AT&T lost 649,000 DSL customers in three months.

AT&T’s broadband customers are taking their business elsewhere as second quarter results show the phone company lost 649,000 DSL customers in the last three months, while only picking up 553,000 new U-verse Internet users to replace those leaving. The result was a net loss of nearly 100,000 broadband customers in a single quarter. The company also only managed to attract 155,000 new U-verse television customers away from satellite or cable operators during the quarter.

AT&T blames the losses on “seasonality” — code language for part-time residents, college students, and other fluctuations that occur as customers come and go. Total broadband connections dropped 0.2% for AT&T, with 16.43 million remaining customers.

Landline customers also continue to depart AT&T in droves. More than one million home phone customers pulled the plug on AT&T this quarter. AT&T has lost nearly 11 percent of their landline customers over the past year.

For those remaining, a combination of rate increases, cost cutting and fierce marketing of bundled packages of services are keeping revenue growing on both the residential and business side.

AT&T is getting closer to announcing a “rural landline solution,” which some analysts predict will be the company’s exit from the rural landline business.

Executives continue to hint the company is reviewing its future in the rural landline business. AT&T lobbyists have shepherded new laws in several states that would allow them to abandon rural landline customers where the company is no longer required to be “the carrier of last resort.”

AT&T U-verse is turning out to be not much of a threat to cable and satellite operators, only achieving a 17.3% penetration rate in areas where the service is available.

The real money for AT&T is being made in the wireless sector, where increasing prices, changes to service packages, and data usage-based billing are all paying off  — revenue for wireless data alone is up 18.8% to $1 billion during the second quarter. AT&T earned $14.3 billion from its wireless business in just the second quarter alone.

At the same time, the company is slashing investments in parts of its network and cutting employees.

Capital expenditures in the second quarter amounted to $4.48 billion, down 15% from the $5.27 billion AT&T spent a year ago. AT&T also cut its workforce by 6.4% since June 2011, with a reported 242,380 total remaining employees.

Despite the company’s talking points, AT&T’s upgrade fee is designed to slow down customers considering upgrading their smartphones.

In other highlights:

• Wall Street analysts are praising AT&T’s stricter upgrade policies and device upgrade fees. In fact, at least one analyst wants to see AT&T raise the fee to $50 for every phone upgrade. The fees discourage customers from upgrading their phones, which dramatically reduces AT&T’s costs. AT&T subsidizes phones for customers. The longer customers hold off from upgrading, the more revenue AT&T keeps for themselves and shareholders. AT&T has made it clear it will continue to “introduce discipline”  in the handset market to enforce “rational pricing,” which means customers will continue to see further reductions in device subsidies and face higher prices when upgrading phones.
• Much of AT&T’s investment will be in its LTE 4G network. AT&T’s spending on wireline services including U-verse is on the decline.
• AT&T admitted its policy of monetizing data usage for profit is well underway: “[We are getting] ourselves set up for revenues that are going to be tied to usage, which will then be tied to our capital requirements and a really profitable situation.”
• AT&T is aggressively pushing customers to upgrade to smartphones so they can earn additional revenue. “Smartphone subscribers now number 43 million and make [up] 62% of our total postpaid base. But smartphones accounted for 77% of postpaid sales during the quarter, showing continuing opportunity for growth. And when you look at our total smartphone base, we’ve added 9 million high-value smartphone customers in just the last 12 months.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/ATT 2Q2012 Results.flv[/flv]

AT&T spins its 2nd Quarter results for shareholders in the best possible light. Although revenues are up, the number of customers leaving AT&T for other providers may challenge future growth and earnings. (4 minutes)

Won first place nationally for the best 4G LTE network with the fastest overall speeds and best performance.

PC Magazine went to a lot of effort to test the data speeds of America’s wireless providers, traveling to 30 U.S. cities sampling both 3G and 4G wireless networks to see which carrier delivers the most consistent and fastest results.

After 240,000 lines of test data, the magazine declared the results a bit “muddy.”

They have a point.

Depending on which carrier’s flavor of “4G” is being utilized, where reception was strongest, how much spectrum was available in each tested city, and how many people were sharing the cell tower at the time of each test, PC Magazine was able to deliver the definitive results. And it was effectively a draw.

Verizon Wireless achieved victory in 19 cities, AT&T won in ten others, and T-Mobile came in pretty close behind, and that carrier does not even operate an LTE 4G network. But taking all factors into account, including upload and download speeds, whether or not test downloads actually completed, and whether streamed media was tolerable, Verizon Wireless won first prize nationwide.

But by how much?

Not enough to matter, if you are using Verizon, AT&T, or T-Mobile.

But the results do offer some things to think about.

1. MetroPCS is a mess. Despite the fact this smaller carrier is building its own 4G LTE network, results were simply terrible. Either its backhaul network from cell towers offers lower capacity or its backbone network is screaming for an upgrade.
2. Cricket was not willing to participate in the test. Their network, still 3G, delivers dependably “meh” results in the places where they actually provide coverage. The company has been reducing data allowances on their mobile broadband plans and raising prices on others. In one conference call with investors, company executives admitted they have been losing mobile broadband customers and expect that to continue at the prices they are charging.
3. Sprint needs their forthcoming 4G LTE network more than ever. Their 3G data service turned in mediocre results and their 4G WiMAX network was yesterday’s news a year ago. Sprint’s 3G network is also notorious for dead-end downloads, a situation I have witnessed on friends’ phones for several months.
4. Verizon Wireless remains far ahead of AT&T in covering more cities with their 4G LTE network. But more customers are also starting to use Verizon’s newer network, and the more customers piling on, the slower the speeds get for everyone. AT&T turned in some superior speed results in several cities, but those networks are often used less than the competition, for now.
5. No network is good if you cannot afford to use it. As America’s wireless carriers keep raising prices and reducing usage allowances to keep data usage under control, there will be a breaking point where customers decide the money they spend for wireless data just is not worth it, especially if they live in a place where Wi-Fi is free and easy to find.
6. What you test today will probably be different tomorrow. Wireless networks are constantly evolving and changing, with a wide range of factors contributing to their overall performance. Perhaps a more useful test would have been measuring how wireless carriers respond when their networks need upgrading and how long it takes them to respond to changing usage patterns. Verizon seems particularly aggressive, AT&T less so based on these results. The real surprise seems to be how well T-Mobile’s older technology is performing, and how quickly Sprint is now falling behind. On Cricket and MetroPCS, “you get what you pay for” seems to apply.

Despite repeated provider claims that usage-based billing will save customers money on their broadband bill, new evidence shows the exact opposite is true. Broadband prices for metered broadband across Canada are rising, not falling, and now outpace pricing in the United States.

The reason for more costly broadband? Internet Overcharging schemes like usage caps, overlimit fees, and so-called usage billing, which providers have uniformly implemented on both wired and wireless broadband in most parts of the country.

A new study from PricewaterhouseCoopers finds Canadian consumers now pay 3.9% more for broadband than American consumers do, and prices are expected to increase another 9% by 2016 — from the average $38.43 paid last year to $45 for usage-capped broadband.

Usage billing has been profitable to Canadian providers like Rogers and Bell, with broadband revenues up 17.5% last year as consumers adopted higher priced plans to accommodate their monthly usage.

Canadian providers have also systematically reduced or “re-tiered” usage allowances, engineering service upgrades for customers trying to avoid costly overlimit fees.

“Canada’s broadband fees were lower than those in the United States in 2007-09, but as a result of large increases during the past two years, the average Canadian broadband subscriber paid more in 2011 than the average U.S. subscriber did,” says the report.

Bandwidth caps have allowed Canadian providers to now charge premiums to high bandwidth users, according to the report. Rising use among all broadband customers “should continue to put upward pressure on pricing.”

In the United States, providers are having a more difficult time implementing similar usage caps and overlimit fees, primarily because of consumer-organized backlash.

Despite claims from some of their competitors that customers don’t want or need super-fast broadband, Verizon Communications is taking broadband speeds to the new level, upgrading service to as high as 300Mbps in selected areas.

Our friends at Broadband Reports had the scoop on this a few weeks ago, but now it’s official: speed -and- price increases for Verizon are on the way for the company’s fiber optic network FiOS.

Many customers will see their broadband speeds double or more in June. At the same time, the company has been sending out letters informing customers of price increases, often $5 a month for those not locked into service contracts.

Verizon's Speed Upgrade Chart (Courtesy: Broadband Reports)

Verizon’s new top tier of 300/65Mbps will be introduced in areas that have Verizon’s Gigabit Passive Optical Network (GPON). Pricing has not yet been announced.

The company is targeting its speed upgrades to premium broadband customers who subscribe to faster tiers. Customers on Verizon’s standard 15/5Mbps tier will see no changes in service.

While a downturn economy continues to afflict middle and lower income America, it doesn’t seem to be doing much harm to Time Warner Cable’s profits.

America’s second largest cable operator saw profits jump more than $150 million higher to $564 million last quarter, compared to $392 million at the same time the year before.  Time Warner’s revenue grew by 4% to $5 billion in the fourth quarter alone.  In fact, the company is performing so well, executives announced they would return $3.3 billion in earnings to shareholders through share buybacks and dividend payouts, in addition to the forthcoming $4 billion share repurchase program.  Wall Street liked what they saw, boosting shares 7% after the company posted its quarterly and annual results on its website.

Time Warner’s biggest success story remains its broadband service, which consistently delivers the company new subscribers and has helped offset the loss of video subscribers, numbered at an additional 129,000 who “cut the cord” in the fourth quarter of 2011.

Time Warner Cable earned $1.148 billion in revenue from broadband in the last quarter, an increase of 8.6% over last year.  For 2011, the cable operator earned $4.476 billion selling residential Internet access, also representing an 8.6% growth rate over earnings across 2010.

The company attributed this to “growth in high-speed data subscribers and increases in average revenues per subscriber (due to both price increases and a greater percentage of subscribers purchasing higher-priced tiers of service).”

The increased costs incurred by Time Warner Cable to upgrade and expand their network and cable systems were well offset by the aforementioned price increases and subscriber upgrades.  The company increased capital expenditures to $942 million in the last quarter.  Results over the full year show just a 0.2% overall increase in capital investment, now at $2.937 billion.  System upgrades, Time Warner’s plans to move their systems to all-digital cable television, the ongoing rollout of DOCSIS 3.0, new home security and automation services, and investment in online video and data centers are included in these costs. But a more significant reason for the increase comes from the company’s ongoing expansion into business services, which requires wiring more office buildings for cable.

Britt

Time Warner Cable CEO Glenn Britt led off the conference call with investors with an explanation for the increased expenses.

“We plan to continue our aggressive growth in business services by expanding product offerings, growing our sales force, improving productivity and increasing our serviceable footprint. This means continued investment, both in people and in capital,” Britt said. “Projects include expansion of our content delivery network, which powers our IP video capability, our 2 international headends, completion of DOCSIS 3.0 deployment, and conversion to all-digital in more cities. We expect to be able to accomplish this while maintaining the capital spending of the last 2 years — that is, between $2.9 billion and $3 billion, which represents a continued decline in capital intensity.”

Nothing in Time Warner Cable’s financial disclosures provides any evidence to justify significant changes in their pricing model for broadband, which currently delivers flat rate, unlimited service to customers at different speed rates and price points.  In fact, the company’s investments in DOCSIS 3.0 upgrades, which can support faster broadband speeds and a more even customer experience, have already paid off with subscriber upgrades.

Robert D. Marcus, president and chief operating officer, noted subscribers are increasingly considering faster (and more profitable) broadband tiers.

“Once again, high-speed data net adds over-indexed to our higher-speed tiers,” Marcus noted. “Roughly 3/4 of residential broadband net adds were Turbo or higher. And DOCSIS 3.0 net adds accelerated for the eighth consecutive quarter to an all-time high of 54,000.”

Time Warner’s biggest challenges continue to be the current state of the economy, which has made subscribers much more sensitive to pricing and rate increases, and cord cutting traditional cable television service.

“One group is extremely price-conscious, perhaps due in part to the ongoing economic malaise,” Britt said. “The other group is willing and able to pay for more features and service. We’re going to focus more attention on products and services that best meet each group’s needs rather than pursuing traditional one-size-fits-all solutions.”

That is clearly evident in the company’s bundled service options, including increasingly aggressive discounted pricing for new customers and for those threatening to leave and Time Warner’s super-premium Signature Home service, which delivers super-profits.  Average revenue from Signature Home customers averages $230 a month.  Traditional “triple play” customers who buy phone, Internet, and cable service only bring the cable company an average of $150 a month.

The company’s plans for 2012 do not include a specific statement about implementing an Internet Overcharging scheme like usage billing or usage caps.  But it is unlikely such an announcement would be made explicitly at an earnings announcement.  In the last quarter, Stop the Cap! reported comments from chief financial officer Irene Esteves that the company was still very interested in the concept of selling broadband with usage pricing as a “wonderful hedge” against cord-cutting.

Esteves told a UBS conference she believes usage-based pricing for Time Warner Cable broadband will become a reality sooner or later.  Charging “heavy users” more would already be familiar to consumers used to paying higher prices for heavy use of other services, and she claimed light users would have the option of paying less.

But despite favorable reception to the idea of usage pricing by Wall Street, Esteves acknowledged the company’s past experiments in usage pricing didn’t go as planned, and she suggested the company will introduce usage pricing “the right way rather than quickly.”

Other developments and highlights

• 

  Time Warner faces Verizon's $500 rebate offers in NY City

  Time Warner Beats Up DSL: Time Warner Cable’s most lucrative source for new broadband customers comes at the expense of phone companies still relying on DSL to deliver broadband service.  As DSL speeds have failed to stay competitive with cable broadband, the cable operator has successfully lured price-sensitive DSL customers with attractive ongoing price promotions delivering a year of standard 10/1Mbps cable Internet access for $29.99 a month, often less expensive than the total price of DSL service that frequently delivers slower speeds.

• Stalled Verizon FiOS deployment has limited the amount of competition Time Warner faces from fiber optics to just 12% of the company’s service area.  Where competition does exist, especially in New York State, Time Warner has had to stay aggressive to retain customers with deeply-discounted retention deals to keep up with Verizon’s high value rebate gift cards and new customer offers.  AT&T now provides U-verse competition in about 25% of Time Warner’s service area, but like satellite, AT&T U-verse pricing is less heavily discounted.
• Retention pricing and new customer deals deliver lower prices than ever.  In November, Time Warner started selling a triple play offer for $89.99 a month that includes DVR service and now also includes deep discounts or free 90 day trials of premium movie channels. That is $10 less than the same time last year.
• Premium movie channels continue to take a major hit as subscribers try to reduce their bills, especially after Time Warner began increasing rates on those networks.  HBO now sells for as much as $15 a month in many areas.  Time Warner Cable hopes to ‘revitalize’ premium movie channels with online video services like HBO and Max Go and promotional discounts.
• Long-standing customers of Time Warner’s “triple play” package received a “thank-you gift” — free voice-mail in 2011, something that will continue in 2012.
• Customers signing up for Time Warner’s premium-priced Wideband (50/5Mbps) service ($99/month) are being offered free phone service to sweeten the deal.

What to Expect in 2012

• Time Warner is moving forward to create its own Regional Sports Network for southern California;
• Los Angeles will continue to see large-scale expansion of Time Warner’s growing Wi-Fi network, available for free to premium broadband customers, with thousands of new access points on the way;
• The cable company will introduce Wi-Fi service in other, yet-to-be-announced cities in 2012, with up to 10,000 access points planned.
• Time Warner will be making its “digital phone” product more attractive with lower prices and more features, especially in product bundles, as consumers increasingly discard landlines;
• Expect to see the end of analog cable television in a growing number of Time Warner Cable areas, requiring customers to use new equipment (initially provided free) to continue watching on older televisions and those without existing set top boxes.
• Time Warner will continue to expand its “TV Everywhere” project to include live streaming TV on smartphones, video game consoles, computers, and more.  On-demand programming will be available as well sometime this year across all platforms.
• A nationwide channel re-alignment will move subscribers to consistent channel numbers across the country, in part based on grouping them together into “genres.”  Many areas already have digital cable channels arranged this way, but now they will be consistent from coast-to-coast.
• Time Warner will complete DOCSIS 3 deployment in all areas this year.
• The company is moving to introduce 2-hour service call windows almost everywhere, and 1-hour windows and weekend appointments in some markets.  Several cities now allow customers to select specific times for service appointments.
• Self-install kits will become increasingly available for different products, allowing customers to install equipment themselves;
• Time Warner’s IntelligentHome home security, monitoring, and automation product will expand beyond its launch markets (Syracuse and Rochester, N.Y., Charlotte, N.C. and Los Angeles/Southern Calif.).  The product currently has customers in the thousands, considered relatively small.  But Time Warner has learned subscribers are using the service in surprising ways, which will let them adapt their marketing.  Among the most popular features: remotely watching your pets at home.

Most Memorable Quote: “I think, more than anything else, our pricing strategy is dictated by what the marketplace will bear as opposed to what our underlying cost structure is.” — Robert Marcus, president and chief operating officer, Time Warner Cable