George Mannes

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Cable Holding Its Own Amid DSL Onslaught

George Mannes

Major cable TV operators will add 6% more subscribers to high-speed Internet service in the third quarter than they added in the third quarter of last year, estimates Smith Barney analyst Niraj Gupta.

And though telephone company price cuts have pushed adoption of the DSL service that competes with cable modems, the increasing popularity of DSL doesn't appear to have come at the expense of cable operators, including Comcast (CMCSA), Cox (COX) and Cablevision (CVC).

As they have over the past few quarters, cable investors will be keeping a close eye on news about high-speed data services during the forthcoming earnings season. Cable operators have spent billions of dollars over the past few years to upgrade their networks to offer high-margin advanced services such as fast Internet connections.

Despite these upgrades, operators face competition on different fronts from telcos and satellite service providers, such as Verizon (VZ) and SBC (SBC), having cut prices earlier this year in an effort to gain share.

Indeed, DSL's share of new high-speed Internet subscribers will grow to 37% in the third quarter from 32% in the second, estimates Gupta. But that number doesn't mean bad news for cable operators, says Gupta: "The pickup in DSL activity has not come at the expense of cable modem adds, as cable [operators] have not seen any slowdown in the business."

Among other operators, Comcast -- which has spent the past year turning around the fixer-upper systems it acquired from AT&T (T) -- could add as many as 440,000 subscribers in this quarter, speculates Gupta. That's up about 30% from year-ago quarter additions of 339,000, and ahead of Gupta's already-published forecast of 416,000 additions, which is above other estimates on Wall Street.

Cox, says Gupta, looks to add at least 150,000 high-speed data subscribers in the quarter, compared to the 157,000 it added in the corresponding quarter one year earlier.

Though subscriber-addition comparisons to year-ago figures don't appear to be remarkably improved for cable operators other than Comcast, additions will be up 29% sequentially from the second quarter industrywide. That reflects seasonal effects in the cable business -- for example, students returning to campus and signing up for high-speed access -- as well as expanded retail distribution for cable modems and a larger population of potential customers served by upgraded systems able to deliver high-speed data.

Based on numbers supplied by Smith Barney telecom analyst Michael Rollins, Gupta estimates that DSL providers will claim 37% of net additions for residential broadband Internet service in the third quarter, compared to 62% for cable operators. The split was 32% for DSL and 67% for cable in the second quarter, estimates Gupta.

Figures suggest there will be 653,000 residential DSL additions in the third quarter, up 35% from the net new customers added in the second quarter of 2003, and up 10% from the additions in the third quarter of 2002.