AT&T Cable Deal: Good for Gearmakers?
One theory holds that Comcast’s penchant for digital upgrades could spur investment in the AT&T portion of the newly expanded 22 million subscriber network. For the past year, AT&T Broadband has been sluggish to upgrade its network, as it prepared its cable division for one of two scenarios: a sale or an initial public offering. Comcast, on the other hand, has been aggressive in its digital upgrade, and the company has been a leader in the rollout of digital services.
In a note to investors this morning, Alan Bezoza, an analyst with CIBC World Markets said that he views the sale as very positive.
“We are enthusiastic to finally see an end to the AT&T Broadband 'soap opera' that has plagued our universe of cable equipment suppliers as infrastructure spending has been non-existent for over a year," he writes.
The main reason Bezoza is so bullish on the merger is that he sees big potential for the cable equipment market. AT&T Broadband is the largest cable operator in North America with roughly 15 million subscribers. But it lags behind its competitors in terms of the completion of its digital upgrade to a two-way 750 MHz plant. Bezoza says the company is about 61 percent upgraded to 750 MHz today.
But one big question remains: When will the company start spending? Opinions are mixed, and with the economy remaining sluggish, there may be little incentive for Comcast to speed up this process.
In his research note, Jason Ader, an analyst with Thomas Weisel Partners says he doesn’t expect spending on the AT&T Broadband network for at least another six to 12 months. This is how long it is expected for the deal to go through.
“In the short term, the deal will most likely be a negative for cable equipment vendors because it delays most new spending by AT&T Broadband for at least 6 months, if not 12 months,” he writes.
But CIBC's Bezoza thinks that the regulatory approval should be fairly smooth, and he anticipates spending for infrastructure to ramp up as soon as Q1 of 2002.
Regardless of when it happens, the bottom line is the combined Comcast and AT&T Broadband will eventually start spending on upgrades. It has already seen a deceleration in additions for new services such as digital services, cable telephony, and data.
Not all equipment companies selling into the market will benefit equally. For example, the company isn’t likely to spend much on edge routers from companies like Cisco Systems Inc. (Nasdaq: CSCO), Juniper Networks Inc. (Nasdaq: JNPR), or Riverstone Networks Inc. (Nasdaq: RSTN), that are used to aggregate data traffic from cable head-ends. Bezoza says that AT&T Broadband has already upgraded about 30 million of the 38 million homes in its network for data. But what isn’t in place yet is the bandwidth at the shared node level, he says.
Equipment companies that enable three major new services stand to benefit from the spending splurge whenever the spigot is turned on.
First, equipment suppliers that enable CATV transmission could be big winners as AT&T Broadband begins offering more interactive services. Companies that sell this equipment include Arris Group Inc. (Nasdaq: ARRS), C-COR.net (Nasdaq: CCBL), CommScope Inc. (NYSE: CTV), Harmonic Inc. (Nasdaq: HLIT), Motorola Inc. (NYSE: MOT), and Scientific-Atlanta Inc. (NYSE:SFA).
Video on demand is another service that will require the company to buy more equipment, according to Bezoza and Ader. Comcast has generally been much more aggressive in deploying video-on-demand services than AT&T Broadband. The company will likely go with suppliers already installing gear in the Comcast network, says Bezoza. These would include Concurrent Computer Corporation (Nasdaq:CCUR) and SeaChange International.
Cable telephony is also likely to be another hot area that will stimulate equipment purchases. It appears that Comcast is committed to deploying voice services to its current subscriber base. Comcast will probably expand on AT&T Broadband’s current circuit-switched footprint, but will likely await voice over IP (VOIP) standards to be completed next year before widescale deployments begin. VOIP players like ADC Telecommunications Inc. (Nasdaq: ADCT), Arris, and Motorola will probably benefit when deployments begin rolling out.
The market seems to agree with Ader’s assessment that benefits are further out for equipment companies. At the end of the day, Arris closed down 0.75 (6.81%) to 10.27, Harmonic was off 1.11 (8.77%) to 11.55, and Motorola was down 0.51 (3.24%) to 15.25.
— Marguerite Reardon, Senior Editor, Light Reading