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Comcast's Voice Plateau
February 16, 2008

Apparently, behind Comcast's 134% year-over-year growth in digital voice subscribers (from 4Q06-4Q07) was a bit of bad news for one of its main suppliers of cable voice modems, Arris.

How could a business that more than doubled in 12 months have a downside?

The torrid growth of Comcast's voice services in 2006 and early 2007 was very good for Arris. But in the past two quarters, the operator has seen "an apparent leveling-out of their net subscriber growth," Arris CEO Bob Stanzione told Wall Street analysts on Thursday.

Arris also took a hit from Thomson, which Comcast added as a second supplier of eMTAs in the second half of the year. Stanzione didn't refer to them by name, by the way -- he just said "a second vendor entered into the mix."

Together, according to Arris, they're the two primary factors depressing first quarter 2008 sales, which it forecast to be down as much as 18% from previous expectations.

After the call I asked Arris for more detail about how the growth rate of Comcast's voice services was hurting eMTA sales, especially as the cabler touted growth in voice subs as a bright spot in its own earnings call on Thursday. Comcast president and COO Steve Burke noted that the company added 2.5 million digital voice customers in 2007, 61% more than it added in 2006.

"We hit our stride, and we’ve been adding approximately 600,000 new customers for each of the last four quarters," Burke said, adding that Comcast is now the fourth-largest residential phone company in the country with 4.4 million customers.

But the growth does appear to be "leveling off."

In response to my inquiry, Bruce McClelland, president of Arris' Broadband Communications group, pointed out in an e-mail that after a peak of 673,000 net adds for digital voice in Q2 2007, "clearly they have hit a natural run-rate in the 600-650k range."

Indeed, the number of Comcast's quarterly VoIP net adds, on a sequential basis, rose in the teens in the first half of last year, but then fell in the second.

Comcast Digital Voice
In Thousands

Quarter	Net Adds Per Quarter	Total Subs	Net Adds Q/Q Growth
1Q06	232	538	N.A.
2Q06	326	864	41%
3Q06	486	1,357	49%
4Q06	510	1,867	5%
1Q07	571	2,426	12%
2Q07	673	3,112	15%
3Q07	662	3,774	-2%
4Q07	604	4,377	-9%

Source: Comcast financial reports

So, this plateau effect is causing a near-term issue for Arris.

But look at the big picture -- Comcast is still adding voice subs at a healthy clip. And it sees a lot more room to grow, as only 10.4% of "homes passed" by digital voice were subscribers as of the end of 2007. The landline businesses of Verizon and AT&T continue to bleed customers (though by the same token, Comcast has been losing subs in its own core business, basic video).

"We continue to see strong growth in our [digital voice] service, and see no reason why we can't double our business and achieve 20% to 25% penetration over the next couple of years," Burke said. Voice "is the cornerstone of our bundling efforts, and we believe we are still in the very early innings."

Posted by Todd Spangler on February 16, 2008 | Comments (0)