Price War Erupts For High-Speed Internet Service

The battle between cable and phone companies to sign up new customers for high-speed Internet service is heating up, creating fresh opportunities for consumers to cut their bills.

Verizon Communications Inc., which last quarter became the first company ever to see a drop in DSL subscribers -- some of whom went to its faster FiOS service -- is now offering customers six months of DSL service free if they sign up for the company's phone and Internet package. That makes the bundled package $45 a month, vs. $65 prior to the offer. AT&T Inc., meanwhile, is now guaranteeing its current prices, ranging from $20 to $55 a month, for two years.

While the most generous offers are coming from the phone companies, some analysts expect cable companies will also become more aggressive in their own promotions as they compete to retain customers.

Cable and phone companies have competed for broadband customers for more than a decade, but discounts have been relatively modest, mainly because the companies continued to add new customers at a healthy clip. Now the market is maturing quickly; some 60% of U.S. households currently have a high-speed Internet connection.

Cable and phone companies added 887,000 new broadband customers during the second quarter -- half the number they added a year earlier, according to research from Leichtman Research Group.

And while the new additions were long split roughly evenly between the two camps, the tide turned dramatically in cable's favor for the first time during the last quarter. Cable companies picked up 75% of the new customers, sending the phone companies into a scramble. As bandwidth-hungry applications like video downloads grow, customers prefer the generally faster speeds cable offers. Cable companies have also been marketing more aggressively in recent months, analysts say.

"Phone companies can't just sit back and let cable companies take that much of the broadband market, or they will eventually cede everything," says John Hodulik, an analyst at UBS.

Winning broadband customers has enormous strategic consequences for both cable and phone companies. It gives them a foot in the door to sell other services, such as pay-TV and phone service. Mr. Hodulik says customers are most apt to get phone and TV services from the same company that provides them with their broadband connection. And broadband services are also the most profitable of the bundled services.

For now, the new deals being offered are with the phone companies' garden-variety broadband services. But the heightened anxiety over the state of the market could force the phone companies to cut prices on their higher-end products, too, said Thomas Eagan, an analyst at Collins Stewart.

In the case of Verizon, that would be its FiOS service, a connection that is almost three times as fast as its fastest DSL option. FiOS is currently available in only about 10% of U.S. households, most of them in the Northeast.

AT&T's U-Verse, the company's fastest Internet service, is available in about 10% households, mainly in the West, Midwest and Southwest.

By: Vishesh Kumar
Wall Street Journal; September 2, 2008

HSBC Is Under Pressure

Diminishing Return On Capital Emerges As Investor Red Flag

When any company's return on invested capital converges toward its cost of capital, it should ring alarm bells.

That is the worrying prospect facing HSBC's shareholders. Even though it has emerged relatively unscathed from the credit crunch, the U.K. and Hong Kong-based bank's returns have come under pressure.

HSBC's ROIC, a gauge of how profitably a company is investing its money, fell to 12% in the first half from 18.4% in the same period last year. The bank estimates its own cost of capital at 10%.

Admittedly, HSBC's performance looks stellar when compared with rivals such as Citigroup, which has spent recent quarters drowning in red ink. But HSBC is still under pressure to find ways to deploy capital more effectively and to shed low-earning assets.

One issue is that the emerging markets, where HSBC invested in recent years, haven't provided sufficient earnings to offset problems in the U.S. and slower-growing European markets.

HSBC has allocated plenty of capital to Asian markets, including China and India. The long-term economic outlook is good. But as the sharp declines on Asian stock markets have shown this year, there could be hiccups along the way.

Meanwhile, HSBC's return on assets has fallen recently in Hong Kong. In the rest of Asia Pacific, its first-half return fell to 1.4% from 1.7% a year earlier.

These disappointing returns have proved a drag on HSBC's overall performance. And the self-styled "world's local bank" remains weak in some regions where growth is fast.

In north Asia, it is trying to remedy that with the time-consuming exercise of taking a majority stake in Korea Exchange Bank. HSBC operates in Turkey but isn't that strong in eastern and central Europe.

Bulking up in new, fast-growing markets looks sensible. But HSBC also needs to keep cutting its exposure to some struggling businesses in the U.S. HSBC North America's risk-weighted assets rose 11% to $374 billion in the first half, under the new Basel II banking rules, with most of the rise at HSBC Finance. That is the old subprime-dominated Household International, HSBC's U.S. unit into which it has pumped $2.2 billion in equity this year and which continues to need intensive treatment.

The area where HSBC should make more of what it already has is its global banking-and-markets unit. On the one hand, there is the temptation to do a big deal, with HSBC's name sometimes linked to potential bids for an investment bank.

On the other, HSBC's strong balance sheet seems to be giving the global banking and markets business some traction in its own right. It accounted for more than 26% of group net profit in the first half.

HSBC can try deploying modest amounts of capital in that area to gain market share, as rivals retrench, while continuing to buy emerging-market assets. That might be more attractive to investors than trying to time the purchase of a distressed U.S. investment bank.

Dish Network Whiffs Against Triple Plays: Phone, Cable, & Internet

Dish Network has plenty of possible excuses for its startling second-quarter loss of 25,000 subscribers. There is the slowing economy, increased competition from phone companies and seasonal factors.

Whatever the truth, the satellite operator's results highlight a serious concern for investors: In a market dominated by cable and telephone companies selling packages of video, telephone and Internet services, satellite is too much of a one-trick pony.

Unlike satellite operators, both cable and phone companies have been able to offset losses in one product area with growth elsewhere. Comcast, for example, reported a drop in basic-video customers last week. But investors -- more interested in the cable operator's subscriber gains in phone and high-speed Internet -- shrugged off the news.

Dish needs to find an exit strategy. One option is a cost-cutting merger with rival DirecTV. The trouble is, even though struggling satellite-radio companies Sirius and XM recently won approval for such a deal, it doesn't follow that profitable Dish and DirecTV would gain clearance.

Dish might have more luck trying to strike a deal with AT&T. The telecom giant made clear last month that, despite its move to terminate its Dish marketing arrangement, it plans to continue reselling a satellite option to customers not served by its cable-based TV product.

As for timing, don't hold your breath. Dish may do well to wait until it has a better handle on the regulatory climate after the presidential election.

By: Arindam Nag
Wall Street Journal; August 5, 2008