AT&T, Verizon Video Offsets Voice Losses
At some point, AT&T and Verizon will find that their video entertainment services “stabilize” consumer segment revenue, say John Culver and Michael Weaver, Fitch Ratings analysts.
That point hasn’t been reached yet as the scale both service providers need, in terms of completed builds and active marketing, is not yet in place.
Still, it is a sobering observation most IPTV providers already would agree with. About the best one can hope for with new video entertainment revenues is to stabilize revenues lost from shrinking voice lines.
That’s a daunting realization, considering that AT&T quantified its in-region video entertainment opportunity as $35 billion worth of annual revenues, while Verizon says its opportunity is $20 billion a year.
Assume each of them achieves a 30-percent market capture rate. That would suggest $10.5 billion worth of annual revenue for AT&T and $6 billion annually for Verizon.
Assuming it primarily is competition from cable operators that is causing line loss, and further assuming the cable operators have achieved half of all the gains they ultimately will in the mass market for wired voice, and then making the assumption that video revenue ultimately replaces most of the lost voice revenue, then AT&T is looking at a loss of another $5 billion or so of annual consumer voice revenues while Verizon is looking at something on the order of $3 billion a year worth of further consumer voice losses.
In the market share battle between cable and telcos, cable jumped out first. AT&T and Verizon did not begin to register video subscriber gains until 2007, where cable companies had been poaching voice customers since 2005 and earlier, in the case of Cox Communications.
For AT&T and Verizon, though, the tactical importance of new services has changed. Up until roughly 2006, revenue declines from primary consumer access-line losses and other voice services were at least partly offset by solid growth in high-speed data services revenue, as well as revenues from long distance and enhanced services, not to mention wireless.
But the high-speed access market is nearing saturation. Beginning in 2006 for Verizon and in 2007 for AT&T, growth in revenues from video services in turn started to offset some of the effects of slowing revenue growth from high-speed data services.
Over the past couple of years, AT&T has demonstrated a more stable consumer revenue stream than Verizon, the Fitch analysts note. On the other hand, while Verizon had experienced greater declines in 2006, beginning in 2007 the company has been more successful in generating consumer revenue growth even while primary residential access-line losses remained high.
Both companies have been growing average revenue per subscriber, which has generally offset the effect of primary consumer access-line declines on consumer revenue.
Verizon is ahead of AT&T at this point in terms of deploying its network, and this is demonstrated by the growth Verizon has experienced in its legacy consumer business (excluding the mass market operations of the former MCI) beginning in 2007, the analysts say.
Quarterly revenues in the consumer business grew on a year-over-year basis for each quarter in 2007, and in the first quarter of 2008. ARPU for Verizon has also shown robust growth.
As a result, Fitch believes Verizon’s success so far indicates that as AT&T scales its network, its prospects for a strengthening of its consumer revenue base will improve as well.
In 2008, Fitch expects growing revenues from video services to enable AT&T and Verizon to sustain relatively stable consumer revenues.
Fitch believes in the longer term and in a moderately growing economy, Verizon and AT&T could return to a moderate level of consumer revenue growth, with the growth supported by video
service revenue and better access-line-retention rates.
AT&T’s Project Lightspeed (the service is branded as U-verse) features a fiber-to-the-node network architecture similar in physical topology to a cable hybrid fiber coax network, at least in its use of fiber as the trunk network and copper media as the access.
AT&T expects to pass 30 million homes with its FTTN network by the end of 2010. By that point, the network is expected to cover approximately one-half of the living units in AT&T’s service territory and pass one-third of businesses.
At the end of the first quarter of 2008, the network passed more than nine million living units, so AT&T still has some ways to go.
In deploying the FTTN network, AT&T drives fiber to nodes, which serve 300 to 500 households. On average, fiber is brought to within 3,000 feet of the home, or 5,000 feet maximum, and existing copper plant is used between the node and the home.
The network delivers approximately 20 megabits per second to 25 Mbps of capacity to the home, which provides for up to 6 Mbps high-speed data services, one stream of high definition television, voice using VoIP, video on demand, and three streams of digital TV, for a total of four streams of television.
In the future, AT&T expects to use pair-bonding to increase the potential throughput of the network, so that up to four HDTV streams can be provided, and up to 10 Mbps high-speed data service can be offered.
U-verse penetration rates have exceeded 10 percent in certain markets, even though the company has been offering service for less than 12 months.
At the end of the first quarter 2008, AT&T was operating in 43 markets. They are ramping to 40,000 weekly installations by the end of 2008, and are targeting more than one million additional homes in service by the end of 2008.
AT&T also has something like 2.2 million satellite video customers as well.
Verizon, on the other hand, is much further along with its FiOS network, expected to pass 18 million homes, or more than one-half the homes in its service territory, by 2010. By the end of the first quarter of 2008, the company passed 10.4 million homes and is adding dwellings at a three-million annual rate.
At the end of the first quarter of 2008, Verizon’s penetration rate for video services was approximately 18.7 percent, based on 1,206,000 subscribers in markets where there were 6.5 million homes open for sale, out of the 10.4 million passed.
That’s an increase from the 11 percent penetration rate Verizon had in the same quarter of 2007.
By 2010, Verizon’s goal is for video penetration rates to be in the range of 20 percent to 25 percent of homes where FiOS is available. But that could be conservative. Verizon already has seen penetration rates of more than 40 percent in some of its markets.
At the end of the first quarter Verizon also had some 948,000 satellite video customers as well.
Separately, Verizon penetration of FiOS high-speed data services was nearly 23 percent at the end of the first quarter of 2008, compared with 16 percent at the end of the previous year’s quarter.
Some of the initial markets are in the 30 percent to more than 40 percent penetration range. The 2010 goal is to reach a penetration rate of high-speed data services of 35 percent to 40 percent of homes passed by the FiOS network.
The Fitch analysts think Verizon can do that.
It is too early to determine whether the choice of access architecture has any meaningful impact on adoption rates of new services. But it is hard not to be impressed by what Verizon has been able to achieve. IP
