SBC Communications Inc. produced record growth in digital subscriber line additions in the third quarter, while BellSouth Corp. posted solid numbers — both developments which will lend credence to a recent analyst report suggesting cable may want to offer a lowered-priced data tier to compete.
SBC added 365,000 DSL subscribers in the third quarter — its best quarter ever — giving the telco 3.1 million broadband subscribers.
Company executives predicted continued strong growth, saying by first-quarter 2004, some 80% of all SBC homes would be DSL-capable.
"We see a lot of upside in DSL," SBC chief financial officer Randall Stephenson said. "We expect to continue to ramp up in broadband."
BellSouth added 111,000 DSL subscribers, a slight sequential increase the from second quarter's 103,000 additions, but a slight drop from the year-earlier figure of 121,000.
As those results came in, Smith Barney analyst Niraj Gupta issued a report saying he expects the cable industry to respond to continued DSL price cuts by the telcos by offering a lower-speed data service and by introducing voice-over-IP telephone service.
Gupta's thesis: Cable operators and telcos have signed up most early adopters for high-speed, and the next batch of subscribers will be price-sensitive.
"We believe the cable industry can respond to growing price sensitivity and DSL price competition with two approaches: The introduction of a lower-priced, slower-speed alternative to the flagship cable modem product (complemented by a higher-priced, higher speed offering), and the rollout of IP telephony service in a large number of markets (expected in 2004)," Gupta wrote.
Gupta called it "imperative" that cable operators offer a tiered service in the next six to nine months, to protect subscriber bases and continue attacking dial-up Internet-service providers.
Despite the lower-tier service, SBC executives said revenue per subscriber remained in the $40 range. Consumers now represent 73% of all SBC DSL subscribers, Stephenson said, a jump from 65% a year ago. SBC attributed the growth to its partnership with Internet portal company Yahoo! Inc. and its $26.95-per-month pricing initiative for new subscribers in bundles or who sign up online.
Bundling also is growing at SBC. The company said 36% of its customers take phone service plus one other bundled service, either wireless, DSL or long distance. That's nearly twice the amount of bundled customers as fourth quarter 2002's 19%. Video will get added to that bundle when SBC begins its alliance with EchoStar Communications Corp.'s Dish Network direct-broadcast satellite service in first quarter 2004.
BellSouth CFO Ron Dykes said DSL penetration now stands at 5%. About 25% of new customers in the quarter opted for BellSouth's lower speed, lower price service. Dykes said only 1% of high-speed, higher priced subscribers downgraded. "That's not a huge migration," he said. Dykes added that BellSouth plans a $4.95 a month dialup promotion to try and get customers onto the BellSouth platform, then upsell them to higher levels of data service.
All that puts added pressure on operators to think about offering tiers of service. Operators, for the most part, have shied away from lowering prices, instead focusing efforts to improve service. In the past month, Time Warner Cable, Comcast and Adelphia all have announced they were increasing downstream data speeds from 1.5 to 2 megabytes to three megabytes.
MSOs are starting the ball rolling on VoIP. Cablevision Systems Corp. has launched service; Time Warner Cable and Comcast Corp. have identified a handful of markets where each will launch service next year.
While cable enjoys a two-thirds to one-third market share lead over telcos in broadband data, the gap began to close in the second quarter, and lowered tiered services could be on the way.
Smith Barney envisions a "bronze" level package, priced between $20 and $25 per month, a silver level between $35 and $40 per month and a gold package at $80 per month.
Only Charter Communications Inc. offers a lower priced service at the moment, and Cox Communications Inc. has discussed the possibility. "However, we expect all major MSOs to introduce a lower tier of cable modem service in at least some markets during 2004," Gupta wrote.
Smith Barney estimates a $20 monthly service based on downstream speeds of 256 Kilobytes per second and upstream speeds of 128 Kbps "would be very successful" in getting remaining narrowband subscribers to migrate to broadband.
Gupta said Rogers Cable debuted a 128-Kbps service in April 2002 along side a 1.5 Megabyte service. High-speed data revenue per unit rose from 2002 to 2003, despite the addition of the "Lite" service, which accounts for 40% of all new cable modem net additions.