AT&T Broadband Hikes Cable Rates

The Yankee Group reports that cable modem services will reach 66 percent of U.S. homes by year-end 2001, but AT&T Broadband will raise cable Internet fees in 2002. Could this be a harbinger of great gains for DSL providers?

ISP-Planet Staff [November 7, 2001]

AT&T Broadband, the dominant U.S. cable television company, said last week it would increase 2002 cable service rates by an average of 5.5 percent to offset its increased operating costs and the higher fees it pays for programming.

Declining profitability, along with a morose economic outlook and increased programming fees, forced AT&T Broadband to re-think what it charges for all aspects of cable connectivity and content.

AT&T Broadband said its programming costs in 2002 would increase by about 15 percent, with sports programming accounting for the largest portion of the cost increase.

Hike across America
The cable price-hike affects all standard cable customers and some "digital value'' customers. Total monthly rates vary by market, according to a company spokesperson. AT&T Broadband said the rate increase was necessary to cover its higher operating costs.

At press time, AT&T Broadband was only offering pricing for business services in six areas: Dallas, Denver, Florida, Massachusetts, Pittsburgh, and Richmond and the residential broadband website would not provide prices without a valid home address.

"Everyday costs such as putting gas in field trucks and paying competitive wages to customer care personnel and technicians have increased. AT&T Broadband also is paying higher fees to programmers for the rights to carry their content,'' the company said in a statement.

Cable operators report that they spend about $360 installing equipment to support a new broadband subscriber. Or course, costs drop significantly if cable companies can get new users to self-install cable modems. Comcast, which now sees more than one third of its new broadband customers install their own cable modems, said the adoption of self-installation can translate into millions of dollars of savings annually.

This cost consciousness comes as the company is weighing takeover offers from Comcast Corp. (NADAQ:CMCSK), among others. AT&T postponed plans to spin off its AT&T Broadband unit when Comcast made an unsolicited takeover offer initially valued at $44.5 billion.

AT&T (NYSE:T) said it aims to decide by the end of the year whether to sell or spin off AT&T Broadband. Either way, a cable price hike is imminent. The company said it would notify its 13.7 million subscribers through their cable bills and through legal notices in newspapers published in areas where prices are changing.

Reporting the numbers
The problems were clarified in AT&T's earnings report. While AT&T reported exceptional third quarter gains from the spin-off of its wireless division, poor earnings from the telecom giant's long distance division overshadowed its overall performance.

For the three months ended Sept. 30, AT&T earned $11.30 billion, or $3.13 per share—but these earnings were largely due to the spin off of AT&T Wireless in July for a $13.5 billion after-tax gain.

Excluding the gain, as well as several other one-time gains and losses, AT&T earned 4 cents per share—meeting expectations of analysts surveyed by Thomson Financial/First Call, but a far cry from last year's 35 cents per share. AT&T did not provide an equivalent dollar amount.

Continuing operations (including long distance) at AT&T came in at a loss of 69 cents per share, in large part due to a $3.5 billion charge to the dissolution of its Concert joint venture with British Telecom and a $1.8 billion charge against the company's stake in AT&T Canada. The results still came in line with Wall Street's expectations. Overall revenues fell 7.7 percent to $13.09 billion from $14.18 billion.

In summary, although AT&T Broadband reported revenue growth of 15.2 percent over the year-ago quarter, those gains were eaten away by declines in the carrier's consumer and business long distance divisions as well as the overall economic downturn. Earnings in consumer long distance dropped 17.8 percent, with business long distance down almost 5 percent.

With revenues staying negative (preliminary numbers suggest a loss of over $2 billion in the three months ending September, 2001), AT&T may have decided that it can no longer cross-subsidize its broadband holdings by using profits from phone service to subsidize unprofitable Internet offerings.

Perhaps digital subscriber line access will become more appealing to end-users as a result of AT&T Broadband's 2002 price increase. After all, no broadband access provider has ever upped monthly DSL fees in order to stream reruns of "I Love Lucy" to your PC.

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