The Qwest for Speed

While 10-ton telco gorillas AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) struggled mightily with broadband in the second quarter, chimp-sized Qwest Communications International Inc. (NYSE: Q) comparably jumped ahead. (See DSL's Worst Quarter Ever .)

That’s not to say that Qwest exactly excelled in the second quarter. Indeed, the telco added only 31,000 DSL customers in the second quarter, down from 100,000 during the same period a year ago. But, given that Qwest is a about a third the size of AT&T and Verizon, those 31,000 net broadband adds seem downright gargantuan. AT&T added only 46,000 broadband customers in the second quarter while Verizon netted 54,000. Proportionally, Qwest more than doubled the performance of its larger Bell brethren.

What made the difference for Qwest? The key, it seems, is the deployment of fiber-to-the-node (FTTN) DSL services and using the bandwidth only for data services, offering download speeds of up to 20 Mbit/s. Rather than pumping video over its DSL plant like AT&T does with U-verse, Qwest relies on bundled satellite service from DirecTV Group Inc. (NYSE: DTV). Qwest says it is on track to deploy FTTN to 1.8 million homes by the end of the year, a small slice of its 13.2 million-home footprint.

Although Qwest now only offers FTTN to a bit more than a million homes, 19,000 of its 31,000 DSL additions were won in this territory. In other words, Qwest earned 61 percent of its net DSL adds in only 8 percent of its footprint. Apparently, speed sells.

“We believe that we should spend and be very strong in high-speed Internet. Everything else revolves around that in the home,” said Qwest CEO Ed Mueller during the company’s recent earnings call.

And spending they are. Qwest says it has budgeted $300 million for its FTTN deployment, about half of which has been spent so far. Qwest is also upping its marketing and promotional activities to get the message out. In markets where they are able to both raise the speed and the promotional volume, Qwest says it is going toe-to-toe with cable MSOs.

“We are actually seeing that speed matters, technology matters, but we really believe in the promotional activity," Mueller said. “Up until the second quarter, we were head-on-head with the cable guys on net adds.” That is, winning about 50 percent of quarterly net broadband additions in its markets.

However, the company made some marketing missteps in the second quarter, which Mueller says have been corrected, paving the way for a potential return to parity with cable MSOs for competition for new broadband customers.

“I think there is a lot of momentum here and the speeds seem really adequate for us. So I am encouraged with that, particularly when you add DirecTV,” Mueller said.

— Michael Harris, Chief Analyst, Cable Digital News