DSL's Worst Quarter Ever

The trumpeting of video subscriber gains by AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) in the second quarter amounts to little more than putting lipstick on a pig. (See AT&T Hits 550K IPTV Subs and Verizon Hits 2M FiOS Subs.)

Behind the glossy video veneer, the residential business of the top two U.S. telcos continues to hemorrhage. Indeed, the companies posted their worst quarter ever for DSL subscriber additions. ("Ever" in this context is defined to include the period of time since these companies began ramping their DSL deployments in the second half of 1999).

The depth of the DSL decline at AT&T and Verizon is astounding. Between the two of them, these companies actually lost 87,000 DSL customers in the second quarter of 2008. That negative number is not a typo. During the same quarter a year ago, AT&T and Verizon added a combined 485,000 DSL customers. The 2008 second quarter breakout was 46,000 DSL additions for AT&T and a decline of 133,000 at Verizon. That compares to 400,000 DSL net adds by AT&T and 85,000 by Verizon during the same period a year ago.

While the troubled economy is undoubtedly a key factor, so is the inferiority of the DSL offering to cable modem service. The largest U.S. MSOs will be reporting their second quarter results in the coming weeks. [Ed note: Comcast Corp. (Nasdaq: CMCSA, CMCSK) will report its numbers bright and early Wednesday morning.]

Look for seasonal and macroeconomic-driven weaknesses to show in cable's broadband Internet results, too, but also evidence that the price and performance of cable's high-speed offering is crushing DSL in the marketplace.

This is a big problem for AT&T and Verizon, because the majority of their combined footprint will be serviced via DSL for years to come.

Despite the pizazz of video, broadband data services offer far better operating margins, and that business appears to be increasingly at risk.

Verizon did add 187,000 FiOS Internet customers in the second quarter of 2008, resulting in 54,000 net broadband additions for the company. The cup is half empty, though. FiOS is now marketed to less than a third of Verizon's 33 million homes passed. By the end of 2010, FiOS will only cover 54 percent of Verizon's total footprint. In other words, today, two out of three Verizon homes are vulnerable to cable assault and that figure only improves to a little more than one out of two in two years.

For AT&T's part, U-verse is expanding and may well reach 18 million homes by the end of this year -- more than half of the company's footprint. But even with video, 100 percent of its network will be DSL-based, exposing its entire broadband customer base to cable cannibalization.

If the DSL woes at Verizon and AT&T weren't enough, their residential wireline telephone businesses are faring even worse. AT&T's residential primary line customer total dipped below the 30 million mark, to 29.3 million, at the end of the second quarter of 2008. That's down 8.7 percent from 32.1 million at the end of second quarter of 2007.

Verizon fared even worse as its wireline phone customer total dropped 11.4 percent year-over-year, from 25.3 million at the end of second quarter of 2007, to 22.4 million at the end of its corresponding period in 2008.

The bright spot at both AT&T and Verizon continues to be wireless, of course. Verizon added 1.5 million wireless customers in the second quarter to bring its total 68.7 million. AT&T added 1.3 million in the quarter, extending its total to 72.9 million. Each company generated more than $10 billion in wireless service revenue in the second quarter.

— Michael Harris, Chief Analyst, Cable Digital News

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