The heated competition between regional Bell operating companies and cable companies shows no signs of abating as the rivals invade each others’ turf with “triple play” services – voice, data and video bundles
Time was you would buy TV service from your cable company, telephone service from your phone company, and that was that.
But now cable companies are offering phone services at hard-to-pass-up prices, while phone companies are fighting back with plans for TV services delivered through brand-new agreements with leading satellite TV providers.
The heated competition between regional Bell operating companies and cable companies shows no signs of abating as the rivals invade each others’ turf with “triple play” – voice, data and video – service bundles designed to attract new customers and retain old ones. Throw wireless services into the mix and the prospects for even fiercer battles – and even more aggressively priced service packages – loom.
“A driving factor in our success continues to be our bundling strategy,” said Cox Communications President and CEO Jim Robbins during the company’s earnings announcement last month. “Today nearly one-third of our customers buy multiple services.”
The chief business beneficiaries of this budding competition are home office workers and very small companies, customers the RBOCs covet as much as the millions of residential users.
“We take [cable competitors] very seriously,” says Mark Pitchford, senior vice president of consumer marketing at Qwest. The carrier does not divulge numbers, but has seen line loss to cable operators in some of its larger metropolitan markets.
Such encroachment by cable operators in RBOC territory is just beginning and is likely to last a long time, analysts say.
“Cable competition is the greatest threat to Bell franchises,” says John Hodulik, an analyst at UBS Warburg, who says he believes widespread cable telephony rollouts will begin in 12 to 18 months.
Here come the MSOs
Cable companies are becoming multiservice operators (MSO) to increase revenue by offering new voice and data services over their existing video infrastructures. These new services are facilitated by recent high-speed data communications standards and advancements, such as the Data over Cable Interface Specification (DOCSIS) and voice over IP (VoIP), respectively.
With their new service rollouts, MSOs are running directly into the pocketbooks of RBOCs, which also are trying to tap new revenue streams through DSL Internet access and remarketing of satellite TV service as their profits from traditional voice taper off.
The early results are mixed. In data, deployments of cable modems for broadband Internet access already outpace DSL by almost 2 to 1 – 11.6 million cable modem subscribers vs. 6.5 million DSL users in the U.S., according to UBS Warburg.
The overwhelming majority of those cable modem services, however, are for residential consumer use; only 5% of U.S. cable modem deployments are for home offices or mom-and-pop shops, according to In-Stat/MDR. Business DSL, meanwhile, accounts for 35% of all DSL deployments in the U.S., In-Stat/MDR says.
Some cable companies already offer circuit-switched voice services in some markets. But all are emboldened by the operational efficiencies of packet-switched VoIP and the opportunity to capture primary- and secondary-line services from the RBOCs.
“The gradual increase in cable telephony competition is expected to re-accelerate retail line loss” among RBOCs, UBS Warburg’s Hodulik says.
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Voice service availability from the four most-aggressive MSOs – Cablevision, Comcast, Cox and Time Warner Cable – is still spotty, however, and many are still in the trial phase with VoIP. Customers typically can’t get it unless they also sign on for broadband cable modem service, though some MSOs say they soon will repeal this requirement.
Interest in cable telephony is rising, MSOs say. Some report increasing numbers of subscribers as users reap the benefits of unlimited local and long-distance service, offered at a monthly flat-rate discount, when ordered with cable TV/broadband Internet access services.
For example, Cox says it added 56,170 digital circuit-switched telephone customers in its second quarter, bringing the total to more than 800,000, an 18.4% penetration rate of the homes or businesses able to access Cox telephony. That rate represents growth of 45% from last year, according to the company.
Cox also has a VoIP test in progress in Roanoke, Va., that the company plans to to expand sometime this year, analysts say.
Time Warner earlier this year launched VoIP service in Maine that offers unlimited local, in-state and domestic long-distance for $39.95 (bundled) to $49.95 (unbundled) per month. The company has signed 2,700 subscribers, and plans to expand the service to Rochester, N.Y., and two locations in North Carolina later this year.
Cablevision began offering primary- and secondary-line voice to its OptimumOnline residential customers earlier this year. By year-end, all 4.4 million homes in Cablevision’s region will have access to the company’s voice service, a company spokesman says.
Cablevision did not disclose how many voice subscribers it has, but analysts put the figure at about 10,000. The company has offered voice and data services to businesses for a few years via its Lightpath unit, a competitive local exchange carrier that operates a SONET network connecting 1,500 buildings in New York, New Jersey and Connecticut.
The largest cable telephony company is Comcast, with more than 1.37 million customers, a penetration rate of 15.5% of the homes and businesses eligible for the service. Comcast, which did not respond to multiple requests for interviews, already offers circuit-switched voice to subscribers in Michigan and Virginia, and began rolling out a residential, primary-line VoIP service in Philadelphia last quarter.
But Comcast lost some subscribers and telephony revenue in the second quarter because of reduced marketing efforts, according to company statements on its second-quarter financial results. Analysts say Comcast is focusing on improving its margin and reducing its debt, following its huge acquisition of AT&T Broadband, the source of much of its telephony base.
Battling Bells
RBOCs are not standing pat. SBC and Qwest recently announced deals with cable companies’ staunchest rivals – satellite TV providers – to bundle video programming into their voice, wireless and broadband Internet access packages.
SBC has an exclusive, $500 million arrangement with EchoStar to offer the Dish Network to customers within SBC’s 13-state region next year. Qwest says its marketing arrangements with both EchoStar and DirecTV are slowing line losses to MSOs in Omaha, Neb., and Phoenix.
Together, EchoStar and DirecTV have as many subscribers as Time Warner, the second-largest cable company in the country, says Allan Tumolillo, COO of Probe Financial Associates.
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“Cable companies look at satellite as the deadly enemy because once that customer goes over to satellite he’s probably not going to buy anything from the cable guy,” Tumolillo says. “I don’t think there are a lot of cable modem customers who do not take cable television.”
Verizon and BellSouth have yet to divulge their video bundling plans, but observers expect them also to sign deals with EchoStar and DirecTV. Verizon says its long-term triple-play strategy will be based on fiber-to-the-premise (FTTP), which the RBOC says it will start deploying next year.
Observers, however, say the RBOCs will be slow to invest in and deploy FTTP while they enhance DSL and develop satellite video partnerships.
Broadband as Trojan horse
Yet telephony penetration is tied more closely to delivery of high-speed broadband data and Internet access service to homes and offices than to video, analysts say. That’s why RBOCs have been lowering the prices of DSL service so dramatically – to stave off further penetration by cable modems that potentially could replace RBOCs’ primary voice lines into homes and businesses.
For instance, in June Verizon lowered its DSL monthly fee by up to $10 if purchased as part of an unlimited local/long-distance and wireless bundle. As part of the same package, the company boosted the downstream speed to 1.5M bit/sec. SBC soon followed suit, as did BellSouth. Qwest lowered its bundled and unbundled DSL prices by $5 to $15 per month.
The silver bullet for RBOCs, though, could be wireless, which has become very popular with businesses and consumers as the result of minutes-of-use packages that include huge numbers of minutes at very low cost. Offering attractive wireless bundles potentially can replace landline revenue that RBOCs lost to MSOs and other mobile wireless operators, analysts say.
Wireless makes SBC’s triple-play bundle a “quadruple play,” officials at the RBOC boast.
“Wireless is a key point of differentiation,” says Gordon Brown, executive director of alliance management at SBC. “When stacked up with broadband, telephony and now video in our bundle, we think it positions us well.”
SBC and Qwest have yet to see any MSOs in their regions partner with a wireless operator or disclose any wireless plans. But analysts say it’s a must in an MSO bundle.
“Cable comes to the table now with a bundle that excludes wireless,” Probe’s Tumolillo says. “The cable companies need to find some partners on the wireless side.”
The cable advantage
An advantage for the cable companies could be their heritage in video, though satellite use also is growing each quarter, analysts say. Another perceived advantage could be the ability of MSOs to offer services over a single common infrastructure, SBC’s Brown says. RBOCs provision their bundled services over multiple facilities, such as satellite video, that they don’t even own.
“Is that a true bundle? It won’t be as convenient or efficient or as compelling as what cable is offering,” says Mike Paxton, an analyst at In-Stat/MDR. Remarketing arrangements have failed in the past. We’ll have to see how they really offer it and how they price it and what kind of synergies really exist before we can say that’s a real competitive service bundle to what the cable guys are offering.”
A true bundle is in the eye of the beholder, Brown says.
“If the customer experience is seamless and the billing experience is seamless, I don’t think [a common facility] necessarily resonates with the customer as an advantage,” he says.
So it’s too early to call who has the overall advantage in offering a triple-play bundle. Cable companies have the majority of broadband access subscribers and the “bundled” infrastructure; RBOCs have wireless and the business presence.
“If people want really high-speed Internet, the edge may tilt toward cable,” Probe’s Tumolillo says. “If the decision is, ‘I’m OK with DSL,’ then the telcos have the edge because they have mobility, and they can get you everything else that you need. After that, it gets very dicey.”
