July 25, 2006 12:27 PM PDT

Cable bundle pricing dings AT&T broadband growth

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While AT&T reported second-quarter profits that beat analysts' estimates on Tuesday, there's reason to believe that the company's strong broadband growth over the past several quarters may be slowing as competition from cable operators increases.

For the second quarter of 2006, AT&T signed up 342,000 new DSL subscribers. This compares to 511,000 subscribers in the first quarter of this year and 425,000 subscribers in the fourth quarter of 2005.

Rick Lindner, chief financial officer of AT&T, said during a conference call with analysts on Tuesday that the decline in the number of subscribers had been expected, since the second quarter is typically slower than other quarters. AT&T's subscriber numbers don't look as dismal when compared to the same quarter last year, when the company signed up 360,000 new DSL customers.

While seasonality may explain part of the decline, increased competition from cable operators offering "triple play" packages of voice, broadband and TV service has also likely impacted subscriber growth.

"As cable companies enter specific markets, we do see some impact," Lindner admitted. "It's more in the early periods when they first introduce service, and then it starts to level off."

About a year ago, AT&T introduced a low promotional price for its DSL service--1.5Mbps for $12.99 for the first 12 months of service. The promotion has been successful and likely helped the company grow its subscriber base rapidly throughout the second half of 2005.

"They captured a lot of the low-hanging fruit when they introduced the lower-price service," said Jim Penhune, an analyst at Strategy Analytics. "But now cable operators are fighting back with low prices on their triple-play bundles."

Comcast, the nation's largest cable company, has been pushing its triple-play bundle in some areas of the country for $99 for the first year of service.

Lindner admitted that Comcast's success has affected AT&T's business.

"We're seeing some impact from Comcast," he said. "But penetration is leveling off."

In the fight for broadband customers, the triple-play bundle is the holy grail that many providers believe will keep customers loyal to their brand. The idea is that consumers who subscribe to only one service can easily switch to another provider, but when they subscribe to two or more services, the odds of them switching declines.

Cable operators such as Comcast, Cox Communications and Time Warner Cable are way ahead of AT&T in offering such packages. They have been selling voice service, in addition to broadband access and TV service, for more than a year.

AT&T began offering its U-verse TV service, which is based on Internet Protocol television technology, last month. The company is marketing the service to only 6,200 customers in San Antonio, 10 percent of which it says have already signed up. It plans to expand the offering to select customers in 15 to 20 cities by the end of the year, but Lindner emphasized that the rollout will be slow.

"We are being patient and rolling out the service in a measured way," he said. "We want to ensure the customer experience is good, and we want to make word of mouth to be a positive impact on marketing."

In the meantime, AT&T has also launched its Homezone service, which integrates satellite TV service from EchoStar Communications with AT&T's broadband service, in San Antonio and Ohio. Homezone is being offered in areas where AT&T isn't deploying U-verse.

"Homezone is better than what AT&T offers now," Penhune said. "But ultimately, they don't want to be reselling anyone's service. That said, AT&T doesn't have much choice right now. Rolling out U-verse is going to take time, and they need something to compete."

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