Telcos pick up pace of video expansion

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NEW YORK -- Top U.S. telecom carriers are attracting more subscribers to their nascent video services, with Verizon Communications Inc. finally gaining a critical mass to compete against cable rivals.

While still losing customers to cable companies -- which made a head start in offering all-in-one "bundles" of video, Internet and phone services -- AT&T Inc. and Verizon are fighting back, the latest quarterly earnings reports showed. Verizon added 167,000 subscribers to its FiOS TV service in the second quarter, taking the total to 515,000, according to its quarterly report on Monday. That compared with 141,000 additions in the first quarter and showed that the roll-out, which began in September 2005, was picking up momentum.

"They're gaining a critical mass of subscribers," said A.G. Edwards analyst Kent Custer, adding that investors were more supportive now of the high cost of the all-fiber-optic network that Verizon is building. "The proof is in the pudding now."

AT&T reported 51,000 U-verse video subscribers at the end of the second quarter, up from 13,000 three months earlier. That showed that the Internet-based service, which has lagged behind FiOS, was also gaining traction, analysts said.

In another encouraging sign, a survey released this week showed that 54% of consumers prefer to buy bundles from telecoms companies, compared to 44% choosing cable.

The survey of 1,200 households was conducted by CFI Group, which specializes in consumer and employee satisfaction surveys. CFI says it is an independent group but has previously done work for AT&T.

"The phone companies will be at a good place to win customers because they're perceived to have better customer service. That's one inference we can make from our study," said John Gilbert, a co-author of the report.

Service outages, long waits for repairs and installation, and poor call center help are problems found across all providers, but consumer angst is particularly strong among cable customers, Gilbert said.

Both phone companies need to succeed in video as they lose traditional landline subscribers to wireless services or to VoIP, which are digital phone services offered by cable operators as well as Web-based companies like Skype.

While AT&T and Verizon have wireless businesses, offering video entertainment along with Internet and voice services is seen as a key element of maintaining customer loyalty amid increasing competition from cable.

Bernstein Research analyst Craig Moffett said a weaker housing market had hurt cable subscriptions, but noted: "Adding to the headwind is the impact of Verizon."

He said cable companies had lost subscribers and a "majority of those lost subscribers have ... been absorbed by Verizon's 167,000 video net additions versus only 35,000 FiOS net additions last year."

However, with cable television subscribers totaling 65.6 million at the end of 2006, Moffett says companies like Comcast Corp. and Cablevision Systems Corp. are still at an advantage. Many analysts say it could take years for a meaningful shift in market share to phone companies.

Verizon has said it plans to spend $18 billion from 2004 through 2010 on FiOS. AT&T has said it would spend $6 billion to $6.5 billion on U-verse through end-2008, although it is due to update this forecast soon to include targets for BellSouth, which it acquired late last year.

Tuna Amobi, analyst at Standard & Poors, said Verizon's FiOS was "more of a medium to longer term issue" for New York-based Cablevision.

"I think the potential customers they could lose to Verizon over the next couple of years is way less than they're going to gain in terms of the phone," he said of Cablevision.

Some also say there will be some areas -- mostly rural -- where it is still too expensive for phone carriers to build fiber networks, which is why they are hanging on to partnerships with satellite television providers.

Shares in both AT&T and Verizon have risen around 30% from a year earlier. Analysts' recommendations on Verizon are almost evenly divided between "buy" or "hold" ratings, with few "sell" recommendations.

Most recommend a "buy" on AT&T shares, which are now trading at around 15 times 2007 earnings estimates compared to a multiple of 18 for Verizon, according to Reuters Estimates.
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