Cable Operators

Rutledge: VoIP’s No Worry

6/23/2006 8:00 PM Eastern

Cablevision Systems Corp.’s chief operating officer said he isn’t worried about upstart voice-over-Internet Protocol competitors, and that users of its Optimum Online high-speed Internet service are losing money if they subscribe to one of those competing services.

Speaking at the Wachovia Securities Media Conference in Nantucket, Mass., on June 19, Tom Rutledge said Optimum Online subscribers that also use VoIP provider Vonage Holdings Corp. are paying $15 more per month for phone service than if they use Cablevision’s own VoIP offering, Optimum Voice.

“Anyone who is using Vonage on our network really doesn’t know what they’re doing,” Rutledge said at the conference.

That caused Pali Research analyst Richard Greenfield, who also follows cable providers, to quickly revise his rating on Vonage to a “sell” and drop his 12-month price target on the stock to $5. Vonage went public on May 24 at $17 per share, but quickly degenerated into the worst performing initial public offering in two years.

Vonage’s share price dropped 12.6% ($2.15) the first day of trading, closing at $14.85, and has been on a steady slide since, closing at $8.85 on June 21, about half the IPO price.

In a report, Greenfield estimated Vonage has about 40,000 subscribers in Cablevision’s 4-million home territory in the New York metropolitan area. He does not expect those Vonage customers to switch to Cablevision voice service overnight, but Cablevision’s “ability to undercut Vonage on price is a key reason for our [average revenue per unit] concerns, and in turn, our sell rating on Vonage stock.”

At the same conference, Rutledge said the cable company had expected to attract lawsuits regarding its network digital video recorder offering, but was steadfast in its belief in the product’s legality.

“We were prepared to go forward with the product,” Rutledge said according to a transcript of the conference. “We think it is a fairly simple product conceptually to deploy on our network. And we think it is legal and a fair use. We put out a lot of publicity around our product so we would attract the attention of anyone who might think otherwise, and we did.”

Cablevision had said earlier this year it planned to test the network DVR — which would have the same functionality of a set-top DVR except that it would be housed on Cablevision’s servers — beginning in June in about 1,000 homes in Long Island, N.Y.

Before that trial could begin, programmers including 20th Century Fox Film Corp., Universal City Studios, Paramount Pictures, Disney Enterprises, CBS, ABC Inc. and NBC Studios sued the cable company in the U.S. District Court for the Southern District of New York, claiming that the network DVR violated its copyrights.

Cablevision has suspended the network DVR trial as a result of the suit, mainly to expedite the litigation process. Rutledge added he expected the litigation to be heard in October.

The outcome of the suit is expected to have broad implications in the industry — other cable operators have said they would deploy the same technology if the Cablevision product passes legal muster.

Rutledge said if Cablevision wins the suit, it could begin offering the network DVR next year. But there will likely be appeals to higher courts. “I think if we win at the first level, we probably will be comfortable enough to go to market with our product,” he said, according to the transcript.

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