SBC Finds a Bundle of Joy

SBC (SBC) is piling up the broadband bundles to barricade its shrinking phone business.

The San Antonio, Texas, phone titan impressed Wall Street on Wednesday by offering enough good news on its growth ventures -- such as fast Internet service and Cingular Wireless -- to offset continuing declines in its core local phone service.

SBC shares rose 30 cents, or 1%, to $24.66 in midday trading Wednesday.

With about half of its customers now getting a bundle of two or more services from SBC, the company seems to have finally lowered its customer defection rates. Not only has the company reduced its so-called churn, it is also getting closer to the right combination of scale and pricing on fast Net access to raise its digital subscriber line, or DSL, service out of the red ink.

Formally, the company does not comment on whether its DSL effort -- made through a joint venture with Net titan Yahoo! ( YHOO) -- is profitable. But informally, a person familiar with the business says it is not quite at break-even just yet.

Nonetheless, analysts and investors say the growth of DSL has contributed to the improved customer retention and margins, and this could mark a bottom of sorts for the company.

"The bundle seems to be having its desired effect on SBC," says Blaylock & Partners analyst Rick Black, who has a hold rating on the stock.

Now that Bells such as SBC and Verizon ( SBC) have suddenly rediscovered DSL and the benefits of bundling, some cable industry analysts see a head-to-head battle brewing for broadband market share. Big cable operators such as Time Warner ( TWX) and Comcast ( CMCSA) own the lion's share of the fast-growing and lucrative high-speed Internet access market, in part because cable modem service is perceived as technically superior.

In a report Tuesday, Credit Suisse First Boston analyst Lara Warner downgraded the cable industry, citing increased competitive pressure from the Bells in areas such as fast Net access and video. Warner says the Bells' lower DSL prices have them "poised to take over 50%" of new broadband customers in the next two quarters.

It's an important lever for the Bells, says Black. "Once DSL comes close to breakeven or profitable, the bundle doesn't pull in your margins," the analyst says. "You can see where people might move from a cautious to a more positive view of the Bells."

But, says Black, "the first quarter doesn't make a trend."

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