AT&T and Time Warner shareholder alert: Sell!

Management at Time Warner and AT&T have either been smoking something or are confident existing government policy will kill any broadband competition in their geographic markets. The funny thing about government regs is that industry and the buying public always find a work around. One example: when CAFE standards pretty much outlawed large cars, even larger SUV’s became the fastest growing automotive business.

Time Warner Cable and AT&T offer top speeds of 20 megabits and 10 megabits a second, respectively. These services typically cost from $50 to $60 a month. Both companies question whether consumers need higher speeds right now.

Time Warner Cable and AT&T argue that the money needed to upgrade their networks for higher speeds can be better utilized on other projects. How much such upgrades would cost isn’t clear. Verizon is spending $23 billion over several years to build its FiOS network although that network also offers TV and phone services.

Cable operators don’t have to spend as much to boost speeds. Comcast is using a technology developed by an industry group to inexpensively tie together several pipes it uses to shuttle data to customers into one big virtual pipe in order to deliver the higher speeds. This technology, known as Docsis 3.0, won’t require Comcast to rebuild its network to boost speeds.

The philosophical divide will have big consequences for the camp that gets it wrong. If customers end up flocking to the superfast connections, Time Warner Cable and AT&T will be caught flat-footed without a high-end offering. And not only is broadband service the highest-margin service sold by phone and cable companies, it opens the door for providers to sell both TV and phone service. That could be an issue in markets where consumers have a choice of an ultrafast connection or a fast, but not as speedy, service. Time Warner Cable and AT&T overlap with either Verizon or Comcast in a substantial portion of their markets. (Wall Street Journal)

While we don’t give investment advice, I can’t see a very bright future for either of these companies’ broadband businesses. Then again, the future of all communications and exchange of all media is in broadband, so the shareholders will be losing value soon under the current managements’ mindset. Competition will appear!