AT&T and Verizon DSL Disconnects and Flat Business Revenues for 2nd Quarter

Implications: The AT&T and Verizon 2nd quarter results point to five problem areas: 1) High DSL disconnects; 2) Increasing wire-line losses; 3)Flat business revenues; 4) Wireless ARPU increases of only 1% to 2%; 5) Competition for high-value wireless subscribers.  The high DSL disconnects make AT&T and Verizon dependent on wireless services to compensate for increased wire-line losses and flat business revenues. 

Analysis:

Both AT&T and Verizon reported strong 2^nd quarter wireless growth in subscribers as well as revenues.  But AT&T had net DSL adds of only 46,000 with 900,000 disconnects.  Verizon had 133,000 DSL disconnects, and attained 54,000 net broadband adds from 187,000 new FiOS Internet Fiber customers.  The wire-line losses of 8.7% for AT&T and 8.5% for Verizon since the end of last year’s second quarter outweigh the TV customer growth of AT&T’s 170,000 U-verse and Verizon’s 176,000 FiOS.  Verizon’s CFO commented about the blended ARPU for FiOS being $130 ARPU and even higher for triple-play customers.  The CFO emphasized the increasing traction with 20-25% penetration in the footprint.  Yet the scale of FiOS is still only 2.0 million Internet customers and 1.4 million TV subscribers. 

For AT&T, the overall impact is shown in the 2.1% decline of consumer revenue from the same quarter last year.  The article includes AT&T’s CFO remark that non-paid disconnects only increased by 2% and the weakness is inward orders.  The CFO also alluded to the economic slowdown effect on the “value segment”, and implied that competition is not necessarily the critical factor.  However, Comcast’s second quarter added 278,000 broadband Internet and 555,000 VoIP Digital Voice.  Comcast’s 12.9 million broadband Internet customers nearly match AT&T’s 14.7 million DSL sub base.  And Comcast commented about their competitive and bundling success with two-thirds of new broadband customers switching from DSL and about one-fifth of customers choosing the triple-play package.       

For business revenue, Verizon increased by just 1% for the same quarter of 2007.  AT&T declined 1.4% for enterprise revenue and increased 1.6% in the SMB segment.  The economic constraints in the enterprise segment is seen with broadband data provider Paetec that did not meet 2^nd quarter expectations and is revising its full year forecast.  Paetec also noted the pricing pressure and increased customer turnover.  AT&T’s SMB revenue might have increased by obtaining tariff relief whereas the enterprise sales are controlled by contract pricing. 

With both consumer and business revenues being challenged, AT&T and Verizon are dependent on wireless growth.  AT&T’s record low postpaid 1.1% churn and Verizon’s .83%  show that they are holding wireless customers.  AT&T had previously stated for the first quarter that 30% of the 491,000 net DSL adds were “naked DSL” without wire-line and about half were bundled with wireless.  These 100% mobile users might be disconnecting DSL, but retaining AT&T wireless services.  Their mobile lifestyle perhaps has replaced home computer use with handset messaging and free Wi-Fi locations for notebooks.  AT&T’s mere 3,000 satellite adds could imply that the 100% mobile user might have gone to cable triple-plays.  Also, the lower adds and high churn replacement costs of DISH and DirecTV suggest the strong cable competition of Time Warner and Comcast. 

An alternative to AT&T and Verizon for the retention of home services is femtocells, such as AT&T’s $500 million deal with ip.access for 7 million femtocells over 5 years.  The femtocell shortcoming is the possibility of reducing mobile voice revenue more than the benefits of backhaul savings and improved data coverage.  The femtocell deployment becomes more justified if it is bundled to sell TV and broadband services. 

Both carriers have only about 1-2% total wireless ARPU increases year-over-year.  In contrast, the 2^nd quarter data ARPU increases are 31% for Verizon and 52% for AT&T.  The difference implies that new rate plans are discounting voice and offsetting with data revenue.   At the same time, wireless revenue increased 15% and 11% respectively for AT&T and Verizon compared to the same quarter last year.  The wireless revenue growth is subscriber additions, probably mostly from Sprint Nextel defections.  Verizon attracted higher-value subscribers with the net adds being almost 97% postpaid compared to 67% for AT&T despite Apple’s iPhone.  The future challenge will be how AT&T and Verizon can further add subscribers in a fully saturated U.S. wireless market.  And will Sprint’s market share continue to decline to provide prospective subscribers?  AT&T is trying to focus on the wireless data user with offers such as the NetReach plan that searches for access from 3G, Wi-Fi or home broadband.  With declining consumer and flat business revenues, the future quarterly results of AT&T and Verizon depend on wireless growth.  If the opportunity for subscriber growth is limited, then the challenge is increasing ARPU with high margin data usage to offset declining voice prices.