Ralph de la Vega, an AT&T group president who oversees entertainment, said the fledgling AT&T U-verse service offers "lots of revenue opportunities" and could become a $1 billion business. The TV service so far is in only 100,000 homes, but has picked up half of those since June and is growing at a rate that could put it close to 200,000 by year-end, he said.

That's a drop in the bucket compared to Comcast's 24 million, but COO Steve Burke said Tuesday that Verizon, the other telco TV provider, is providing significant competition with its FiOS service--and while a challenge from AT&T has apparently caused less "damage" so far, Comcast expects that to heat up as AT&T ramps up its investment.

That was a marked change from comments by some top cable executives who before questioned the viability of the fiber-based telco TV services.

"Verizon is real," Burke said. "FiOS exists in our footprint; Verizon is taking video customers from us."

Verizon's FiOS had 515,000 customers at the end of June and was available to some 3.9 million customers, for a penetration rate of 13%. The telco is looking for up to 4 million customers by 2010, for up to a 25% penetration rate across the markets it serves.

Burke and de la Vega made their comments at an investor event in New York.

Still, while Verizon is peeling away customers in several markets, Burke said the telco may still suffer from investing too much money too quickly to deploy the service. "We have always questioned, will they get a fair return for their shareholders?" he said. Burke said it's more difficult to gauge what kind of subscriber gains AT&T may be making vis-à-vis Comcast in the large Houston market where they compete head-to-head. But regarding AT&T's potential challenge, he said "they are real--they're a very big company, very serious about what they're doing, spending a lot of money."

AT&T has so far produced a considerably slower 2% penetration rate compared to Verizon's 13%. AT&T's 100,000 subscribers come from a 5 million-home footprint, and the company plans to be in 8 million homes by year-end. If that holds and it has 200,000 subs by then, the penetration rate would still be less than 3%. Of course, a major marketing spend could accelerate uptake. AT&T plans to be in 18 million homes by the end of 2008.

AT&T's de la Vega said U-verse will yield more revenues as the company reduces its cost structures. For example, he said, it used to take an average of 7.5 hours to install U-verse--which is now down to 6.5 and one technician can do it in 4 hours. He also said the company has made technological improvements, allowing it to reduce the amount of bandwidth it needs to provide HD viewing, bringing costs down.

Also, subscriber growth, perhaps to the 1 million range, will give AT&T more leverage via-a-vis content providers and could lead to reduced per-subscriber payments. de la Vega added that he also expects to bring those costs down by approaching programmers and offering them a three-screen distribution deal, where they could offer their video on U-verse as well as reach millions of AT&T broadband and wireless customers. He said he's looking for "innovative content producers" interested in multi-platform reach.

As costs come down and consumer interest piques, de la Vega said: "It's going to follow the same trends as broadband." AT&T has some 12 million broadband customers.

U-verse installations are taking place at an average rate of 7,000 to 8,000 a week, he said, and the company believes it can get to 10,000 by next year.

Separately, de la Vega signaled that AT&T plans to ramp up its ad sales efforts to attract marketers looking to reach its massive customer base in the broadband and wireless areas in bundles. While it doesn't yet sell advertising on U-verse, it has opportunities online and is seeking to ramp up in mobile.

"I think there's great upside in advertising, and we've only begun to dive into those markets," he said.

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