Cutting the Cable Cord and Getting 'Phone TV'
Verizon and AT&T Experiment With Delivery Outside Traditional Cable-TV Bundle.
The way things are going, the term "cable TV" may have to be replaced by "phone TV."
Nearly a decade after Verizon Communications Inc. VZ +0.49% Verizon Communications Inc. U.S.: NYSE $ 50.73 +0.24 +0.49% Nov. 4, 2013 11:08 am Volume (Delayed 15m) : 2.18M P/E Ratio 66.87 Market Cap $144.49 Billion Dividend Yield 4.17% Rev. per Employee $651,745 11/03/13 NSA Cloud Could Give AT&T Cove... 11/01/13 Telecoms Selling TV Have Bigge... 10/30/13 Comcast's Revenue Falls Withou... More quote details and news » and AT&T Inc. T +0.08% AT&T Inc. U.S.: NYSE $ 36.27 +0.03 +0.08% Nov. 4, 2013 11:08 am Volume (Delayed 15m) : 5.68M P/E Ratio 25.54 Market Cap $191.35 Billion Dividend Yield 4.96% Rev. per Employee $531,527 11/01/13 Telecoms Selling TV Have Bigge... 10/30/13 Comcast's Revenue Falls Withou... 10/30/13 NSA Fallout Hurts AT&T's Ambit... More quote details and news » began building pipelines to carry TV service to U.S. homes, they are nearing the market share of cable operators in areas where they operate, according to third-quarter results released by cable and phone companies in recent days. The top two cable providers, Comcast Corp. CMCSA -0.99% Comcast Corp. Cl A U.S.: Nasdaq $ 48.16 -0.48 -0.99% Nov. 4, 2013 11:08 am Volume (Delayed 15m) : 1.71M P/E Ratio 19.72 Market Cap $127.02 Billion Dividend Yield 1.62% Rev. per Employee $493,550 11/01/13 Telecoms Selling TV Have Bigge... 10/31/13 Animation Studio Tries for a H... 10/30/13 Comcast's Revenue Falls Withou... More quote details and news » and Time Warner Cable Inc., TWC -1.54% Time Warner Cable Inc. U.S.: NYSE $ 121.61 -1.90 -1.54% Nov. 4, 2013 11:08 am Volume (Delayed 15m) : 1.24M P/E Ratio 18.59 Market Cap $34.82 Billion Dividend Yield 2.13% Rev. per Employee $431,922 11/01/13 Telecoms Selling TV Have Bigge... 10/31/13 Time Warner Cable Earnings: Su... 10/20/13 East Coast Internet Traffic Is... More quote details and news » shed 435,000 video customers in the quarter, while AT&T and Verizon added 400,000.
The growth of telecom's share of the TV business could have a significant impact on the television industry. Both phone companies have shown a greater willingness than their cable rivals to experiment with delivering movies and TV programming over the Internet outside the traditional pay-TV bundle.
AT&T and Verizon are now the fifth and sixth biggest pay-TV providers in the U.S. after Comcast and Time Warner Cable and the two satellite-TV companies, DirecTV and Dish Network Corp. The phone companies account for only about 10% of the pay-TV market, compared with 55% for cable, according to MoffettNathanson LLC, but that is largely because phone companies don't offer service everywhere cable does.
In the markets where they do operate, Verizon isn't far behind cable: FiOS has signed up 35% of the households where it offers its service, compared with 40.3% for Comcast and 38.9% for Time Warner Cable. AT&T's average is much lower, but it has become much more aggressive lately, launching a $6 billion investment in its wireline operations last year that includes extending the reach of its TV service.
The AT&T effort has had a noticeable impact on cable operators recently. In their earnings reports this week, Time Warner Cable and Comcast both reported greater-than-expected video-subscriber losses over a period that AT&T said was its second best quarter ever in television. Both cable operators attributed their weaker performance at least in part to telephone competition, though Time Warner Cable's summer fight with CBS was also a major cause of its shortfall.
The third-quarter results are a reminder that the biggest threat facing the cable industry is competition from phone companies, despite worries about consumers disconnecting to adopt cheaper online options, says MoffettNathanson analyst Craig Moffett.
Some cable executives say their industry needs to compete better. "When I first got this job 12 years ago, I think the cable industry as a whole, including our company, was in denial that we had real, viable competition," said Time Warner Cable Chief Executive Glenn Britt on a conference call Thursday.
Time Warner Cable and Comcast reported video-subscriber losses over a period AT&T said was solid in TV. Bloomberg News
"I still hear some of my peers saying dismissive things about our competitors, and certainly each of them has strengths and weakness, just as we do. However, they are around to stay, and we need to keep getting better at competing."
The phone companies are following in the footsteps of DirecTV and Dish, which started eating into cable's monopoly position in pay television in the 1990s. But the satellite-TV firms, unable to offer competitive broadband services, face greater challenges now that broadband has become a crucial product for TV providers to sell.
Both Verizon and AT&T jumped into television in the mid-2000s, looking to offset a steady erosion of their landline phone business to wireless and cable. Initially at least, Verizon made a bigger commitment. Starting in 2004, it launched a $23 billion investment plan to build an all-fiber network called FiOS, offering customers a bundle of phone, Internet and TV.
After years of criticism about the returns FiOS could generate, Verizon slowed its FiOS expansion to concentrate on signing up more subscribers in its existing markets. Working in its favor: FiOS's ability to easily increase the speed of its Internet service as cable operators scramble to catch up.
Meanwhile, AT&T, which launched U-verse using a cheaper technology that combines fiber-optic and copper wire, has signed up an average of 21% of the potential subscribers with access to U-verse, the company says. And in particularly mature markets like Texas, that share is in the 30s. Under the investment plan it announced last November, AT&T expects to extend the availability of U-verse by 7.5 million homes, to a total of 33 million by the end of 2015.
"It is going to be a dogfight between us and cable for the next 20 years," said AT&T Chief Executive Randall Stephenson in September. "They will invest, and they will step up. We will invest. It will go back and forth."
Cable executives and analysts say AT&T and Verizon have largely won share using discounted pricing and promotional packages. ISI Group Inc., a Wall Street research firm, noted that U-Verse has been going after "low-hanging fruit in new markets," offering low-price bundles of TV, slow-speed Internet and limited phone minutes. ISI also said FiOS was offering "aggressively priced bundles," including $100 gift cards. Company spokesmen disputed those claims, asserting that customers are leaving cable for more than just price benefits.
Cable operators aren't sitting still. Comcast has increased investment in on-demand services and new technology, marketing its souped-up Internet-connected set-top box and guide dubbed the "X1" to draw new customers. Meanwhile, Time Warner Cable executives said on a conference call Thursday that they will market their broadband service at a discounted price to the 4.5 million households in their service area that still use the relatively slow DSL Internet services offered by phone companies.
The growing might of the phone giants could eventually feed a shift of TV viewers to Web-based services. Phone companies' public statements and other actions suggest they're more focused on offering strong broadband products and more willing to experiment with streaming services outside of traditional pay TV than the cable industry.
In an interview Wednesday, Lori Lee, AT&T's senior executive vice president of Home Solutions, which includes U-verse, made clear the company was agnostic about what form television takes, whether traditional or Web-based "over the top" options like Netflix Inc.
"We are well positioned in the video space no matter how the model evolves, whether it becomes more over the top or stays linear," said Ms Lee. "We understand that over the top is an important trend in the market, and we intend to work to participate in that."
Both Verizon and AT&T have taken steps to offer video-streaming services more aggressively than cable operators. Verizon, for instance, struck a deal with Outerwall Inc.s Redbox to create a streaming, subscription-video service available to anyone. AT&T has talked to startup video-streaming service Aereo Inc. about possible partnerships, including bundling its service on broadband. AT&T also made an unsuccessful bid for the video-streaming service Hulu LLC in partnership with entertainment veteran Peter Chernin.
