MSOs, AT&T Set Table For VoIP Rollouts

Voice-over-Internet protocol telephony took center stage last week, dominating discussions at two key investment conferences as behemoths Time Warner Cable and AT&T Corp. announced significant vendor contracts and rollout schedules for the service.

Time Warner Cable put one of the last major pieces together for its national rollout of VoIP, signing deals with MCI and Sprint Corp. to provide connectivity and other IP provisioning services for the MSO's VoIP rollout.

AT&T announced it would offer VoIP service nationwide next year, starting with several markets in the first quarter. The long-distance giant plans to offer a secondary line VoIP phone service on top of the cable and digital-subscriber-line modem platform.

But AT&T also has 4 million local phone customers in 35 states and offers local DSL service in 11 states through Covad Communications Corp. That gives it the local marketing presence, backed by its national backbone, to offer VoIP.

Joining the crowd, Qwest Communications International Inc. said it will launch VoIP service in Minnesota, competing there against Time Warner Cable and, eventually, Comcast Corp.

Comcast Corp. said it will roll out VoIP in four markets in 2004 — Philadelphia, Hartford, Conn., Indianapolis, and Springfield, Mass — targeting 2005 for a much broader rollout of VoIP.

Cox Communications Inc. has launched a VoIP test in Roanoke, Va., while Cablevision Systems Corp. has launched VoIP across its New York-area footprint. Charter, Insight and Mediacom also said they were looking at VoIP rollouts in 2004 and 2005.

New Battles

Clearly, VoIP will become a new key battleground among a multitude of telecommunication companies in 2004. The announcements prompted major stories in The New York Times and The Wall Street Journal.

Cable operators see VoIP as a relatively low-cost application that can be added to an already established data platform, and can be priced more inexpensively than the competing regional Bell operating companies.

VoIP also gives those operators not already in the traditional circuit-switched telephony game the third element in triple play of video, data and voice. And telephone service has already lowered churn for such operators as Cox.

While all operators love the marketing bundle, MSOs are taking different technological approaches to VoIP deployment.

For Time Warner Cable, MCI and Sprint will handle termination of the MSO's IP voice traffic to the public switched-telephone network, delivery of enhanced 911 service, local number portability and long-distance traffic.

"This allows us to get into the business very quickly," Time Warner Cable chairman and CEO Glenn Britt explained at a UBS Warburg conference last week. "VoIP is a very good business."

The news got a thumbs-up from Wall Street. "We believe VoIP could provide the next leg of growth once high-speed data plateaus," Merrill Lynch analyst Jessica Reif Cohen wrote in a research report. "We believe that this multiyear deal virtually guarantees that Time Warner will meet its aggressive target of offering telephone service deep within all its markets (which could have been compromised given the tight timeframe) and at the low incremental [capital expenditure] of $300/sub."

She added: "The deal could also give Time Warner time to build out its network while learning from their telco partners, eventually bringing in the capabilities in house once the deals expire."

Indeed, Cox and Comcast plan to build out substantial portions of their VoIP telephony network in-house, although both MSOs have embedded circuit-switched facilities, which makes it easier for a go-it-alone approach.

Time Warner kicked off VoIP service in Portland, Maine, working with a small local carrier, Pine Tree Networks. So far, the MSO counts 8,000 subscribers in that market. It's launching in Raleigh, N.C., and plans a national expansion, starting on the East Coast and in the Midwest, throughout 2004.

Britt On Costs

Britt said VoIP penetration has reached 18.5% of data subscribers in Portland. While telemarketing close rates in that market are 6%, direct sales close rates are 35%. He said 76% of subscribers rate the service "good" to "excellent" and that 86% of customers are porting over their existing phone numbers to the VoIP service.

"VoIP is 50% cheaper than circuit-switched technology," Britt said. He said per-subscriber costs will include $120 for the modem, $47 for distribution, $50 for the soft switch port and media gateway, $50 for the battery and $30 for "other," giving VoIP a total expense of $300 per home.

Given that cost, Britt said the service would generate positive cash flow in year three.

Time Warner is pricing the service at $39.95 per month for video and data subscribers. The MSO is charging $44.95 per month for a data or video subscribers and $49.95 a month for a voice-only subscriber.

Britt said all but a few hundred of the subscribers in Portland are triple-play subscribers.

Britt said Time Warner's VoIP service is $25 per month cheaper than similar phone service from Verizon Communications Inc. and $14 cheaper than SBC Communications Inc. And even with that, Britt said Time Warner could drop the price of VoIP, to compete as others drop prices, and still make money.

"There's room to play with price," he said.

The deal gives Sprint and MCI a boost in the cable market. Sprint will supply service in 17 Time Warner Cable markets, while MCI will have the remainder of the MSO's territories.

"We feel we have a very strong value," said Sprint director of service deployment Mark Shall, citing the company's 100-year history in the local-telephone business.

"We have all the back-office systems that allow cable companies to quickly enter the phone business," he said, including managing number portability and loading SS7 databases. "Those back-office operations enable Time Warner to provide an equivalent service RBOC and allows them to enter the market much faster."

Sprint also provides wireless service, and that's something Shall is talking to operators about. "There is a lot of power in bundling wireless," he said.

Voice calls will travel through Time Warner's network to the media gateway, where they will be handed off to either the MCI or Sprint network. Sprint has moved 100,000 of its local phone customers to a packet-switched network.

The company has activated more than 20 Nortel Networks Inc. soft switches across the country, and will initially use three of those soft switches to handle traffic in the 17 Time Warner markets, Shall said.

Shall said Sprint "is in active discussion with multiple companies" about offering services similar to those in the Time Warner Cable deal.

AT&T's Backbone

AT&T played up its national IP backbone in its announcement.

"Unlike many of our competitors, who are constrained by geographic reach or broadband access technologies, our voice IP offer will be available in cities across America to customers with different kinds of broadband access," AT&T chairman and CEO Dave Dorman said.

Coinciding with the announcement, Dorman named Cathy Martine, senior vice president of the consumer division, to head AT&T's VoIP initiative.

AT&T did not disclose VoIP pricing, but a spokesman said it would be competitive with other VoIP packages in the market. Last week, AT&T said it would offer UNE-P local service in Kansas, Oklahoma and Missouri, for example, with unlimited local and long-distance service for either $48.95 or $49.95 a month, which would mean its VoIP service would likely be cheaper than its circuit-switched local phone offering.

For cable operators, AT&T represents yet another Vonage Holdings Corp.-like competitor, selling a VoIP service on top of pre-existing broadband data platforms, whether a cable or DSL modem. AT&T has deployed an undisclosed number of soft switches throughout the country, with the last of the deployments finishing up on the West Coast, the company said. Once those switches are in place, AT&T will launch the VoIP service, a spokesman said.

Vendor Cheer

On the vendor front, MCI and Sprint certainly came up big last week. More familiar key suppliers are also likely to benefit.

Time Warner uses Cisco Systems Inc. soft switches and media gateways, and Motorola Inc. embedded multimedia terminal adapters. Those companies will likely get more business as Time Warner rolls out nationally next year.

AT&T did not disclose which soft-switch vendor it has been using. AT&T's entry into the market not only will compete with cable, but also upstarts like Vonage and Net2Phone. And that doesn't count Qwest, Verizon and other RBOCs that might be planning deployments in 2004.

The prospect of competition from multiple points left financial analysts asking Comcast executives last week if they were moving quickly enough.

"We're comfortable with our position," executive vice president of sales, marketing and customer service David Watson responded at a UBS Warburg conference, adding that Comcast has learned a lot about making telephony work well — and be profitable — from the former AT&T Broadband circuit-switched systems it operates.

The new competition "will not change our schedule at all," he said. "We'll get a lot of learnings with the four markets."