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Telcos' DSL Dilemmas A Good Sign for Cable

12/02/2001 7:00 PM Eastern

Over the last month, executives from four different regional Bell operating companies uttered the quotes above. The bullish comments came from Verizon Communications and BellSouth Corp., and the bearish ones from SBC Communications Inc. and Qwest Communications International Inc.

Their words reflect the underlying conflicts within each telephone company over their respective agendas for digital subscriber line service. And those doubts give cable hope that it can continue to win the lion's share of new high-speed-data subscribers.

Consider this: In third-quarter 2000, Qwest, Verizon, BellSouth and SBC added 345,000 DSL subscribers. In third-quarter 2001, that number was 398,000 — a 15 percent year-over-year increase.

Cable's six largest data providers — AT&T Broadband, Time Warner Cable, Cox Communications Inc., Comcast Corp., Charter Communications Inc. and Cablevision Systems Corp. — added 559,000 cable-modem subscribers in third-quarter 2000 and an estimated 760,000 in third-quarter 2001, for a year-over-year jump of 36 percent.

In fact, cable's margin over DSL grew for the fifth consecutive quarter (see chart).

Year to date, the four RBOCs have added 1.24 million DSL subscribers, while cable's top six MSOs have added 2.21 million — for a market share of about 64 percent.

What's more, several MSOs reported their best quarters ever, in terms of new sign-ups, during the third quarter of 2001 — despite the economic slowdown. Cox tallied 111,000, Charter added 102,000, Time Warner plugged in 252,000 and Comcast picked up 117,000; those totals were the companies' best-ever quarterly take rates.

Conversely, SBC's 150,000 third-quarter additions marked the fourth best in its history, while Verizon's 135,000 additions were only its third-best total.

BellSouth added 82,000 DSL subscribers in the third quarter. In its best-ever period — the first quarter of this year — BellSouth added 88,000 subs.

For its part, Qwest added only 31,000 DSL subscribers in third quarter, a drop from the 55,000 sign-ups in the second quarter. It was Qwest's worst DSL quarter since first-quarter 2000.

With at least two RBOCs pointing fingers at Washington and the general economy as their reasons for slowing DSL deployment next year, cable operators are licking their chops about the prospects.

"I think we have a wonderful opportunity to expand the footprint on the data product," Charter chief financial officer Kent Kalkwarf told Wall Street analysts on Nov. 1. Kalkwarf indicated that Charter might even sacrifice a bit of margin to grab more high-speed market share.

CONSUMER QUESTIONS

Even the more-bullish RBOCs are feeling the pressure from government regulation, a recession that's forced them to lay off employees, the economy's effect on DSL capital expenditures and their own shifting agendas. Many are looking to enter the more-lucrative long-distance telephony market.

"We're seeing customers say: 'I don't know if I want to spend $49 with DSL,' " said Qwest CEO Joe Nacchio during the company's third-quarter earnings call to analysts. "Four quarters ago, the complaint was, 'Why didn't we put DSL in the most remote places in the Rocky Mountains?' "

Nacchio said consumer confidence and purchasing power has affected consumers' need to get broadband right away.

"It still is growing very strongly," Nacchio said. But he told analysts that Qwest will watch its capital spending on DSL in 2002.

"There's no reason to put capital out there in front of the recovery," he said.

Qwest plans to cut capital expenditures from $8.5 billion in 2001 to $5.5 billion in 2002. Maintaining local and long-distance equipment accounts for about $2 billion of that budget each year, which shrinks the pool of available capital for DSL even further.

The recession is also weighing on Nacchio's mind. He said he's anticipating a "relatively long recession and a mild recovery in the second half of 2002." Given that climate, he said, Qwest will focus on its cornerstone incumbent local-exchange carrier business, by working to swipe market share from AT&T in the business sector and rolling out long distance.

As far as SBC is concerned, regulation is killing its DSL-expansion efforts. The telco added 150,000 DSL subscribers in the third quarter, a marked increase over the second quarter's 87,000 additions.

But that performance paled in comparison to fourth-quarter 2000 and first-quarter 2001, when it added 251,000 and 187,000 DSL connections, respectively.

"Rules regarding our DSL networks have literally added hundreds of millions of dollars in cost and delayed deployment," said SBC CEO Ed Whitacre. "Our DSL services are burdened with regulations that our cable-modem competitors do not face."

That's causing SBC to curtail its rollout of Project Pronto, which aimed to move DSL deeper into the company's networks.

"We are completing predominantly our tier-one towns this year with Pronto," said chief financial officer Randall Stevenson. "However … we are taking a hard look before we go any further. There will be some significant cuts in terms of the finalization of Pronto and where we invest that capital."

At present, 58 percent of SBC customers can get DSL. When it introduced the service in 1999, SBC hoped to get to 80 percent in three years. The company has installed 4,700 neighborhood gateways, up from about 2,000 at the first of the year.

But SBC DSL Internet communications manager Joe Izbrand said 58 percent "is not where we are going to stop. We don't want to give the impression our DSL buildout is coming to a grinding halt because that is not the case. We are still absolutely committed to it, and we have invested hundreds of millions of dollars to make it available to customers."

But SBC is taking a more measured approach these days.

"Certainly, the regulatory environment is a disincentive to continue to invest," Izbrand said. "In 13 states in which we operate, there are inconsistent rules and regulations from state to state, there are federal obligations and regulations that are all the more burdensome. You start looking at significant cost being added to deployment."

VERIZON, BELLSOUTH ARE SANGUINE

Verizon and BellSouth remain more bullish on DSL. Verizon recently launched a $29.95-per-month promotion to drive DSL to its year-end end target of 1.2 million to 1.3 million subscribers. It passed the 1 million mark in early October.

"Demand for high-speed Internet access remains high, and we're meeting America's need for speed by continuing to expand availability of our DSL service," said Verizon Advanced Services senior vice president Keiko Harvey.

But Harvey also strikes a cautious regulatory note.

"There is a growing recognition in Washington that there is a need for a national broadband policy that removes the barriers to deployment and encourages even more investment in high-speed technology," she said.

BellSouth officials sounded even more bullish.

"DSL economics are exceeding our expectations. It's the cornerstone of our growth," BellSouth's chief financial officer Ron Dykes recently told financial analysts.

Although BellSouth added 82,000 DSL subscribers in the third quarter, it will need 137,000 more in the fourth quarter to reach its year-end goal of 600,000. BellSouth's previous best period came in first-quarter 2001, when it tallied 88,000 additions.

"We believe we can reach the 600,000 goal," Dykes said. "We'll have to ramp [up] faster in the fourth quarter."

Dykes's optimism stems from BellSouth's marketing campaigns, which "target customers with a high propensity to buy." He said 64 percent of BellSouth homes are DSL-qualified, and that figure will rise to 70 percent by year-end.

Web-delivered orders now account for 20 percent of the business, he noted, and that's expected to grow to 30 percent by year-end. Dell Computer Corp. is shipping PCs with built-in DSL Modems, Dykes said, and the company's deal with MSN should also help to drive sales.

But Dykes also conceded that the company's 2002 DSL capital expenditures would be lower than in 2001.

Still, BellSouth told analysts several weeks ago that it intends to reach 1.1 million DSL subscribers by the end of 2002 — a total that would yield $600 million in DSL revenue. DSL revenues are expected to reach $225 million by the close of this year.

Some DSL analysts are unsure whether SBC's tactics will work.

"I think it will have the opposite effect," said ARS Inc. broadband analyst Mark Kersey.

Slowing down DSL buildouts could play into the hands of the RBOCs' foes, who are likely tell regulators there's no need to deregulate since the RBOC saren't interested in DSL, he said. The Baby Bells are operating under the same laws that were in place 12 to 18 months ago, when they were much more bullish on the technology, he noted.

"DSL is an expensive deployment," Kersey acknowledged, adding that cable operators tend to provision service more quickly. "It's almost a self-inflicted wound, in that DSL providers raised rates throughout the year," he added, explaining the disparity in growth rates.

The Growing Cable-DSL Gap
Sector 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01
Telcos: Verizon, SBC, BellSouth and Qwest
Cable: AT&T, Time Warner, Cox, Comcast, Charter and Cablevision.
* estimate
Telco 345,000 564,000 506,000 336,000 398,000
Cable 559,000 832,000 794,000 651,000 760,000
Gap 214,000 268,000 288,000 315,000 362,000

 

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