something they have to worry about in the future? Yes, but I think that’s why companies like Comcast are investing in improved services — to try and play a little defense there.

The thing about Verizon is that their ultimate goal is to pass 18 million homes and to get 26% video market share, so that’s about 5 million homes. That’s going to have to come out of some folks. So you say Comcast has about 24 million subscribers so they’ve got about a 30% market share, so they’re going to lose maybe 1 to 2 million to Verizon over the long term. But we should see that over time, and I don’t think the numbers from last quarter should really be materially tied to that, yet. I’m not saying it isn’t an issue long term; I‘m just saying it isn’t an issue right now. On the AT&T side, they have 51,000 subs they’ve captured through the year. It’s a similar story though; it’s a small amount over the entire country. It’s growing very rapidly, and ultimately it will be a bigger concern. But I don’t think you can really tie it to the second quarter numbers. It’s one small part out of a number of moving parts.

Yet you’re bullish on the telco/satellite bundle?

Over the last few periods we have seen acceleration of video subscriber growth with the satellite bundle for the large telcos, including AT&T’s Homezone and the Quest product also. That bundle is compelling, because it addresses the download limitations of DSL versus cable with the very strong download capability of satellite. Then there is also synergy created between the two — or additional functionality — when you add the DSL convergence with the satellite set-top box so that you can have remote programming through either the Internet or through your mobile phone. So it helps both of those industries in the battle against cable.

You see that bundle adding value for the consumer rather than just mimicking the pricing of the cable triple-play?

Correct. The other main thing it does is…through the DSL line you gain some additional VOD functionality. Now, it’s not as fast as cable, but it is functional.

Anything else in the telco financials with implications for competition against cable?

We saw some price stabilization and firmness on the DSL side, which I think is significant — part of that from the [bundling] with satellite. We’re finally starting to see a reversal of the access line loss trend at Verizon, which has had the absolute highest access line loss rate. They’re moderating — they’re still the highest — but from the other [telcos] we saw acceleration. So the industry dynamics — wireless and cable substitution — are still pressuring the telco guys. The wireline companies think that wireless is a very integral part of the triple-play bundle or the quadruple-play bundle, while the cable side is still not convinced of that, especially at the Comcast level. My view is it’s somewhere in the middle, probably more toward the cable side. Because what wireless customers want is just really good coverage, and the bundle and the functionality is secondary.

How about the capital expense numbers for Comcast — any concerns?

They were above the annualized rate of company guidance. I look at it in terms of a percentage of revenue. My forecast is a little over 19% of revenue for the year, and it was about 21.6% for the second quarter. There was some concern about that. But my view is that it’s important that they do get that money out there. Sooner is better than later. And I expect capex to decline on an absolute basis and as a percentage of revenue over time.  They do a good job of planning and executing, and I have confidence that they’re spending their money well.

The Telcos’ Growth in Context

The telcos’ video offerings are gaining critical mass, but their total subscriber numbers pale in relation to cable’s.

  Comcast Time Warner Cable Verizon FiOS AT&T U-verse
Source: Company financial statements for the three months ended June 30, 2007.
Q2 ’07 net adds -95,000 -57,000 167,000 38,000
Total subs 24,100,000 13,400,000 515,000 51,000
Percentage growth -0.40% -0.43% 48% 292%

Rob Garretson is a business and technology writer based in Gaithersburg, Md.

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