Wireless driving profits for big phone carriers

Verizon Communications said Monday that revenue from its stake in Verizon Wireless helped boost profits during the third quarter of 2006. Meanwhile, Verizon dealt with increasing pressure from cable companies that ate into the company's profits.

The news comes just days after AT&T and BellSouth, which jointly own Cingular Wireless, reported strong profit gains that they attributed to increased wireless revenue. Meanwhile, AT&T executives also acknowledged pressure on traditional phone and high-speed Internet growth from increased cable competition.

In total, Verizon profits were up only slightly, 2.8 percent to $1.92 for the quarter ended Sept. 30. That compares with a profit of $1.87 billion during the same quarter a year earlier. Revenue increased 26 percent to $23.25 billion, up from $18.49 billion last year.

Verizon Wireless, jointly owned by Verizon and European phone company Vodafone Group, increased revenue 19 percent to $9.87 billion. The mobile operator added 1.9 million new customers, bringing its total to 56.7 million. Cingular, its closest rival, finished the quarter with 58.7 million customers, and reported revenue of $9.55 billion in the third quarter.

"We are excited about the wireless success," Ivan Seidenberg, chief executive officer for Verizon Communications, said during the company's conference call with analysts. "As long as we are making forward investments, the growth should be sustainable."

But aside from wireless, Verizon and AT&T reported lackluster results in their traditional telephone and broadband businesses. Executives from these companies said they are seeing increased competition from the cable companies, as they bundle voice services with video and high-speed Internet services.

"We're seeing increased line loss related to cable competition," Rick Lindner, chief financial officer of AT&T, said during a conference call with analysts on Oct. 23. "And I think that's as you would expect. In 2005, we had the launch of just about all of the Time Warner markets in our territory, and in 2006, we're seeing the launch of all of the Comcast markets. By the end of this year, I think cable competition from a voice perspective will be pretty much fully launched."

The problem faced by phone companies is that cable operators have almost completed their introduction of voice services, which allows them to sell a bundle of voice, video and TV services. But the phone companies are only just beginning to get their TV service into the market. Results from the last two quarters have proven that bundling services has been an important force in signing up new customers.

"I think we are seeing each quarter that cable's triple-play offering is becoming a competitive factor," said Jim Penhune, an analyst at Strategy Analytics. "AT&T and Verizon aren't yet to the point where they can roll out TV service to the mass market in a cost-effective way. And they're still a long way from being able to do that."

In total, Verizon has about 522,000 Fios data customers, but so far only 118,000 have signed up for its video service. Meanwhile, AT&T is even further behind in spreading its U-verse video service. The company said last week that it's only signed up 3,000 TV subscribers.

Meanwhile, cable operator Comcast, which reported third-quarter results on Oct. 26, said it had signed up 483,000 telephone customers, beating analysts' estimates. The company also said it had a record quarter for signing up broadband customers, with a net addition of 536,000 new high-speed Internet customers.

Executives from AT&T and Verizon said they expect line losses to stabilize in 2007 as the cable products become more mature. In the meantime, these will likely rely even more heavily on profits from their wireless entities to fuel growth.

"Wireless has been a growth engine for the phone companies for a long time," Penhune said. "And I don't see that changing anytime soon."