AT&T's Faulty New ConnectionBroadband?

With its new broadband TV service, the giant phone company is betting consumers want to watch TV away from home. But the perk is pricey

On Sept. 12, AT&T launched its first paid wired and wireless broadband TV service. Called AT&T Broadband TV, the service will initially offer 20 live channels, including The Weather Channel, Biography, A&E, and Bloomberg. But analysts are skeptical that consumers will tune into a service that charges nearly $20 on top of existing broadband bills.

Supported by content and technology partner MobiTV, Broadband TV is available nationwide and doesn't require users to buy AT&T-branded broadband access, new hardware, or software. Currently, AT&T (T) offers a 14-day trial with a limited number of channels for free. After that, Broadband TV, expected to appeal to people who want to watch TV programs at work, college students who don't have TV sets in their dorms, and business travelers, will cost $19.99 a month (see BusinessWeek.com, 7/13/06, "MobiTV Lands a Cool $70 Million").

FREE VIEWING.

This steep price seems to hark back to 2004, when AOL rolled out its broadband service that, for $24.95 a month, allowed users to watch video from ABC and CNN. Fast-forward two years: Time Warner's (TWX) videos are now available for free. "What AOL realized was that people already paying $40 a month for broadband aren't interested in paying more," says Gerry Kaufhold, an analyst with consultancy In-Stat. "It seems like AT&T is redoing what AOL has tried, and that didn't work. The pricing just seems completely wrong."

AT&T's Shahid Butt, vice president of broadband entertainment, says that the online video market has changed since the AOL and other video subscription services debuted. Last year, nearly 44.6 million U.S. households had broadband access, necessary for decent-quality video transmission, vs. 6.2 million in 2000, according to consultancy Forrester Research. Butt says AT&T's internal market research shows "there's an appetite to watch TV away from home." The research indicates that users are willing to cough up $19.99 a month because AT&T offers something that's still not easy to find: live channels vs. video clips.

But many analysts are not so sure. "We are not very bullish on being able to charge for broadband TV," says Maribel Lopez, an analyst with Forrester Research. After all, most of the video content available online today, through sites such as YouTube.com, Google (GOOG) Video, and AT&T's own Blue Room, is free. Granted, much of that content is between 30 seconds and six minutes long, but that's changing rapidly.

In April, Walt Disney–owned (DIS) ABC offered episodes of its Lost and Desperate Housewives shows online for free. On Sept. 5, CBS started streaming its evening news with Katie Couric online, and on Aug. 31, CSTV.com launched more than 100 live broadband TV channels of college sports, with many games available for viewing for free (you just have to watch commercials). CSTV.com also is experimenting with subscriptions (see BusinessWeek.com, 7/31/06, "The Phone Companies Still Don't Get It").

À LA CARTE.

By comparison, AT&T Broadband TV's programming doesn't appear to be as extensive. While AT&T plans to expand its lineup to as many as 40 channels within 60 days, that's still a far cry from hundreds of channels most users receive through cable and satellite TV services. And some of its channels, like Fox, will only be available to AT&T Broadband TV subscribers who also buy AT&T broadband service.

While the jury is still out as to whether people will pay for online TV, Kaufhold expects all major TV networks to end up relying on advertising instead. He believes that, in the coming months, they will take the bulk of their programming onto the Web for free, as advertisers have become increasingly excited about the exploding online video audience. The worldwide market for online content services is expected to grow tenfold, from about 13 million households in 2005 to more than 131 million households by 2010, according to In-Stat.

Analysts point out that AT&T also may have erred in offering a cable TV-like service instead of an à la carte lineup of TV channels, which many of today's cable TV subscribers crave. Users of services like YouTube are used to on-demand offerings. Plus, 86% of existing broadband subscribers already pay for TV services and are unlikely to pay extra for PC viewing, says Joe Lazslo, an analyst with JupiterResearch—unless, that is, they get something they can't receive through their existing service providers.

QUICK EVOLUTION.

That's the approach Apple (AAPL) and Amazon (AMZN) have embraced. Launched on Sept. 7, Amazon's new Unbox video store offers 1,300 movies and several hundred TV series for download or rental fees. On Sept. 12, Apple expanded its iTunes service to allow users to buy movies online the same day the flicks come out on DVD.

An à la carte offering could have helped AT&T Broadband TV compete with place-shifting technology from the likes of Sling Media, whose devices and software allow users to watch all of their TV channels from a computer or a mobile device. Sling Media's users don't have to pay a monthly service fee; they only need to purchase a $199.99 device to install in their home to be able to watch TV channels from their PCs (see BusinessWeek.com, 3/3/06, "Will Sling Media Shift Places?").

Chances are, AT&T Broadband TV will need to evolve drastically in the coming months to become a success—and to help stem AT&T's subscriber losses to cable providers now offering TV services. AT&T's TV network build-out, called project Lightspeed, is moving slower than, say, a build-out by telco Verizon (VZ), says Chris King, an analyst with Stifel Nicolaus & Co.

Plus, Lightspeed can only reach some 40% of AT&T’s subscribers, says MobiTV’s CEO, Phillip Alvelda. "They need something else, they need to hit everyone else," he says. "[Broadband TV] can hit everyone with a broadband connection."

NO SUBSTITUTE.

Also, to fill the void, AT&T mainly relies on reselling service from satellite TV provider EchoStar (DISH). In May, it also announced a service, provided with MobiTV's help, allowing users to access 15 TV channels for $11.99 per month or $5.99 per day via AT&T's 7,000 U.S. Wi-Fi hotspots (the service will eventually be available in all of the company's 11,000 Wi-Fi locations).

The idea is to make it more appealing for existing customers to stick with AT&T instead of leaving for cable companies. In the coming weeks, AT&T will offer Broadband TV bundled with its DSL service for a more attractive price, says Butt. Trouble is, based on the current Broadband TV's high price, not many AT&T users are expected to sign up for the service, says King. "I don't think it will be a meaningful revenue contribution any time soon," he says.

With the right offering, AT&T could push consumers to downgrade to a less expensive cable TV package as they buy more channels online, says Laszlo. That move will be partly predicated on the introduction of new technologies, such as those allowing people to easily view content sent to the PC on the home TV. For now, though, "we don't see this service as a substitute for your at-home TV experience," he says. It doesn't mean Broadband TV can't become that eventually, though.