AT&T Broadband Raises Cable Rates

AT&T Broadband, the dominant U.S.
cable television company, said last week it would increase 2002 cable service
rates by an average of 5.5 percent to offset its increased operating costs and
the higher fees it pays for programming.

Declining profitability, along with a morose economic outlook and increased
programming fees, forced AT&T Broadband to re-think what it charges for all
aspects of cable connectivity and content.

AT&T Broadband said its programming costs in 2002 would increase by about 15
percent, with sports programming accounting for the largest portion of the cost

Hike across America
The cable price-hike affects all standard cable customers and some “digital
value” customers. Total monthly rates vary by market, according to a company
spokesperson. AT&T Broadband said the rate increase was necessary to cover its
higher operating costs.

At press time, AT&T Broadband was only offering
for business services in six areas: Dallas, Denver, Florida, Massachusetts,
Pittsburgh, and Richmond and the residential broadband website would not provide
prices without a valid home address.

“Everyday costs such as putting gas in field trucks and paying competitive
wages to customer care personnel and technicians have increased. AT&T
Broadband also is paying higher fees to programmers for the rights to
carry their content,” the company said in a statement.

Cable operators report that they spend about $360 installing equipment to support
a new broadband subscriber. Or course, costs drop significantly if cable companies
can get new users to self-install cable modems. Comcast, which now sees more
than one third of its new broadband customers install their own cable modems,
said the adoption of self-installation can translate into millions of dollars
of savings annually.

This cost consciousness comes as the company is weighing takeover offers from
Comcast Corp.
among others. AT&T postponed plans to spin off its AT&T Broadband unit when
Comcast made an unsolicited takeover offer initially valued at $44.5 billion.

said it aims to decide by the end of the year whether to sell or spin off AT&T
Broadband. Either way, a cable price hike is imminent. The company said it would
notify its 13.7 million subscribers through their cable bills and through legal
notices in newspapers published in areas where prices are changing.

Reporting the numbers
The problems were clarified in AT&T’s earnings report. While AT&T reported
exceptional third quarter gains from the spin-off of its wireless division,
poor earnings from the telecom giant’s long distance division overshadowed its
overall performance.

For the three months ended Sept. 30, AT&T earned $11.30 billion, or $3.13 per
share—but these earnings were largely due to the spin off of AT&T Wireless
in July for a $13.5 billion after-tax gain.

Excluding the gain, as well as several other one-time gains and losses, AT&T
earned 4 cents per share—meeting expectations of analysts surveyed by Thomson
Financial/First Call, but a far cry from last year’s 35 cents per share. AT&T
did not provide an equivalent dollar amount.

Continuing operations (including long distance) at AT&T came in at a loss of
69 cents per share, in large part due to a $3.5 billion charge to the dissolution
of its Concert joint venture with British Telecom and a $1.8 billion charge
against the company’s stake in AT&T Canada. The results still came in line with
Wall Street’s expectations. Overall revenues fell 7.7 percent to $13.09 billion
from $14.18 billion.

In summary, although AT&T Broadband reported revenue growth of 15.2 percent
over the year-ago quarter, those gains were eaten away by declines in the carrier’s
consumer and business long distance divisions as well as the overall economic
downturn. Earnings in consumer long distance dropped 17.8 percent, with business
long distance down almost 5 percent.

With revenues staying negative (preliminary numbers suggest a loss of over
$2 billion in the three months ending September, 2001), AT&T may have decided
that it can no longer cross-subsidize its broadband holdings by using profits
from phone service to subsidize unprofitable Internet offerings.

Perhaps digital subscriber line access will become more appealing to end-users
as a result of AT&T Broadband’s 2002 price increase. After all, no broadband
access provider has ever upped monthly DSL fees in order to stream reruns of
“I Love Lucy” to your PC.

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