Nov 6, 2006 12:00 PM,

Is access line loss slowing?

By Carol Wilson

Recent third-quarter earnings reports produced what seems to be a conundrum. On the one hand, cable companies reported record growth for their service bundles, including residential voice. On the other, two of the four largest telephone companies said they are seeing a slowdown in the pace at which they are losing access lines to cable and wireless substitution, and a third said it expects a similar shift next year.

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“Year-over-year losses to access lines are flattening,” said Pat Shannon, BellSouth chief financial officer. “This is a new data point. Access lines are still down 265,000 for the quarter, and that is driven by wireless substitution and by cable VoIP competition, but we did not see an acceleration in cable losses.”

Shannon compared the cable VoIP push with the rush of CLEC competition that telcos faced in the '90s. “We have seen competition come into the small business market years before the consumer market, and we saw line loss and revenue share go down there,” he said. “Then over the last few years, there was a slowing of that trend until eventually it turned back positive.”

A day earlier, Rick Lindner, AT&T chief financial officer, had said he believed AT&T is “starting to top out in terms of line loss” to cable voice over IP (VoIP), wireless substitution and wholesale consolidation.

Queried on the topic during Verizon's earnings call, Chairman and CEO Ivan Seidenberg said his company is seeing some “plateauing” of lines lost to cable in areas where cable deployed VoIP early. Doreen Toben, chief financial officer, said Verizon expects to see “flattening” in its loss of access lines by late 2007.

Industry analysts are more pessimistic on the competitive services front, however, and see cable as a longer-term threat.

“The phone companies are in line to get more losses,” said John Celantano, Skyline Marketing president. “Comcast still has a long way to go. They are not fully built out yet — about 60% of their network is built out to handle voice. They are only at 1 million lines — they have capacity for 40 million lines.”

As Time Warner and Comcast take over the Adelphia properties, they also will be built out for voice, said Teresa Mastrangelo, analyst with broadbandtrends.com.

“I think that they are overemphasizing a slight decline in the loss rates,” she said. “It's curious that they are making such a point to emphasize that. It wasn't like it was dramatic. I think we haven't seen the full effects of real competition on the voice side of cable. Comcast will really be going gangbusters next year, and Time Warner, too, with the Adelphia properties. If [the telcos] see what they are seeing now — if it is slowing into next year, then they can make their case.”

The cable industry has been making steady improvement in consumers' eyes as a potential provider of bundled services, according to the Yankee Group's annual “Technologically Advanced Families” survey, said Jennifer Simpson, an analyst with Yankee Group.

“We ask people who is their preferred provider of bundled services,” she said. “In 2002, 38% said telco was the preferred bundled dealer, and only 6% said cable. In 2006, 39% said telco, and 28% said cableco. Consumers are much more aware of bundles and more willing to think of a cableco as a legitimate provider of the bundle.”

Aggressive pricing by cable companies is likely to drive more customer adoption, she added.

Qwest Chairman and CEO Richard Notebaert pointed out that losing access lines doesn't always mean losing customers. Qwest is selling stand-alone DSL services to appeal to customers who prefer wireless voice services and is finding success, he said.

“Our biggest competitor is wireless,” he said. “We are not seeing anything there that we didn't expect to see. The migration to wireless is very real. We hope people will keep security and safety of having a wireline phone.”