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AT&T CEO Randall Stephenson triggered a mini-free fall in the shares of phone companies last week when he told investors at a Citibank conference that non-pay disconnects are “happening all across consumer products lines,” with the possible exception of wireless voice accounts. In other words, a larger-than-expected chunk of customers aren’t paying their bills. And AT&T is pulling the plug on them.
This bit of concrete evidence that a recession is indeed underway spooked an already jittery stock market, dragging down non-telecommunications shares in the process. Hardest hit, though, were the leading telecom and cable companies, which managed to recovered slightly but continue to labor under a cloud of investor suspicion.
Comcast CFO Michael J. Angelakis echoed Stephenson’s claim. Speaking at the same Citibank conference, Angelakis said that during the second half of 2007 “we clearly saw bad debts increase, and we clearly saw a pickup in churn.” Translation: A growing number of cable customers aren’t paying their bills, either.
Against this backdrop, earnings season is about to get underway, meaning we’ll soon get a look at some hard fourth-quarter 2007 numbers from the top telecom and cable companies. If Stephenson and Angelakis are any indication, we’re in for disappointing results from the country’s top broadband, voice and video providers.
But a recession-driven slowdown for either cable or phone companies would be a new thing. Historically, cable has prided itself on being recession-proof. During the recession of the early 1990s and the downturn in 2001 and 2002, cable companies didn’t lose customers. In fact, in 2001 and 2002, cable was in the midst of digital TV and high-speed Internet rollouts, which cranked up growth (although the telecom and dot.com meltdowns, not to mention the accounting scandal that brought down WorldCom, made cable seem like it, too, was in the doldrums).
Phone companies have also held up well during economic downturns. Even though the big incumbent companies that now make up AT&T, Verizon and Qwest started losing access lines in 2000, those losses were mostly restricted to the commercial sector and were due to the rapid late-90s rise of competitive local exchange carriers. Consumer spending cutbacks typical of a recession didn’t come into play.
Things could be different this time around, because unlike in the past, cable and phone companies now sell a lot of services that consumers feel are discretionary. During past downturns, customers clung to their voice and pay-TV services because the telephone was considered essential and subscription TV was a bargain service, relative to other entertainment options.
However, that held true before the days of triple-play or quadruple-play bundles, before multiple digital service tiers and HD packages came along and before broadband either existed or was widely adopted. The thing to watch out for now is the possibility that the proverbial bundles of voice, video and data services might unravel.
For example, homes that buy both mobile and landline voice services could feel free to simply cut off the wired voice connection. During his Citibank talk, Stephenson cited this cost-savings measure as one cause of what will in all likelihood be stepped-up line losses for the company in the fourth quarter. Not that wireless substitution hasn’t been going on for a while, but tight household budgets could no doubt accelerate this trend.
Contrary to what I would normally expect, broadband service might turn out be a dispensable expense during a recession. “It’s non-pay disconnect that is driving the disconnect on access lines and on broadband as well,” Stephenson said during his Citigroup talk, reiterating several times that residential broadband growth has suffered some kind of a setback.
Cable companies, which posted very disappointing growth rates across the service board for the third quarter of ’07 — before the economic slowdown truly took hold — have already started drawing up lower-cost service options and are about to market “double-play” packages of voice and high-speed services.
So what will we hear from cable operators and phone companies in the upcoming quarterly reporting season? Comcast officially confirmed back in December that it won’t make its fiscal 2007 guidance, citing weaker-than-expected subscriber gains. Based on the sounds Stephenson made, AT&T is managing expectations in advance of a weak fourth-quarter report as well.
Most of the other cable and phone companies will probably not have much better news, with the possible exception of Verizon, whose CFO, Denny Strigl, told the same Citigroup investors that the weak economy had “minimal” impact on his company. Moreover, in contrast to its peers, Verizon issued relatively robust third-quarter numbers last fall.
But compared to a lot of other industries, and despite any short-term hit that cable and phone companies may take, the communications network business — be it cable, telco or wireless — is a relatively sure bet in the long term. Both AT&T’s Stephenson and Comcast’s Angelakis, while acknowledging the challenges of increased competition and a weak economy, stressed this fact. “We are in the middle of a growth industry,” Stephenson said.