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Telco TV

FiOS Slows Down in Q4; U-verse Keeps Up Pace

2/01/2010 1:00 AM Eastern

The biggest U.S. telcos continued to grow their TV rolls through the end of 2009, but while AT&T kept charging full-steam ahead, Verizon Communications’ FiOS hit the brakes.

AT&T posted strong gains for U-verse TV, with 248,000 net additions in the fourth quarter to reach 2.1 million subscribers by year-end. It was the telco’s fifth consecutive quarter with video net adds above 240,000.

FiOS, meanwhile, ended the year with a comparatively sluggish quarter, adding 153,000 subscribers for both TV and Internet services — well off its pace in the first half of 2009, when it packed on 599,000 TV customers.

Verizon’s video net additions in the fourth quarter of 2009, to end the year with 2.9 million subscribers, were down a “startling” 50% from the year-ago period, noted Sanford Bernstein analyst Craig Moffett in a research note, representing “a serious miss in the growth of their FiOS business.”

In the fourth quarter, Verizon had total broadband and video revenues of $1.7 billion, a 25.5% increase compared with the fourth quarter of 2008. At the same time, Verizon laid off 13,000 wireline workers in 2009 and expects a similar number of layoffs in 2010 for the unit.

Despite those cost-cutting measures and FiOS growth, the company’s wireline unit continued to suffer. The segment’s operating revenue for the fourth quarter was $11.5 billion (down 3.9% year over year) while operating margin fell to 2.5% (vs. 6.0% a year prior).

Verizon chief financial officer John Killian pointed out that FiOS TV has gained more than 900,000 subs two years in a row. “Over those two years, we’ve had fluctuations quarter by quarter. It hasn’t been an exactly linear climb up,” he said on the telco’s earnings call last week. In 2010, “We think we can continue to improve the profitability of the FiOS offering and, at the same time, continue to sustain growth.”

AT&T, for its part, said revenue from U-verse TV, Internet and voice services nearly tripled over 2009 and is approaching an annual run rate of $3 billion, as the telco continues to pack on video and broadband subscribers.

The pace of residential phone-line losses also slowed, with AT&T losing 766,000 in fourth-quarter 2009 vs. 1 million in the year-earlier period, and U-verse gains in the quarter “were solid,” UBS analyst John Hodulik wrote in a report.

More than 75% of U-verse TV subscribers have a triple- or quad-play option, and video-penetration rates exceed 20% in areas that have been marketed to for more than 24 months.

U-verse has grown to the point where “it’s beginning to meaningfully change our consumer revenue profile,” AT&T chief financial officer Rick Lindner said on the company’s earnings call last week.

Nevertheless, U-verse still represents less than 5% of total wireline segment revenue, and the growth hasn’t been enough to offset declines in other parts of AT&T’s wireline business. The wireline unit saw revenue fall 6.0% for 2009, to $65.7 billion, and net income slipped 29.2% to $7.9 billion.

AT&T will continue to build out U-verse in 2010 and aims to reach 30 million homes passed by the end of 2011, up from 23 million today. Lindner said many of the new U-verse markets will be in the Southeast, which represents markets served by the former BellSouth.

“Our expectation for U-verse is to continue to, market permitting, grow at the kind of rates you’ve seen us grow over the last four to five quarters,” he said. In just about all U-verse markets, penetration tends to increase at one percentage point per month, Lindner added.

TUNING INTO TV
The two big telcos’ numbers as of Dec. 31, 2009

  AT&T’s U-verse Verizon’s FiOS
* Wireline residential customers
SOURCES: Company reports
TV subs/annual change 2.06M (+97.5%) 2.86M (+49.2%)
Broadband subs*/annual change 13.71M (+5.8%) 9.22M (+6.3%)
Voice lines*/annual change 27.33M (-12.8%) 18.37M (-12.3%)
Homes passed 23M 15.4M
Video penetration Less than 13% 24.5%

September