Cable's Race with DSL Looks Like a Marathon

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If the country's broadband push is likened to a race, then the competition between cable operators and telcos has changed from a 100-meter sprint to a 10,000-meter long-distance run.

Both industries must now grapple with a recession that has forced them to closely examine capital expenditures for their high-speed Internet businesses, the profitability of individual customers and the prospect of using rate increases to juice the bottom line.

Cable has maintained its lead in high-speed-data customers over the telcos and their digital subscriber line services. So far, fourth-quarter results have shown solid gains, albeit somewhat tempered by several MSOs' shift from bankrupt cable-modem provider Excite@Home Corp.

Those figures also included Time Warner Cable's "best quarter ever" for cable-modem subscriber additions (256,000), per Cable Datacom News.

The four regional Bell operating companies added 564,000 DSL subscribers in the fourth quarter of 2000. That figure jumped to 683,000 in fourth-quarter 2001, with Verizon Communications and BellSouth Corp. making up for a slide by SBC Communications Inc.

On the cable side, the seven largest MSOs added 830,000 cable-modem subs in fourth-quarter 2000.

To date, the four of those seven operators who've reported fourth-quarter 2001 results said they've added 617,000 data customers; numbers from Adelphia Communications Corp., Cox Communications Inc. and Charter Communications Inc. are yet to come. If those three MSOs match their 273,000 third-quarter additions, then cable would stand at roughly 890,000 new data homes.

That puts cable's year-over-year growth rate at 7 percent. The telcos' yearly growth rate hit 21 percent.

Both sectors are growing, but the telcos closed the gap a bit. The overall cable-modem subscriber count now stands at roughly 8 million, compared to 4 million DSL customers.

Telcos can never be counted out, especially when they show a willingness to continue spending the capital needed to cut into cable's share of the lucrative data market. Recent subscriber-addition figures show some momentum along those lines.

Operators in the East and South will likely see the most heated competition from DSL, as BellSouth Corp. and Verizon Communications plan aggressive pushes for 2002, following relatively strong years in 2001.

SBC Communications Inc. and Qwest Communications International Inc. have fallen off the pace somewhat, although operators can still see them in the rear-view mirror.

Overall, the four major RBOCs added 577,000 DSL subscribers in the fourth quarter, slightly more than the 564,000 additions in last year's fourth quarter.

BellSouth added 400,000 DSL subscribers in 2001, for a total of 620,000 subscribers. After averaging 80,000 additions in each of the first three quarters of 2001, the company added 157,000 subscribers in the traditionally strong fourth quarter — a record number of additions for the company.

"There is a fine line between driving good growth and driving profitable growth," BellSouth chief financial officer Ron Dykes said.

BellSouth expects to add 480,000 subscribers in 2002 as it moves toward its year-end target of 1.1 million subscribers, Dykes said. Its DSL penetration rate now stands at 2.4 percent.

About 15.5 million of the company's 25 million telephone customers can receive DSL service, said Dykes.

By concentrating on self-provisioning, BellSouth will bring its DSL business close to cash-flow breakeven in 2002, according to Dykes.

"Clearly 2003 is a big payoff year for us," he said.

Verizon said it produced a record 225,000 DSL additions in the fourth quarter, ending the year at 1.2 million subscribers.

"DSL is a real success story," said vice chairman and chief financial officer Frederic Salerno.

Verizon has cut installation times from 15 to eight days, he noted. "Virtually all our subscribers utilize self-install."

Looking ahead, Salerno estimated Verizon would add between 600,000 and 800,000 DSL subscribers in 2002. It added 660,000 homes through 2001.

Capital expenditures will drop to $15 billion to $16 billion this year, several billion less than in 2001, Salerno said. DSL is now in 79 percent of Verizon's central offices, and about half of its subscribers are able to receive such service.

Qwest reported 55,000 new DSL subscribers in the fourth quarter, ending the year at 448,000. That was a modest increase from the 42,000 additions in fourth-quarter 2000 and third-quarter 2001's 31,000 additions.

DSL results could have been better, said Qwest CEO Joe Nacchio, but the telco's deal with Microsoft Corp.-owned Internet service provider MSN "got off to a slow start."

"We got somewhat better in the fourth quarter, but we're not at the level of customer satisfaction that we think we ought to be," Nacchio said

Qwest expects to add 200,000 to 250,000 DSL subscribers in 2002, compared to 192,000 in 2001.

The company plans to cut back its 2002 capital expenditures to the $4 billion to $4.2 billion range, down from $8.54 billion in 2001.

"The economy is still the big swing factor," as consumers and businesses are either cutting back on phone service or postponing capital upgrades, Nacchio said. "We will continue to manage costs very tightly."

The telco has curtailed many of its buildout plans under "Project Pronto," its DSL initiative, and that's evident in the company's cap-ex spending numbers.

SBC, which swallowed Ameritech Corp. and Pacific Telesis Group in recent years, spent $11.2 billion on cap ex across its 59-million-line universe in 2001. That number will fall even further, to between $9.2 billion and $9.7 billion in 2002.

Although SBC's 1.3 million DSL subscribers is tops among RBOCs, the company added 566,000 subscribers in 2001, a drop from the 652,000 additions it had in 2000.

The company's reported 146,000 new DSL subscribers in fourth-quarter 2001 was a sharp year-over-year decrease from the 251,000 it added in fourth quarter 2000.

SBC executive director of investor relations Lori Lee said the company added 6.7 million DSL-capable homes in 2001, to reach 25 million households, or about 61 percent of its overall universe.

But in discussing fourth-quarter earnings results with analysts, company executives spoke cautiously about DSL.

"We intend to do what's right for the shareholders," Lee said.

"We took a controlled approach to DSL," added SBC chief financial officer Randall Stephenson. "The business is going pretty well. We'll ramp promotions in the first quarter."

SBC signed a co-marketing deal with Yahoo! Inc. to pitch high-speed access and other premium services.

"We're ready to start selling this product fairly aggressively," Stephenson said.

But SBC declined to estimate how many DSL subscribers it would add this year, or whether it planned to expand its high-speed-data reach of 61 percent. SBC has been critical of federal regulatory policies that it claims prevent the company from expanding its broadband reach.