U.S. telephone giant AT&T Inc. risks losing customers to cable rivals unless it builds a fiber network closer to customers than currently planned for its video and Internet services, analysts said.
Verizon Communications Inc. is spending as much as $12 billion on building a fiber network to deliver video services directly to homes, according to analysts. AT&T is spending $5 billion on its fiber network, which stops 3,000 feet away from the customer's doorstep.
These network upgrades allow phone companies to add video to their package of high-speed Internet and voice services in an effort to compete with cable companies. Comcast Corp., Time Warner Cable, Cox Communications and Cablevision Systems Corp. offer packages that include all three services.
While some investors are happy AT&T is spending less on its network upgrade, others argue that it needs to expand its fiber plans to keep up with rising consumer demands for faster Internet links and high-quality video services.
We expect AT&T to announce a change in video architecture later this year, with limited (capital spending) increases, but with increased revenue potential, Cowen & Co. analyst Thomas Watts said in a research note to clients on Thursday.
Watts believes AT&T will ultimately, like Verizon, lay fiber to the doorstep of consumers or the curb in order to deliver advanced services such as high-definition video.
AT&T spokesman Michael Coe denied any change of strategy, saying the company's plan to bridge the 3,000 feet gap with traditional copper lines will be successful.
While phone companies are just starting to provide video services, the largest cable companies have offered the so-called triple play of TV, phone calls and Internet access for several years.
Cable companies also offer advanced services such as high definition television, video-on-demand and digital video recording that allow users to pause and rewind live television programs and record shows on a hard drive.
It may well be that from a competitive standpoint, if cable continues to bring increasingly competitive offerings in terms of bandwidth, that AT&T has to make a competitive response to avoid a long-term loss of share, said Atlantic Equities analyst Chris Watts.
AT&T does not yet provide high-definition video in its first TV market in Texas, but plans to do so in up to twenty markets set to launch this year, AT&T's Coe said.
Coe said AT&T's fiber network delivers data at a rate of 25 megabits per second (Mbps), much faster what most consumers currently get through their high speed connections.
But Cowen's Watts said he believes networks need to be even faster. We increasingly believe that telcos and cable must deliver 100 Mbps per home to be competitive, he said.
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SurTerre Research analyst Todd Rethemeier said AT&T will likely lengthen its fiber build, but said there was no rush.
Eventually they'll need to go to fiber all the way to the home but I like AT&T's strategy a little better in that they're doing it in steps, not spending as much money today. he said.
Verizon shares have fallen about 11 percent in the past 12 months on concerns whether the company's ambitious spending will entice consumers to switch from cable to phone companies for their video services.
AT&T's shares are up about 3 percent since it began trading under its current symbol after its November merger with SBC.
Investors are happier with the lower level of expense that AT&T is taking, Michael McCormack from Bear Stearns said. He said AT&T was unlikely to push its fiber right to the home in the next two to three years.
He believes AT&T should wait until network gear costs come down and wait to see if Verizon's strategy pays off.
But Atlantic's Chris Watts said AT&T's fiber build poses its biggest uncertainty for investors. By contrast, he noted, Verizon's solution is short-term pain for long-term gain.