THE WAITING GAME?

Cablecos Sit on Telephony Sidelines, Eager for Reliable IP Gear

The penetration rates aren't shabby either. For instance, in two of Cox's original telephony markets -- Orange County, Calif., and Omaha, Neb. -- almost one-fourth of the cable TV subscribers purchase local dialtone as well, says David Pugliese, Cox's vice president of sales and new product marketing.

But if customers' demand is apparently so strong. why aren't more cable companies rushing out to get into the telephone business?

Industry analysts and cable company executives say the reasons are threefold:

• While AT&T and Cox have pursued circuit-switched telephony, other cablecos are waiting for IP solutions they believe will provide them with more capital efficiencies and better use of their existing networks;

• For the last few years, cablecos have spent billions of dollars upgrading their networks for two-way communication. Without IP solutions, they would face millions of dollars in additional expenses buying circuit switches, on top of the $700 to $900 to equip each home for voice services; and

• With their upgraded networks, cablecos first focused on selling digital cable and high-speed Internet access because these services are less complex to offer and manage.

Source Cahners In-Stat Group 
(www.instat.com)

Despite these issues, cable telephony is "rolling out fairly well in terms of a new technology by a new service provider," says Michael Paxton, a senior analyst at Cahners In-Stat Group.

At the beginning of the year, only about 250,000 customers received cable telephony service, he notes. By the end of the year, that figure will be closer to 1.4 million.

"At the same time, you haven't really seen it hit that exponential growth level because a lot of the major MSOs decided to wait until there's IP solutions before they rolled out services," Paxton says.

Most cable companies still are sitting on the sidelines pondering possible trials in 2002. However, Charter Communications and Time Warner Cable already are testing IP telephony equipment from a variety of vendors in some of their markets.

"The whole premise of [cable telephony] only makes sense if we can offer telephone service over our data network," says Jim Rice, Charter's vice president of commercial and residential telecom services. "It holds tremendous promise in terms of efficient use of that network, not overlaying a separate network. We're building very robust, broadband IP data networks to serve our customers. If telephony can roll on top of that as an additional feature, the economics hold promise that this is the way to go. We're avoiding circuit-switched because that's going to be a sunk investment."

Charter has two IP telephony technical trials underway. In Wausau, Wis., it is using routers and gateways from Cisco Systems Inc., Telcordia Technologies Inc. call agents and network interface devices from Motorola Inc. that are placed on the side of the residences, Rice says.

In St. Louis, where Charter is testing Nortel Networks gear, Rice says trials have been slow to start because of problems getting connectivity to the PSTN.

There's big pressure on equipment vendors because they have to come to market and show that the equipment works, says Imran Khan, senior analyst in the consumer research group at The Yankee Group.

Rice expects both technical trials will be complete by January and, after some technical issues are addressed, market trials are slated for the 2002 third quarter.

"The products need some upgrades," Rice says. "We're waiting for some software upgrades to address the challenges with busy line verification and operator services ... the technical issues that have just surfaced when we brought it into the field."

With a goal of providing PSTN-replacement quality telephone service, Rice says Charter and other cablecos face two types of challenges. The first is to ensure the technology is stable. Charter is working out the details, such as connectivity to the PSTN and signaling systems, operator services and other aspects needed to provide lifeline service. The second challenge is within the cablecos operations. Rice says telephony services require more extensive monitoring and management of circuits, interfaces and gateways than what they're used to for cable TV.

Charter acquired about 16,000 circuit-switched customers in St. Louis, as a result of a cable systems swap with AT&T Broadband. Charter decided not to pursue that business model and opted to wait for IP.

Beyond the technical issues relating to IP telephony gear, "the reason we haven't gone with this faster is that we were in the last couple years of our $3.5 billion upgrade, then we got digital set-top boxes deployed, then cable modems," says Rice. "Telephony is a natural layer on top of that. The infrastructure to support high-speed data is the same to support IP telephony."

Time Warner Cable is taking a similar tack to Charter, rolling out digital cable, video-on-demand and its RoadRunner brand of high-speed Internet service, while it works the kinks out of IP telephony.

"We've long believed that the cable plant makes an ideal platform for local telephone service, but that the capital costs for entering with circuit-switched, primary lines were too high," says Mike Luftman, a company spokesman. "Now that IP telephony is almost ready for prime time, we're in a position to roll that out."

The company is doing IP telephony technology and market trials in Portland, Maine; and second-line service for about 1,000 of its RoadRunner customers in Rochester, N.Y., Luftman says. Time Warner Cable declined to name its vendors.

Other cablecos, such as AT&T Broadband, Cox and Comcast Corp. have yet to start IP telephony trials.

Companies like AT&T Broadband and Cox, with a great deal of experience operating circuit-switched telephone networks, may be at an advantage when it comes to deploying IP-based telephony -- even if they're lagging behind in trials of the technology.

"We feel good about not waiting because we've had three years of experience and revenue," says Cox's Pugliese, who adds that the company is evaluating IP telephony trials for 2002. "When [IP technology] is ready for prime time, we'll be ready to deploy as an upgrade or in new markets. If the initial product [is more suitable] for second lines, I can see it being deployed in a circuit-switched market."

AT&T Broadband has slowed marketing of its circuit switched offerings in its 15 markets while it changes and integrates its telephony back office systems. The company expects a smooth transition from circuit switched to IP. "We know how it's provided because we're dealing with implementation issues now," says Sarah Eder, an AT&T Broadband spokeswoman.

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