Is DSL Pricing Behind Drop In Time Warner's HSD Adds?

Cable World, July 28, 2003

Byline: MAVIS SCANLON

Quarter after quarter in recent years, cable operators have been reporting gangbuster numbers of customer additions for high-speed Internet service, the industry's fastest-growing - and most profitable - product. The second quarter, however, is typically the one period that sees slower growth, mostly due to cable modems that are disconnected on college campuses in May, when students flock home.

Still, Wall Street was not expecting Time Warner Cable's big drop in high-speed additions, reported last week by AOL Time Warner. The MSO added 170,000 HSD customers during the quarter, surely nothing to sneeze at, but a full 35% decrease from the 260,000 customers the company added in the first quarter.

The company attributed the drop to seasonality, as well as to economic factors including the war in Iraq.

"Second quarter was kind of a strange quarter," said Don Logan, chairman of AOL TW's media and communications group on a conference call. "We had the war. You know the economy was kind of bouncing all over. I think it's too early to tell whether there is a trend developing." He also noted that churn remains low, while penetration of HSD and digital cable, at 37% and 26%, respectively, remain in the upper echelons of the industry.

If anything, the decline in HSD adds at TWC will cause investors to watch even more closely the results from the rest of the cable group. Both Cox Communications and Comcast report second-quarter earnings this week.

The lingering question is whether the numbers were hurt by economic factors, or whether heavier marketing of lower-priced DSL packages from the telcos is starting to dip into cable's HSD market share.

"Demand actually appears to be slowing down, or is beginning to be impacted by competition," wrote Credit Suisse First Boston analyst Lara Warner in a research report previewing second-quarter broadband numbers. She cut her 2003 estimates for TWC's high-speed data customer additions by 9%, to 920,000 from just over 1 million.

AOL Time Warner has also shelved indefinitely the IPO of Time Warner Cable. However, AOL TW CEO Richard Parsons reiterated his interest in expanding the cable company through acquisitions. Recent asset sales have shored up the company's balance sheet to the point that it does not need to raise money. For months, the company indicated the ongoing Securities and Exchange Commission investigation would not hinder its efforts to take the unit public; last week executives conceded the opposite was true.

THE NEXT QUESTION:

*One year from now, how sensitive will the market be to a lower-priced DSL offering?