AT&T's Web strategy may fall short

Hurdle: Attracting new customers for high speed

Crayton Harrison, Bloomberg News

Published October 23, 2007 at midnight

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AT&T Inc.'s strategy of selling high-speed Internet connections to temper a loss of fixed-line telephone customers may be faltering as new Web subscribers become harder to sign up.

AT&T, the biggest U.S. phone company and the top seller of broadband Web service, may say growth in Internet customers slowed to 17 percent in the third quarter from 24 percent in the year that ended in December, UBS AG analyst John Hodulik said.

Competition between telephone and cable companies has pushed high-speed Internet service into more than half of U.S. homes. AT&T Chief Executive Officer Randall Stephenson and competitors may have to offer more deals to add the customers who have resisted so far, Hodulik said.

"Penetration has gotten up there," said New York-based Hodulik, Institutional Investor magazine's top-ranked telecommunication-services analyst. "To get those incremental customers, I think prices are going to come down."

The top six publicly traded broadband Internet providers in the U.S. all fell short of analysts' estimates for new subscribers in the second quarter. San Antonio-based AT&T may say the trend continued in the third quarter when it reports earnings today.

AT&T may post a 47 percent increase in third-quarter profit, to $3.18 billion, or 48 cents a share, helped by the purchase of BellSouth Corp. and service for wireless phones such as Apple Inc.'s iPhone, according to the average estimate of eight analysts surveyed by Bloomberg. Sales probably almost doubled to $30.1 billion. AT&T reports results before trading opens.

AT&T spokesman Fletcher Cook declined to comment.

The fight for Web users has intensified as phone companies AT&T and Verizon Communications Inc. battle cable providers Comcast Corp. and Time Warner Cable Inc. for the same customers with packages of phone, Internet and television services.

AT&T gets $3.8 billion a year in sales from the consumer high-speed Internet business alone, 3.2 percent of its revenue, UBS estimates. While still a small slice of revenue, offering high-speed Internet helps court customers who want all their services from one place. Web subscribers also are less likely to shut off residential phone service offered in the package, analysts said.

AT&T lost 306,000 residential lines in the second quarter, while Comcast added 671,000 phone users. Excluding the BellSouth connections gained at the end of the year, AT&T lost 1.38 million residential phone lines in 2006. About 35 percent of AT&T's home phone lines also had its broadband service at the end of June, up from 27.8 percent one year earlier.

Once half the market has adopted a new technology, growth slows as companies try to lure the more reluctant half, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York. He estimates that 53 percent of U.S. homes have high-speed Internet connections.

Consumers will increasingly prefer cable modem connections because the technology offers higher speeds than AT&T's digital subscriber line, or DSL, service, he said.

AT&T's growth in high-speed Internet customers is cooling faster than Comcast's. AT&T had 13.2 million DSL subscriptions at the end of June, a 20 percent increase from the year before, down 4 percentage points from the growth rate at the end of December.

Philadelphia-based Comcast, the top cable provider and No. 2 in high-speed Internet hookups, had 12.4 million Internet customers, an 18 percent gain. That was down just 1 point from the end of 2006. Comcast, led by CEO Brian Roberts, reports results Oct. 25.

As demand subsides, investors will find AT&T and Verizon "are unmistakably losing share to cable," said Moffett, who rates AT&T shares "market perform" and doesn't own any.

Comcast spokesman John Demming declined to comment.

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