Consumer Services: Cable’s Triple Crown Bundle

Predominance among contending communications providers will be predicated upon the widespread deployment of the Triple Crown service bundle of video, high-speed Internet access and voice. Today, the cable industry is closer to lashing together that bundle than any of the others.

Yet close only counts in horseshoes and handgrenades. While cable modem service was the undisputed leader of high-speed access in the U.S. at the end of 2002, exceeding DSL by 4 million subscribers, cable telephony is taking a back seat to the video on demand rollout of 2003.

So predicting the timetable of the killer bundle rollout means collecting specific data on the cable modem and telephony markets. Looking at these components provides us with a clearer picture of how this multiservice stratagem will play out. This in turn helps us see where cable multiple services operators (MSOs) are headed over the next several years — and how robustly they will likely compete with the rest of the telecommunications sector.

While cable always has been a broadband medium, it traditionally has been limited to providing big bandwidth downstream, enabling video to be sent from the head-end to the subscriber. Communications upstream could be accomplished only over a telephone connection.

More recently, cable companies have been investing heavily to upgrade their networks to enable two-way transmission. Cablecos began spending aggressively as they realized the impending threat posed by satellite providers in the mid-1990s. Since the Telecom Act of 1996, they have spent approximately $75 billion to upgrade their systems and overlay new networks designed to handle two-way broadband services. (See chart below on capital spending).

Cable Industry Capital Expenditures

The DSL explosion, propelled by the 1996 Act, further prodded the cablecos to push their deployment of broadband infrastructure. As competitive providers such as Covad, NorthPoint, and Rhythms NetConnections began spreading the technology, the cablecos were pushed into high gear.

During the intervening time, cablecos have been morphing from video providers into cable MSOs providing a list of services. By adding twoway transmission to their networks, cable MSOs have rolled out high-speed Internet access and advanced digital services ranging from HDTV to VoD. Cable modem-based Internet access, for one, has had a huge impact on the cable industry. It has added considerably to the bottom line (Comcast Corp., for example, saw an estimated $1 billion in added revenue during 2002 from cable modem service, with Cox Communications Corp. accruing approximately $650 million). And VoD, which is new to the scene, already is gaining traction among subscribers, with Knology Inc. capturing almost 500,000 subscription-VoD customers in 2002.

The most important thing about this range of high-speed access and advanced digital services, however, is the way bundling items reduces churn. By the late 1990s, cablecos were starting to lose customers to satellite providers such as EchoStar Communications Corp. and Hughes’ DirecTV. In 2000, cablecos were reporting monthly churn rates as high as 5 percent. But, largely as a result of bundling video and data products, the cable MSOs have experienced lower rates of churn.

Adding phone service has strengthened the bundles even more. Cox reports that in an area where its video-only churn rate was 1.7 percent in 2001, the churn rate for customers taking video, data, and voice service as a bundle was 0.8 percent, less than half. Some players, such as AT&T Broadband — now part of Comcast Corp.— and Cox, moved into telephony several years ago. They were able to do this by using constant bit rate (CBR), or circuit-switched service, which relies on traditional Class 5 telecom switching.

The advent of new technologies such as IPbased or packetized voice along with the evolving capabilities of cable platforms allows cablecos to expand CBR phone systems less-expensively with IP or deploy pure IP telephony systems. All the top cable MSOs and a large percentage of smaller cablecos, have been testing VoIP infrastructure. Many have been conducting field and marketing trials. A few even have full rollouts.

The story of high-speed Internet access over cable has been a successful one. Cable modem subscriptions outpaced DSL subscriptions by 55 percent at the end of 2002. Based on New Paradigm Resources Group Inc. forecasts, cable modem subscriber levels will continue to outpace DSL (see chart, below) at least through the end of 2006, at which point we project 25.2 million cable modem and 19.7 million DSL subscribers.

DSL Line and Cable Modem Subscribers

There are two reasons for the leadership of cable’s high-speed Internet access. The first is that the cable industry aggressively deployed a broadband infrastructure across the U.S. over the last six-plus years. In contrast, DSL still isn’t available across major metropolitan areas, while cable modem service is available to more residential customers.

The second reason centers on marketing. Cable modem service generally is deployed as part of a package featuring video and, increasingly, phone service.

The benefit of being able to market a package, in turn, is at the core of the cable industry’s biggest marketing communications advantage: the simplicity of the product in customers’ eyes.

Cable modem service also has been a hit financially for the cablecos. As DBS has taken a bite out of cable’s video subscribership and kept prices (somewhat) in check, basic cable revenue has stagnated. New digital services such as VoD look promising and certainly will add to cable’s bottom line. However, cable modem service sales already have ramped up, adding some $4.2 billion to the cable industry’s bottom line in 2002, and an expected $10.12 billion in 2006.

Cableco-supplied telephone service also will enhance the cable bundle, giving customers the opportunity to purchase video, data, and voice in one simple package, with a single bill. Phone service revenue also will add to cable’s stagnating bottom line, though not to the degree that cable modem service will help grow revenue.

The development of IP has been creating a packet system in which everything can be supplied as an application, including voice. A number of cable companies have separate CLEC units that have been providing telephone service as CLECs for some time (e.g., Cablevision’s LightPath, Comcast, Cox Business Services). Yet these operations are not necessarily providing true converged service. Rather, they are providing video and voice as two separate services over two different infrastructures. Comcast (through AT&T Broadband) and Cox have considerable Class 5- served telephony subscribers addressed through CBR technology (circuit-switched).

However, all the major cable players are planning pure IP telephony rollouts (see table below). In addition, NPRG has found during the course of numerous discussions with smaller, generally rural cablecos that they are testing and even taking IP telephony to trial. Many of these companies intend to start rolling out IP-based service over circuit-switched infrastructure using a GR303 gateway during the next 24 months.

Smaller cablecos also have discussed partnering with companies such as Vonage Holdings Corp., which enables cablecos and ISPs to provide VoIP on a hosted basis. This parallels what companies such as TalkingNets Inc. and GoBeam Inc. have been doing for telcos.

Still, the picture painted suggests the IP telephony rollout lags expectations. Where the belief was that telephony would be the next big thing for cable, technological difficulties, mixed with shaky finances and better VoD economics, have conspired to push the beginning of the great cable telephony rollout into 2003-2004. (See chart, below, for telephone service subscriber totals and forecasts.)

The cable companies have been implementing a high-speed access business plan that is competitive with DSL. Their monthly prices are lower than those of DSL, plus they often maintain an advantage with better installation speed and availability. Cable broadband continues to expand its infrastructure reach, available to about 83 percent of U.S. homes at the end of 2002, while focusing on content and bundling to decrease customer churn.

Recently, the much anticipated VoIP has had to take a back seat to VoD. The industry has been pushing VoD because it is easier and faster to extend to customers and will be able to show immediate profits. Still, IP-based voice is less expensive to deploy than circuit-switched, making the economics of the expected telephone rollout more workable and pointing to higher margins than planned for initially. This, along with the need for telephone service in the Triple Crown cable bundle of video, data, and voice, ensures that IP telephony will be implemented in the near future.

A full bundle of video, data, and voice is the future for cable. Moreover, cable has a significant head start relative to intermodal competitors such as the telephone carriers, fixed/mobile wireless providers, and the satellite providers. By the time these other classes of competitors can hope to match cable’s bundling ability, probably some time between 2005 and 2006, cable will have perfected its MSO model and will already be enjoying significant cash flow.

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines