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Will bigger AT&T spur a broadband TV price war?

Competition from a larger AT&T could force cable to lower prices, but experts caution not to expect changes overnight.

The proposed $67 billion merger between AT&T and BellSouth could help ignite a pricing war between telephone companies and cable operators, but experts say that price cuts, if they happen at all, are a long way off.

The environment in the communications market is changing, and cable companies, which have long resisted dropping prices, could eventually be forced to make price cuts to compete, say experts.

"You have to think that at some point the cable operators are going to be forced to do something," said Jim Penhune, an analyst with Strategies Analytics. "But then again I said the same thing last year when the phone companies cut DSL pricing. It's hard to know where the breaking point is and how long it will take to get there."

News.context

What's new:
Should its proposed merger with BellSouth be approved, a bigger AT&T could start a price war, pressuring cable companies to lower fees for broadband service packages that include phone, Internet and TV.

Bottom line:
With the AT&T/BellSouth merger at least a year away, and because rollouts of the phone company's TV-ready broadband networks are moving slowly, a pricing battle with cable companies could be a long way off.

More stories on this topic

AT&T's merger with BellSouth won't create a new competitor, but it will make an already aggressive AT&T even bigger. With an expanded, 22-state territory, AT&T will have even more opportunity to pitch its $12.99-per-month service against the offerings of cable operators. Factor in AT&T's move to sell TV service throughout its territory, and cable companies, at least in some parts of the country, may finally be forced to cut prices.

But consumers shouldn't expect a price war to break out overnight. Not only will the AT&T/BellSouth merger take at least a year to be approved by regulators, but how much competitive pressure AT&T exerts depends on how quickly it can compete with cable on delivery of TV service. And progress there has been slow.

In general, phone companies--namely AT&T and Verizon Communications--have adopted an aggressive strategy when it comes to competing with cable. They have drastically dropped prices on broadband service in the hope that customers getting a taste of broadband at a low price will eventually order more services from them.

Last June, AT&T (then SBC Communications) slashed prices to $14.95 for the first year of service. In February it lowered its price again, to $12.99. Verizon also offers a new tier of service, which includes 768kbps downloads, for $14.95 per month.

The strategy has worked. Phone companies are closing the gap between DSL subscribers and cable subscribers. Last year, for the first time, phone companies signed up more subscribers than cable operators did, according to the Leichtman Research Group. Phone companies scored 5.2 million new subscribers for a total of 18.5 million customers, while cable signed up 4.4 million new subscribers for a total of 24.3 million.

So far cable companies have resisted cutting prices. Instead they've responded by raising download and upload speeds and adding more features to their service. The straw that could finally break the cable companies' backs could be television.

AT&T and Verizon are both in the process of upgrading their networks so that they can deliver a package of services: high speed Internet, telephony and TV. Verizon is extending its fiber network directly to people's homes, while AT&T is extending fiber farther into neighborhoods. The end result of these upgrades will be new access networks that will allow phone companies to deliver TV as well as dramatically faster Internet access.

The network strategy has already started to have some impact on cable. In communities where phone companies have upgraded their networks, cable companies are responding with aggressively priced promotional packages and faster download and upload speeds on their broadband service.

In the New York City suburbs of Long Island where Cablevision competes with Verizon's Fios fiber-optic service, the cable operator is offering a package of cable, high-speed Internet and phone service for $90 per month for the first year--very close in price to Verizon's Fios triple-play package, which costs $105 per month.

In Keller, Texas, the first city where Verizon offered TV service, the local cable operator, Charter Communications, is charging $70 for the first six months for a 3mbps broadband and cable service. This is exactly the price Verizon charges for its new 5mbps high-speed Internet access and TV offering.

Touting speed over price
Instead of cutting prices, most cable companies have simply increased the speed of their services. Last year, Cox Communications boosted speeds in its Northern Virginia territory to 15mbps. Adelphia, whose assets will be divvied up between Time Warner and Comcast later this year, raised speeds 16mbps to residents in Leesburg, Va., another city where Verizon's Fios competes. Verizon offers three tiers of service, with download speeds of 5mbps, 15mbps and 30mbps.

The cumulative effect of phone companies closing the broadband subscriber gap, coupled with competition in TV, could spur cable to slash prices--eventually. Cable operators have a long tradition of increasing prices rather than decreasing them. Between 1998 and 2003 cable TV rates rose 3.5 times faster than the rate of inflation, according to a report from the Federal Communications Commission.

What's more, phone companies have been slow to deploy TV service. Verizon is offering Fios TV only in 24 communities. AT&T has rolled out its TV service to a limited number of customers in San Antonio, Texas. The company plans to spend $4.4 billion through 2008 to upgrade networks in 13 states. By the end of 2008, AT&T hopes to have 18 million Internet Protocol TV customers.

A big hurdle for the phone companies is obtaining cable franchise agreements, which requires companies to negotiate contracts with individual communities. AT&T has argued it should not have to apply for cable franchises because it is just upgrading its existing network. But this stance has caused controversy. And AT&T has sued the city of Walnut Creek, Calif., because it wants AT&T to pay a franchise fee.

Even if AT&T doesn't have to secure franchise agreements in every community, at the very least it will likely have to get some sort of approval from cities to offer its service. Just this week, the company struck a deal with Anaheim, Calif., that gives AT&T permission to build its system.

Some experts also wonder how much the phone companies will be able to undercut cable operators' prices, since obtaining TV content accounts for about 40 percent of a TV broadcaster's operating budget, said Penhune.

"Verizon's broadcast packages are cheap," said Penhune. "And they're having some impact in a small number of communities. But the rollouts have been slow, and the phone companies could be constrained in how much they undercut cable prices to win new customers."

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