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Carrier Scorecard: Broadband Blues

Raymond McConville
News Analysis
Raymond McConville
8/14/2008
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Driving a car off of a cliff never seems to work out too well for the driver. Borrowing that logic, we can assume that seeing broadband subscriber growth go off a cliff isn't good for the telecom operator.

But that's precisely what happened in the second quarter of 2008. The three U.S. RBOCs, which had already seen their broadband growth flatten in recent quarters, posted drastically lower broadband subscriber additions when they reported earnings.

Table 1 illustrates how many broadband subscribers each carrier has added in each quarter since the start of last year. As you can see, the most recent quarter, highlighted in red, is drastically lower than what had previously been the trend.

Table 1: Broadband Adds Per Quarter

Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08
AT&T 2,370,000 352,000 499,000 396,000 491,000 46,000
Verizon 371,000 281,000 280,000 262,000 263,000 54,000
Qwest 167,000 100,000 111,000 95,000 90,000 31,000


Granted, the second quarter is usually weak for these sorts of things, but what happened this year is far more serious than seasonal shakiness. Combine the drop in broadband adds with the continued acceleration in access line losses (illustrated in the table below), and wireline telephony appears to be in serious trouble.

Table 2: Landline Losses
1Q07 2Q07 3Q07 4Q07 1Q08 2808
AT&T* n/a n/a n/a 7.4 7.7 8.1
Verizon 7.1 7.8 8 8.1 8.2 8.5
Qwest 6.84 7.08 7.16 7.29 7.78 8.16
Figures represent percentage declines from the same quarter a year earlier. *For the first three quarters of last year, AT&T's figures included new assets acquired in the Bellsouth merger that it did not have in 2006, thus reflecting misleading growth in broadband subscriber data.


We know what you're thinking: What does this all mean for the North American Carrier Scorecard?

Each quarter, Light Reading publishes scorecards on the world's most influential publicly held carriers, giving each a grade of A through F based on their financial and business performance. Our previous carrier scorecard is right here: Carrier Scorecard: What Recession?.

Getting an A is tough. You need to show strong growth across the board and obvious momentum (the not-off-the-cliff kind) for the future.

Verizon: B-
Verizon Communications Inc. (NYSE: VZ) gets a grade in the B range because it showed double-digit earnings growth during a troubling economic time. But that was largely due to the success of Verizon Wireless .

In wireline, the situation is far different. We've already covered what's happening in generic broadband, but the situation with FiOS is equally disturbing. Verizon added only 176,000 FiOS TV subscribers in the quarter -- its lowest total since March 2007. Video is supposed to be a big growth driver for the company's future, so it's not good to see its flagship video service losing momentum.

Verizon says the growth slowed because it slowed down its marketing in the second quarter. The company says growth will come back now that FiOS TV is available in New York City, where Verizon's starting a new marketing push. (See Verizon Hits 2M FiOS Subs, Verizon: Labor Strike Won't Affect FiOS, and FiOS in NYC: Verizon's Daunting Task.)

But one of its new marketing ploys is a $69.95-per-month month triple-play package for six months, which will only put further pricing pressure on the market.

Table 3: Verizon's Q2 2008 Scorecard
2Q08 2Q07 y/y Change
Revenue (Millions) $24,124 $23,273 +3.7%
Earnings (Millions) $1,882 $1,683 +11.8%
GAAP EPS $0.66 $0.58 +13.8%
Access Lines 38,264,000 41,832,000 -8.5%
Broadband Subscribers 8,330,000 7,471,000 11.5%
FiOS TV Subscribers 1,382,000 515,000 +168.3%




AT&T: B-
We sang AT&T Inc. (NYSE: T)'s praises in our last scorecard for having its stock trading near a 52-week high, but Ma Bell's shares have tumbled about 20 percent since the beginning of June.

And really, who can blame investors for being scared? AT&T saw the nastiest drop-off in broadband adds of all three RBOCs. (See table 1, above) As with Verizon, double-digit earnings growth gives AT&T a grade in the B range, but again, that growth is mainly thanks to wireless.

There are some wireline positives. U-verse TV did perform nicely, unlike FiOS, and AT&T remains on track with its goal to have more than 1 million IPTV subscribers by year's end. (See AT&T Hits 550K IPTV Subs.)

Table 4: AT&T's Q2 2008 Scorecard
2Q08 2Q07 y/y Change
Revenue (Millions) $30,866 $29,478 +4.7%
Earnings (Millions) $3,772 $2,904 +29.9%
GAAP EPS $0.63 $0.47 +34.0%
Access Lines 58,860,000 64,078,000 -8.1%
Broadband Subscribers 14,693,000 13,261,000 +10.8%
U-Verse TV Subscribers 549,000 51,000 +976.5%




Qwest: D
Of the three RBOCs, Qwest Communications International Inc. (NYSE: Q) is actually suffering the least from the broadband epidemic. While it experienced a significant decline in subscriber adds, its drop-off was moderate considering the carrier's size.

But Qwest is showing hardly any signs of near-term revenue growth. Without wireless to bail it out, Qwest had double-digit declines.

CEO Ed Mueller raves about successes with Qwest's DirecTV Group Inc. (NYSE: DTV) partnership and increased data traffic on its network, but nothing has stopped the carrier's continued revenue decline. How much longer can Qwest sustain this?

Table 5: Qwest's Q1 2008 Scorecard
2Q08 2Q07 y/y Change
Revenue (Millions) $3,382 $3,463 -2.34%
Earnings (Millions) $188 $246 -23.58%
GAAP EPS $0.11 $0.13 -15.38%
Access Lines 12,189,000 13,272,000 -8.16%
Broadband Subscribers 2,732,000 2,405,000 +13.60%
Video Subscribers 722,000 554,000 +30.32%




— Raymond McConville, Reporter, Light Reading

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grunt
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grunt,
User Rank: Light Beer
12/5/2012 | 3:34:31 PM
re: Carrier Scorecard: Broadband Blues
It looks like your table two is a little messed up. I assume all the numbers are supposed to be % but only two of the cells are labeled % and those have the tell tale x100 issue in spreadsheet land of taking 7.8 and making it 780%...
grunt
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grunt,
User Rank: Light Beer
12/5/2012 | 3:34:31 PM
re: Carrier Scorecard: Broadband Blues
It looks like your table two is a little messed up. I assume all the numbers are supposed to be % but only two of the cells are labeled % and those have the tell tale x100 issue in spreadsheet land of taking 7.8 and making it 780%...
nodak
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nodak,
User Rank: Light Beer
12/5/2012 | 3:34:31 PM
re: Carrier Scorecard: Broadband Blues
Isn't tracking subscriber additions kind of like tracking lit/dark fiber miles during the telcom bubble? It is great your customer base is growing, but if you are getting it to grow by selling a $100 service for $10, does that not hurt the bottom line? I would say ATT did the best of all 3 carriers, managing to increase profit by ~30% while only increasing revenue by ~5%.
Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:34:30 PM
re: Carrier Scorecard: Broadband Blues
Table's been fixed. Thanks for spotting that, Grunt ... and yes, all the numbers are supposed to be percentages.
Kreskin
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Kreskin,
User Rank: Moderator
12/5/2012 | 3:34:22 PM
re: Carrier Scorecard: Broadband Blues

Copper broadband is slowing ... not optical.

Those that can get optical do so, others wait.

Someone needs to survey copper broadband customers and ask: If you could GET an optical circuit for greater bandwidth, would you?
Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:33:53 PM
re: Carrier Scorecard: Broadband Blues
It looks like 2.4 million might be correct, based on the numbers we'd used in Q1'07 and Q4'06:

Q1'07 - http://www.lightreading.com/do...
Q4'06 - http://www.lightreading.com/do...

slheinlein
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slheinlein,
User Rank: Light Beer
12/5/2012 | 3:33:53 PM
re: Carrier Scorecard: Broadband Blues
On the broadband adds, the table shows ATT adding 2,370,000 subscribers in Q1 '07. Should this be 237,000 instead?
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