Moving Ahead in Baby Steps

The telcos that expected to take a beating from cable companies offering voice services -- in addition to TV and high-speed Internet access -- can take a breather. It looks like competition for their telephony services isn't going to be as fast and furious as once expected.

Much of the excitement surrounding cable company voice services has died down in recent months as most of the major cablecos have been forced to focus less on telephony strategies and contend with more immediate concerns.

Still, Cox Communications Inc. remains bullish on voice. Cablevision Systems Corp. and top 20 MSO Tele-Media Corp. of Delaware earlier this year launched limited IP telephony services. And others are planning to launch at least small trials of voice over IP this year.

Comcast Puts Voice on Hold

Probably the biggest recent setback to cable voice came earlier this year when Comcast Corp. backpedaled on the AT&T Broadband strategy to aggressively market local phone service. The company says, while it is conducting VoIP trials to prepare for a widespread launch of the service at an undisclosed date, telephony is not its main priority this year. Instead, Comcast says it will focus on improving systems providing video and high-speed Internet access.

Prior to its December merger with Comcast, AT&T Broadband was acquiring local and long-distance phone customers at a rapid clip. It picked up about 1.3 million local phone customers, achieving 14 percent penetration out of 8 million homes the AT&T Broadband network could serve.

"AT&T Broadband was a big driver of [cable telephony]," notes Bob Harvey, manager at Class 5 alternative switch vendor MetaSwitch. "When the Comcast deal [to buy AT&T Broadband] went through and they said voice over IP is not that important, the balloon popped."

With its video business hemorrhaging subscribers to direct broadcast satellite (DBS), Comcast clearly needed to refocus on how to cauterize the wound. "[Comcast's] loss of video is staggering" in the former AT&T markets, says a cable industry source who asked not to be identified. "Their churn is very much above national average. And they are running daily anti-DBS ads on the radio."

Charter Communications Inc., also consumed with fighting off DBS competition and dealing with a heavy debt load, is another cable company reportedly delaying telephony plans. Charter officials say the company will not consider rolling out telephony until 2004, although the company says voice will be an important part of its product line in the future.

That's just the tip of the iceberg.

"Everything boils down to money and resources," notes Lynda Starr, vice president of U.S. carrier research at Probe Research Inc. "Comcast is still going through the whole integration with AT&T, and that's taking money and attention. Time Warner -- who knows what will happen with them if AOL and Time Warner are split apart. Cox says they're slashing capex this year. Charter, which hasn't done anything with voice yet, has its share of problems. Cablevision has done some telephony, not that much, but they're selling off assets that are noncore, like movie theaters and The Wiz electronics stores. None of this really bodes well for IP telephony."

That's a shame, says Starr, since CableLab's extensive work on the PacketCable specification for voice over IP on cable networks is close to being completed. (CableLabs began certifying products under the PacketCable initiative in late December 2002.)

Cox Bullish on Telephony

On the bright side, Cox still views voice as "a critical component" to its strategy, especially as part of its three-product bundle, says Rich Brehm, marketing manager for digital telephone residential at Cox.

Cox, which launched its first local phone service in 1997, had about 900,000 residential circuit-switched local voice lines in place as of the end of last year, 80 percent of which were primary lines. The company, with phone services available to 4 million customers in nine markets, plans to launch Cox Digital telephone service in its tenth market -- Kansas City -- this spring.

In many cases, customers purchase voice services -- local, long distance (which Cox resells under its own brand) and calling features -- as part of a bundle of services. Video and high-speed Internet access services complete the total bundle. That's all delivered on a single hybrid fiber/coax network; billed on a single customer invoice; serviced using a single customer call center interface; and installed by a single technician, says Brehm.

Cox remains a true believer in the benefits of bundles. The company's research shows, Cox customers that subscribe to two of its services have a 23 percent lower churn rate than single-service customers. Churn is reduced by 53 percent when people subscribe to three Cox products, says Brehm. In other words, notes Cox spokesman Bobby Amirshahi, the bundle "cuts churn in half for us."

The company's three-pronged bundle appears to position Cox well for the road ahead. As Erik Keith, senior analyst for broadband infrastructure at consulting firm Current Analysis Inc., notes, churn for cable companies today is mainly due to competition from DBS providers, "but your future competitors are the Bells." Of course, the former Bells already have the voice and high-speed Internet access via DSL in place. Meanwhile, SBC Communications Inc. resells DISH Network video services through a deal with EchoStar Communications Corp. and is rumored to be interested in buying Hughes Electronics Corp.'s DIRECTV DBS business. DIRECTV has taken approximately 15 million subscribers from cable, either via cancellations of service, second service to the home or business (sports bars), or new service to locations with no previous cable service, according to Probe Research.

Voice is also important to Cox from a new revenue standpoint.

Cox generates roughly $50 per month for customers that subscribe to its voice services.

"Along with data, voice is an incredible new source of revenue for us," says Amirshahi. Cable TV revenue now accounts for less than 75 percent of Cox's revenue, he says, while the remainder of revenue comes largely from high-speed Internet access and voice services. Brehm says that revenue split is expected to balance out further as time goes on.

The Skinny on VoIP

The National Cable & Telecommunications Association reports 2.5 million U.S. customers were receiving competitive local telephone services via cable systems as of the end of 2002. AT&T Broadband and Cox represent the overwhelming majority of the market, says The Yankee Group. Most of those lines are circuit-switched, but Comcast, Cox and others now are starting to test the waters of IP telephony.

• Cablevision reportedly has launched a consumer voice over IP service called Optimum Voice to its Optimum Online broadband customers in limited areas of Long Island.

• In February, Tele-Media announced the market introduction of IP telephony services in its Virginia systems.

• Time Warner Cable does not offer voice service, but expects to launch VoIP trials in Portland, Maine, and Rochester, N.Y., later this year, says Keith Cocozza, director of corporate communications at the division of AOL Time Warner.

• Cox did a technical trial of VoIP last year in its Oklahoma City, Okla., network "to see how circuit switched and VoIP were complementary," says Amirshahi, who notes the back office infrastructure of the company's existing circuit-switched voice network were used to support IP telephony in this case. This year Cox expects to launch a VoIP trial in a market that doesn't have circuit-switched voice infrastructure in place.

• Meanwhile, Comcast says it is conducting VoIP trials to prepare for a widespread launch of the service at an undisclosed date. A trial in Detroit uses a combination of circuit-switch equipment and IP technology. Comcast also plans a VoIP trial in Philadelphia in the second quarter, where it will use a softswitch to route calls. "There is a belief and hope [VoIP] is going to bring improved economics to getting into the voice business and increase scalability," says Tom White, vice president of marketing for telephony.

Questions still linger on the economic benefits of VoIP vs. circuit-switched voice.

In a white paper released by Cox in February, the company says Cox "disagrees with what it believes to be overstated, potentially misleading cost comparisons of VoIP vs. circuit-switched technologies." The company says widely reported predictions that VoIP will be less than half the cost of circuit-switched technology focus only on specific VoIP equipment and devices, and exclude costs related to the network and other necessary pieces of transport architecture. Cox estimates 8 percent to 10 percent cost improvement when VoIP services are compared apples-to-apples with line, circuit-switched, network-powered phone services, says the Cox white paper "Preparing for the Promise of Voice over Internet Protocol."

The paper notes there are outstanding questions related to powering, law enforcement requirements and emergency 911 service that increase the difficulty of accurately predicting ultimate operational details and cost benefits of VoIP.

Cox says it's not ready to answer whether VoIP is a sound option for wide residential deployment. But the company says it sees the benefits of the technology (see chart) and is "prudently bullish on the potential of VoIP."

Cox on the Benefits of VoIP

• VoIP will allow the company to leverage its existing nationwide IP backbone, telephony infrastructure and back-office functionality to realize potentially signficiant cost efficiencies in the expansion of its phone service.

• VoIP will permit geographic expansion of Cox's phone services, allowing the company to launch telephony in markets where the economics don't justify the cost of a circuit switch. It also will provide the flexibility to determine market-by-market whether to expand service in existing phone markets with a circuit-switch-only approach or with a complementary VoIP overlay.

• The company will be able to regionalize many of the functions and much of the equipment associated with delivering phone service, spreading the costs across multiple markets, for cost savings and efficiencies.

• VoIP will enable Cox to use the telecom expertise, internal processes and procedures acquired over more than five years as a successful provider of residential and commercial phone services.

• VoIP will enable Cox to introduce phone services to customers the company isn't currently reaching -- without stranding the capital it has invested in its circuit-switched operations. The company would not abandon its circuit-switched business . There would be no reason for an existing customer to move from circuit-switched to VoIP technology, unless they wanted the expanded features enabled by VoIP. Otherwise, the technology would be transparent to customers. Cox fully intends to be able to completely utilize the capacity of existing switches.

• With VoIP, Cox anticipates payback on capital investment would be accelerated, because upfront costs may be less, the equipment could be utilized over a larger geographic area and the potential for new service features for which customers likely would be willing to pay more to receive.

• VoIP offers Cox the potential to deliver long-distance service over its own IP backbone network. Presently the company is a reseller of long distance transport it purchases from wholesalers.

• The company could offer unique calling features to customers of a VoIP service, which would further integrate its video, voice and Internet offerings, increase revenue per customer and enhance Cox's competitive position vs. other telephone competitors.

• Further enhancing the synergies among all of its product suites is consistent with Cox's bundling strategy. VoIP is expected to help the company reach its goal of making a three-product bundle of services available to all of its homes passed.

Source: Cox Communications report "Preparing for the Promise of Voice over Internet Protocol"

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