Telecom and cable providers will beef up their networks even as economic malaise curbs demand for high-speed Internet services
August was not kind to the Central California cities of Stockton and Modesto. That's when Modesto logged the highest metropolitan foreclosure rate in the U.S. and nearby Stockton ranked No. 2, according to RealtyTrac, a firm that monitors foreclosures.
The same month, AT&T (T) began selling its premium-priced TV and high-speed Internet services in those and nearby cities, including Sacramento, the state's capital. Late last summer was probably not the best time for a phone company to debut some of its most expensive consumer products in a region hard hit by the mortgage malaise. Indeed, AT&T said Jan. 24 that growth in broadband services has slowed as a result of the housing slump.
But the prospect of a recession is not keeping San Antonio-based AT&T—or rivals, for that matter—from pressing ahead with multibillion-dollar plans to install gear that will provide a raft of new television and high-speed Internet services to neighborhoods across the country. Economic slowdown or not, AT&T and its ilk are under pressure to provide ever faster Web access and TV products as they contend with cable companies such as Comcast (CMCSA) encroaching on phone company turf with their own flavors of phone and Internet access.
"Irrespective of a recession, there is a growing need for speed that is raising the stakes for broadband providers," says Craig Moffett, an analyst at Sanford C. Bernstein in New York. "I don't think there is much chance that the telcos will pull back on their network deployments. That ship has already sailed."
Essential Network Upgrades
Verizon Communications (VZ) has given no indication it will tap the brakes on plans to spend $23 billion installing fiber-optic cables to customers' homes through 2010. AT&T is investing $6.5 billion to $7 billion on its own version, U-verse, which involves installing fiber cables in neighborhoods, though not right up to homes, through 2008. Neither company provides a year-by-year spending breakdown, but both are holding to overall capital spending plans for 2008.
By the end of 2007, AT&T had 231,000 U-verse subscribers, an 83% increase from 126,000 three months earlier. The company expects to have more than 1 million U-verse customers by the end of the year. Verizon reported on Jan. 28 that at the end of 2007 it had 1.5 million Internet subscribers for its comparable service, known as FiOS.
During the telecom bust in the early part of the decade, communications service providers slashed budgets, trimming capital expenditures by 30% in 2002 alone. Analysts don't expect comparable reductions this time around, noting that competitive pressures make network upgrades essential. "The impact of that recession was as much related to technology over-investment, whereas now technology isn't the cause—it's being impacted," says Todd Rosenbluth, equity analyst at S&P, which like BusinessWeek is a subsidiary of The McGraw-Hill Companies (MHP).
Tinkering with the Network
So far, the impact is being felt unevenly. On Jan. 10, Verizon President Dennis Strigl told analysts that his company hasn't been affected by the economic downturn (BusinessWeek.com, 1/15/08). Comcast, on the other hand, reduced subscriber, revenue, and cash-flow forecasts in early December citing both competition and a challenging economic environment (BusinessWeek.com, 12/5/07).
Verizon's FiOS Internet service is currently available to about 7.5 million homes and businesses in 17 states. Verizon plans to make the service available to 3 million additional premises each year through 2010.
Comcast also needs to tinker with its network to enable speeds that can compete with phone company network upgrades. Web access via cable modem typically allows for faster downloads than phone companies' DSL services—but not U-verse and FiOS. That's why Comcast will be installing new equipment at subscribers' homes and in its network that adheres to a new standard called DOCSIS 3.0 (data over cable service interface specifications). "I don't think it trumps fiber to the home but it keeps cable in the competition," says Alan Breznick, senior analyst at telecom consulting firm Heavy Reading.
Meeting Customer Demand
Cable and phone companies aren't just overhauling their gear to compete with each other. They're also intent on meeting customer demand for more bandwidth and speedier downloads as more online video becomes available from companies such as Apple (AAPL), Amazon (AMZN), and Netflix (NFLX).
The risk, of course, is that spending continues apace but demand lags behind. That's a risk Verizon and other providers are willing to take. The thinking is, if you build it, the consumers will come—even if the housing crisis and possible economic contraction keep them in the bleachers for now.