analysing Telco TV: Verizon (VZ), AT&T (T) 1mm TV Subs By Year End

Telecom giants AT&T and Verizon’s expensive foray into digital TV should pay off with a nice, round milestone by the end of 2007: 1 million total TV subscribers.

Est. Telco TV Subs Qtr. AT&T VZ 3Q06 3 118 4Q06 3 207 1Q07 13 348 2Q07 51 515 3Q07E 125 685 4Q07E 200 855 (All figures In 000s)
Source: AT&T, VZ, SAI analysis. This morning, AT&T (T) exec Ralph de la Vega touted AT&T’s “U-Verse” Internet TV service passing its 100,000 subscriber mark. (AT&T formally announced the milestone on Sept. 5.) At the end of June, AT&T had 51,000 TV customers, meaning the telco added about 50,000 in about 2 months. That’s a run rate of about 75,000 net subscriber additions per quarter. Assuming (for now) that rate stays stable, AT&T should report about 125,000 TV subscribers at the end of Q3 and 200,000 TV subscribers at the end of Q4.

Verizon (VZ) is ahead of AT&T: it finished Q2 with 515,000 subscribers to its “FiOS” TV service. The past two quarters, VZ has averaged about 155,000 net subscriber additions per quarter. Taking last quarter’s run rate of about 170,000 net adds, Verizon should finish Q3 with about 690,000 FiOS TV subscribers and Q4 with about 855,000 subs. Combining the two companies, that means about 800,000 TV subs at the end of Q3 and about 1.1 million by the end of Q4… (Continued)

We believe that Telco TV growth will continue to pick up as service availability increases. Both telcos are upgrading new towns to their fibre-optic networks daily. And both are winning new cable franchise licenses to sell TV service in areas where their new networks are already built out. So they could hit the 1 million fibre-TV subscriber milestone even sooner.

Cable rivals like Comcast (CMCSA) and Time Warner Cable (TWC), meanwhile, need not immediately panic. Comcast, for example, has 24 million TV subscribers and is stealing Internet phone customers from telcos faster than phone companies are stealing cable TV subscribers. But the threat is real: Comcast COO Stephen Burke said yesterday that the cable giant can “see” and “feel” Verizon’s TV presence. And even if telcos aren’t directly stealing customers, they’re forcing cable companies to reduce prices to keep existing subscribers loyal — which  reduces margins. Competition is going to get worse, not better, Burke said. He’s right.

Telco TV is real. Now it’s up to the phone companies to show their shareholders that they can win enough customers to make it profitable.