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April 20, 2007

AT&T Finally Getting Some TV Customers - Should We Care?

AT&T (T) rose almost 1% yesterday, possibly in response to Wednesday's afternoon's press release indicating that the company's U-Verse TV offering was beginning to gain some customers. U-Verse is T's multichannel TV product designed to fill out is product bundle that already contains wireless and wireline telephony and high speed internet. U-Verse is based on fiber to the node (FTTN) technology but uses currently laid twisted pair copper wire to get from the neighborhood node to each household.

There has been a lot of controversy about whether FTTN is the right approach vs. FiOS, which is the fiber to the home strategy used by Verizon (VZ) or the fiber plus coaxial cable network long used by the cable companies. Over the past year, most observers had written off U-Verse and felt that T would either spend massively to catch up in a fiber to the home strategy or spend massively to buy DirecTV (DISH) or Echostar (DISH).

T announced yesterday that since January they had added 15,000 universe subscribers and expanded the marketed homes beyond Dallas-Fort Worth to Milwaukee and Kansas City. The press release also stated that current installations are running at 2,000 households per week.

While any sign that U-Verse is a viable product is good for T shares, the subscriber gains should be put into perspective....

When Comcast (CMCSA/CMCSK) reports next week, they are expected to add over 600,000 VOIP telephony subscribers. Comcast marketed to around 30 million homes last quarter, so about 2% of the potential subscribers took the telephone product. We don’t know how many households to which T has been marketing U-Verse but to reach the 2,000 per week installation level, it is probably north of 500,000 putting its penetration gain on a similar path to Comcast.

That is certainly good news for T but the company has fallen way behind due to delays with the U-Verse technology development. Gaining 30,000 TV subscribers per quarter pales in comparison to the 600,000 and growing quarterly telephony subscribers Comcast is picking up. The bundle is supposed to reduce churn, and evidence to date shows that is a fact, so it is not acceptable on a competitive basis for T to lose so many subscribers than Comcast and other cable companies are gaining. Furthermore, the cable companies are now offering VOIP on a close to national basis while T and VZ are offering there TV products one market at a time. This allows cable the comfort of responding market-by-market without impacting national pricing and promotions while VZ and T have to defend on a nationwide basis.

The bottom line is that there are legitimate reasons to like T based on synergies from its recent acquisitions. Proving that U-Verse is a viable product is also a positive. However, it is not the reason to own the stock. And it is not a reason to sell or avoid cable stocks.

Posted by Steve Birenberg at April 20, 2007 09:24 AM in Telephone