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Telephony Poised to Fatten Cable

New York -- Whether circuit-switched or Internet-protocol,
the business of providing local telephone services to cable customers will plump up cable
operators' revenues over the next few years.

That was the resounding message at a Kagan Seminars Inc.
conference here last Wednesday, when representatives from Cox Communications Inc.,
MediaOne and Tele-Communications Inc. shared practical experience and future plans with a
roomful of financial analysts.

MediaOne, which was "very pleasantly surprised"
by take rates for the HFC (hybrid fiber-coaxial) telephony services that it offers in five
markets, is also picking up 5 percent to 8 percent more cable subscribers just by offering
telephone service, said Greg Braden, vice president of telephony for the MSO.

"It's a great value lift for us," he added.

TCI will throw its Fremont, Calif., system into the
HFC-phone mix before pushing ahead heavily with IP-phone services next year, said David
Beddow, executive vice president of TCI and CEO of the MSO's National Digital Television
Center. The IP plunge will follow TCI's anticipated merger with AT&T Corp. early next
April, he added.

TCI's early work in cable-phone service reached its
Hartford, Conn., and Arlington Heights, Ill., systems three years ago, but it had trailed
off in favor of an aggressive digital-video push -- until now.

"AT&T's plan is to be in a full-U.S. footprint,
providing local-loop telephony, one way or another," Beddow said, adding,
"There's absolutely no reason why it'll ever stop short of that."

To achieve service reach beyond TCI's footprint, AT&T
is in pursuit of long-haul arrangements with other MSOs, and both Cox and MediaOne fall
into the category of being "in discussions," panelists confirmed.

"Cox has had conversations with AT&T," as
well as with other long-distance providers, said Chuck McElroy, vice president of new
services for the MSO. "AT&T does have strengths; it seems intuitive that there's
some opportunity for a marriage, even though it hasn't worked out historically."

Tod Jacobs, a senior telecommunications-research analyst
for Sanford C. Bernstein & Co., presented a comprehensive financial model for
cable-delivered IP telephony at the conference, showing that over the next four to five
years, MSOs could reap upward of $3 billion just by providing local telephony, not
including long distance or electronic commerce.

"There's a pretty significant amount of money there
for the cable companies," Jacobs said.

He also pointed out a competitive vortex shaping up in the
next few years that goes like this: AT&T's cushy long-distance revenues are under
attack by regional Bell operating companies, so AT&T will push back with
cable-delivered local phone service.

This will trigger RBOCs to push against cable video, likely
by partnerships with satellite providers, Jacobs said. He concluded that cable will then
need to pursue other forms of revenue, like IP-delivered phone service, to fend off video

"AT&T did not go after TCI for its 17 million
customers only," Jacobs said. "This is by far a defensive vote for AT&T, and
not an offensive one. Relative to that, cable companies will be very wise to join into
this thing, one way or another."

But for the time being, Cox and MediaOne fall squarely into
the wired-HFC cable-phone camp, opting to pursue IP-delivered phone services later.

Both said they are enjoying better-than-anticipated
subscription rates for two-line services, where the first line is slightly discounted from
incumbent telco prices, and the second line is deeply discounted, at 50 percent off telco

McElroy said Cox is actually able to sell the service
faster than it can be installed. MSOs have to slow their pace because of a need to tweak
their networks. Both Cox and MediaOne -- and any other MSOs pursuing HFC telephony -- need
to change how they handle the power portion of their networks, so that the phone stays
live when the power fails.

McElroy said Cox spends roughly $30 per home passed to add
power and status monitoring for lifeline telephony, including the power supply, express
cable to make sure that voltage travels to the phone box and a status monitor to detect

"We had people in the industry a year ago who felt
that we'd never see double-digit [penetration] for phone service," McElroy said.
"I think that we'll go well beyond that."

Jacobs said two technical issues still need resolution on
the IP-telephony side, aside from the underlying need for two-way cable plant: powering,
and signaling methods to ensure that IP-telephony calls are as fully featured as
circuit-switched calls.

On the power side, he said, AT&T is "months
away" from introducing a 10-hour battery, adding that signaling issues will likely be
resolved in 18 to 24 months.

While debate continues about whether IP-telephony services
should be developed and positioned as primary lines or secondary lines, Jacobs was
emphatic that AT&T must pursue both angles.

"AT&T has to go after the first-line solution, no
question," Jacobs said. "Otherwise, they'll have to convert all of their
long-distance business onto that second-line option."