AT&T U-verse — A Double-Edged Sword

IPTV Offers Growth for AT&T, But Creates Broadband Challenges

Roughly two years after its commercial launch, AT&T Inc.(ATT) U-verse has evolved to the point where it’s the core wireline focus and one of very few areas where the telco is increasing non-capital spending. The second quarter was the largest ever for U-verse subscriber growth.

AT&T, which added 170,000 U-verse customers in the second quarter, said it had a total of 549,000 U-verse subscribers at the end of the second quarter and expects to have 1 million U-verse customers by year end. As far as the network itself, U-verse had passed more than 11 million living units as of the end of June, and expects to pass 30 million living units by the end of 2010. AT&T didn’t specify which of those customers are or will be served by DSL versus FTTH networks.

But core internal and external challenges exist and others loom large. Can AT&T deliver added capabilities and features over DSL links to the home? With its DISH Network Corp.(DISH) deal expiring at year-end, how will the company reach beyond wireline networks with video? And, beyond AT&T’s general talk about its three-screen strategy, just exactly how does wireless figure into the plan?

Add and Changes

AT&T recently announced it is cutting capital spending by hundreds of millions, but didn’t disclose specifically how that will affect its FTTH plans. AT&T said roughly a year ago that all new builds would use an FTTH architecture, but with these cuts in capital spending more folks likely will have to get by with copper links. However, AT&T is hiring big for U-verse in areas including customer service and call centers, help desk staff and technicians to install the service. That plays toward customer retention and easy adds.

“We know the capex slowdown will impact how many homes AT&T can pass with U-verse throughout 2008 and early 2009,” said Jeff Heynen, directing analyst for IPTV and Next Gen BSS/OSS for Infonetics Research. “However, right now the priority is signing up subscribers in the areas where they do pass the majority of homes. Their subscriber ramp continues to get better, as it should.”

High Definition

However, the fact that U-verse will run over DSL in many cases could be a problem, said Tom Nolle, president of CIMI Corp. “As soon as you go to DSL delivery, you're forced to contend with the fact that you can't multicast all the channels to the home at once (there is only about 25meg to play with) so you have to create ‘slots’ into which you map channels for viewing,” Nolle said. “HD takes up a bigger slot, so you can watch fewer HD than SD channels at the same time.”

But to keep HD slot sizes reasonable, compression is required. That can result in dropped packets and related pixelization. And because the TV service competes with Internet for bandwidth, subscribers who watch multiple channels at one time will have less bandwidth for Internet usage.

“Even 25mbps is slower than cable could deliver with DOCSIS 3.0, so you're at competitive risk,” said Nolle, adding that “AT&T is spending a ton of money to do what satellite does just by having a bird up there.” That’s a good strategy for VoD if you ignore the issues of 25mbps DSL, he continued, but it's a limited approach to full broadcast TV plus VoD, so could be a problem for AT&T in the long run.

AT&T said recently that it’s been adding the capability to support two concurrent HD streams to the home, which the company’s CFO Rick Lindner said will be complete in the third quarter, but he didn’t mention how this might work. Bandwidth constraints likely have kept AT&T from offering multiroom DVR services until year-end as the offering focuses on recording HD content.

The recent addition of supporting two HD streams in the home “was also a big improvement, as that was something that Comcast Corp.(CMCSA) marketed hard against, particularly in California,” Heynen said, adding he believes AT&T will hit its year-end target of 1 million U-verse subscribers, perhaps even before the conclusion of 2008.

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