Telcos video growth continues, though at slower rate

By
Amer Barghouth

July 30, 2010

AT&T added 209,000 subscribers to its U-Verse video business and Verizon added 174,000 to FiOS during the second quarter of 2010, bringing the telcos' IPTV subscriber bases up to 2.5m and 3.2m, respectively. AT&T's total video subscriber base, which combines U-Verse users and bundled satellite customers outside AT&T's U-Verse footprint, reached 4.6m, up from 4.4m at the end of Q1 2010. Growth in the U-Verse segment more than made up for the 74,000-subscriber decline in bundled satellite subscriptions this quarter. AT&T's U-Verse deployment now passes 25m homes while Verizon's FiOS passes 12.4m.

AT&T U-verse's Q2 2010 net sub addition of 209,000 is slightly lower than the same period last year when the company added 248,000 new subs. Similarly, Verizon subscriber growth of 174,000 is well below the company's rates in 2009. FiOS added 300,000 subscribers in the second quarter of 2009, and has been experiencing lower sub adds ever since, though this quarter's performance was slightly better than Q1 2010 (168,000 net adds).

This is the first quarter that U-Verse revenue exceeded $1bn, more than double its revenue a year ago. According to AT&T, over 75% of U-Verse subscribers have triple- or quad-play plans. Annual Revenue per User (ARPU) for the triple play customers was almost $160, up 13.8% year-over-year and 6.8% from Q1 2010. Similarly, FiOS revenue grew 33% year-over-year, and FiOS ARPU has exceeded $145 this quarter, up 7% over last year's Q2 ARPU.

On the broadband side, Verizon outperformed AT&T by adding 196,000 net new FiOS broadband customers to stand at 3.8m. This handsome addition has offset the decline in non-FiOS DSL connections. Overall, Verizon's broadband connections (FiOS and DSL) grew by just 28,000. AT&T, in contrast, lost 93,000 subscribers in Q2 2010. The company attributes the weaker broadband performance to Q2 seasonality and aggressive marketing from MSOs in AT&T's non-U-Verse footprint. The company intends to fight back with additional infrastructure in these areas which will allow it to offer more robust data speeds and better broadband products.

Despite the decline from last year in net video additions for AT&T and Verizon, it is still early to pronounce the 'telco growth burst' at an end, for many reasons. First, it is typical for subscription TV operators to experience a dip in net additions during the second quarter due to seasonality. Second, other subscription TV operators like DISH Network have been able to reverse declining subscriber growth rates through aggressive marketing and advanced service (HD, DVR and VoD) deployment. Third, FiOS and U-Verse's penetration rates of homes passed (26% and 13%, respectively) are still comparatively low, which leaves plenty of room for growth. Screen Digest's US TV Intelligence estimates Comcast and Time Warner Cable's penetration rates of homes passed in Q1 2010 were at 45% and 47%, respectively.

Going forward, Screen Digest expects FiOS and especially U-Verse to continue to grow at healthy rates for the rest of 2010 and through 2014, though it will be a battle. Back when cable had a virtual monopoly on multichannel subscription TV in the early 1990s, penetration of homes passed was in the mid-60% range. Competition - first from DBS (in the wake of DirecTV's June 1994 launch) then from the telcos (following FiOS's launch in September 2005) - has pushed cable's penetration rates down into the mid-40% range. But competition has also expanded the subscription TV market to the point that today 105.1m subscriptions are being sold to 114.3m US TV homes, all of which are 'passed' by at least DBS. That's 92% of homes, which have agreed TV can be worth paying for, and now are in play.

If the current growth rate differential between the two IPTV networks persists, U-Verse's subscriber base will approach, if not overtake, FiOS' by the time AT&T finishes expanding its footprint at the end of 2011. AT&T has a significant advantage over Verizon because of the former's ability to convert its existing DSL connections into U-Verse connections through less costly technologies like 'pair bonding'.

AT&T's net loss of broadband subscribers confirms the trend of MSOs capturing internet market share from telcos. The loss of DSL connections for both telcos should come as good news to cable operators who continue to look for additional revenue streams to counter the shedding of their video subscribers. However, it must be noted that DSL sub loss is not entirely bad news for telcos. While declines in customer numbers should always be a cause for concern, the telcos' loss of lower-ARPU DSL broadband connections is offset by gains in high-ARPU U-Verse and FiOS connections.

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