DSL Prime: BellSouth's DSL Profit Margins

"All or a vast majority of the revenues flows through to the margin."

by Dave Burstein of DSL Prime and Future of TV [November 6, 2006]

DSL Contribution Up 50 Percent at BellSouth
'At scale … all or a vast majority of the revenues flows through to the margin"
Pat Shannon, CFO: "In the past year, the per unit contribution from DSL has increased over 50 percent as we reached economies of scale, maintained pricing discipline, and focused on improving our mix towards higher speed services. Now that we're at scale with DSL, long distance, and increasingly emerging data services, all or a vast majority of the revenue from these services flows through to the margin and offsets the contribution decline from access line losses, or the substitution of legacy services…. DSL revenue per unit was $40, up slightly versus last year, but down about 3 percent sequentially. Revenue per unit was impacted by the mid-third quarter elimination of the regulatory cost recovery fee from DSL customer bills. And although the fee was profit neutral it did reduce the ARPU by about $1.50 on a sequential basis."

BellSouth is seeing the industry wide migration to higher speeds. "At the end of the third quarter, more than 30 percent of the DSL customer base subscribed to 3 or 6 megabit services, almost double the mix this time last year, and our monthly mix of net adds has consistently been above 80 percent for 3 or 6 megabits all year, reflecting strong and steady migrations from lower speed services."

On the difference between actual selling price and advertisements, Shannon commented, "We also have a $99 offer in the market. Those offers tend to be lower bundles of products and are really designed to increase the call flow into the call centers and we've certainly seen that in early results of our trials around the $99 offer, and then we're able to upsell a significant number of those to higher speed products. I think that the $99 offer has got a lot of traction as far as a marketing tool, but the number of packages that are actually being sold at that level is very low."

The trend towards higher pricing in the enterprise market also was confirmed. "Stability in pricing is also plays an important role in this market, because we've always had fairly good volumes, it's just the pressure on the pricing side over the last really several years has caused the growth rate to be muted. Now with a good, solid volume growth and then an abatement of the pricing pressure, you're seeing some modest growth coming back into that. I think that's welcome." Unless you're the customer, of course.

BellSouth tends not to shout out what they do, but they've long been the most advanced of the Bells in both DSL and fiber to the curb. The last reliable figures I have show them with fully a third fewer unserved homes than any of their U.S. peers. They have the highest ratings among the Bells at DSL Reports.

China Telecom Q3 + 2.09 million to 27.35 million , Netcom + 783,000 to 14,289,000
Disappointing quarter as fixed lines flat to down
DSL net adds in China for Q3 will be over 3 million, but Q2 was close to 4 million. The decline is particularly troubling because landline totals are falling overall and probably down in the more developed parts of the country. In an economy growing at 2 to 3 percent per quarter, China Telecom's residential lines went only from 121.0 million to 121.1 million.

Since the Chinese carriers under government direction are actively adding services in the inland and poorer rural regions, I infer an actual decrease in landlines in the more developed parts of the country. Wendy Liu at Merrill sees "accelerating fixed to mobile substitution", a trend likely to become more intense next year when 3G mobile begins. Liu remains confident on DSL growth, however, estimating Netcom "will reach 32.6mn broadband subscribers by 2010, up from 14.3mn as of 3Q06."

China Telecom and Netcom hope that IPTV services will rekindle growth, and have been making deals with Shanghai Media Group to expand from trials. Netcom is slightly cutting capex, which is already below depreciation. Flat capex at the carriers means domestic sales at Huawei, ZTE, and Alcatel/Shanghai Bell will also be limited. That increases the pressure to export and hence pricing and financing for telecom equipment worldwide.

AT&T Confirms Heavy Churn
Slow Growth Explains Coming $10 promotion
AT&T was up 380,000 Q3, a little better than Q2 but almost 30 percent below last year. For three quarters, AT&T net adds are down 12 percent from the prior year. Randall had been trying to keep average prices in the $30's while advertising $15 promotions, but the strategy wasn't working.

I wrote a month ago "AT&T churn has been high although the company does not provide a specific figure, partly because of 'introductory offers' that get customers mad when they find how high the true rate is." CFO Rich Lindner notes, "Gross sales in the quarter were strong; in fact, the best that we have had in four quarters, but we had some year-ago promotions plus a number of six-month contracts all expiring in the same quarter. … In early October, we simplified our pricing for DSL and added a new speed tier to our lineup and we expect that the convenience of simple, flat-rate pricing with no contract term, plus the added speed tier choice, will stimulate demand as well as enhance customer retention." Current AT&T pricing is $15 to $35, so the churn rate should stabilize.

Lindner calculates their 8.2 million DSL customers include 31 percent of primary lines, "and in our West region, it's over 35 percent (California)." Assuming cable approximately matches the DSL take rate, that means 60 percent of homes have broadband, so some slowdown is inevitable. In addition, "42 percent of our consumer DSL base subscribe to higher-speed service, and that's up from 22 percent just a year ago." That's another data point showing that people want higher speeds, confirming the results from Germany and before that France and Japan. Lindner also confirmed previous DSL Prime reporting that AT&T has resumed buildouts, at a modest rate of about 200,000 units per month. I've reports from Arkansas and Indiana that AT&T is reaching all the CO's, which I assume they will extend across all their territory, whatever happens in the merger talks. (transcripts courtesy of Seeking Alpha).

Copyright 2006 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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