Time Warner Cable tangles with DSL, dial-up

As part of parent company Time Warner's second-quarter results, the nation's second-largest cable provider reported a 23 percent increase in broadband subscribers, from 2.3 million last year to 3 million this year. That's a significant drop from the growth rate of 69 percent the company saw the year before.

The question many analysts and even company executives are asking is whether this is an early indicator that rival digital subscriber line (DSL) services are stealing market share. The answer from them at this point is no, but stay tuned next quarter.

"Because we're in a rough economy, pricing strategies do have a modest effect on who grabs what subscribers," said David Joyce, an analyst at Guzman & Co. "But I think on the whole, cable has not been suffering from DSL competition."

Instead, the slowdown in Time Warner Cable's broadband growth could be blamed on a market that's maturing beyond early adopters and trying to reach mainstream Internet households that still access the Internet via dial-up. Such households may be weighing the costs and benefits of price versus speed.

"You're likely not to penetrate mass market unless you're pricing closer to AOL," the world's largest dial-up Internet service provider, which charges $23.90 a month, said Mark May, an equity analyst at Kaufman Bros.

Time Warner Cable's Road Runner service was one of the early players in offering broadband Internet access and now has relatively high penetration into its market compared with other cable giants.

This quarter, Time Warner said 16.5 percent of its broadband-ready households were high-speed Internet subscribers. In comparison, Comcast, the nation's largest cable provider, reported 13.7 percent penetration last quarter, although that figure will likely change when it reports earnings next week.

Analysts interpret these measurements as evidence that Time Warner Cable's success has hit a natural speed bump.

"The fact that (growth) is lower this quarter than a year ago is no mystery," said Mike Paxton, an analyst at In-Stat/MDR. "Their penetration rate is going up, and growth is going to slow."

DSL effect: fact or fiction?
Signs of a slowdown, however, spark concerns for cable companies. Their biggest fear is that slower growth is stemming from greater gains by the Baby Bells, which offer Internet access at cheaper rates but slower speeds through DSL. For the past year, some Bells have aggressively cut prices to less than $30 a month in hopes of chipping away at cable's dominant lead.

Cable companies have responded to these cuts but have resisted following the discount trend. Earlier this month, most cable companies boosted their base download speeds--sometimes doubling them--to counter DSL discounts without waging a price war. Cable companies remain loath to cut subscription fees, which continue to range between $45 and $55 for basic broadband service.

"We're not going to engage in a price war with DSL," Time Warner Cable spokesman Mark Harrad said. "Our view is we've got the better platform. We can boost speed and deliver these kinds of robust parameters."

Time Warner executives on Wednesday hinted that their desire to add new customers would not prevent them from fiddling with subscription rates. During a conference call with Wall Street analysts, Don Logan, chairman of Time Warner's media and information division, said price promotions could have helped stem the subscriber growth slowdown.

"If we need to do that, that's another arrow in our quiver," he said, referring to the introduction of promotional discounts.

He added that the jury was still out on whether DSL discounts were chipping away at cable's lead. Other indicators, such as earnings results from cable giants Comcast and Cox, are still pending. Meanwhile, SBC Communications added 365,000 net DSL subscribers last month, though other Bells such as Verizon Communications have yet to report.

If the Bells show solid gains, could cable companies eventually slash prices as well?

"It's too early to tell, but there's definitely a red flag with Time Warner's high-speed Internet business this quarter," said David Mantell, an equity analyst at Loop Capital Markets.