Bell Bundle's a Test For Cable Telephony

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New Jersey has become the latest long-distance domino to fall, as Verizon Communications Inc. received federal regulatory approval to offer such service last month. As a result, the Baby Bells may now offer long-distance telephony in 15 states, including Texas and New York.

According to some analysts, cable operators must be aware that it's likely to become more difficult to penetrate local telephone markets once the Bells begin bundling long-distance service with other voice and data products.

For nearly two decades, the Bells were kept out of the long-distance market, because regulators took seriously allegations that the regional telcos would leverage their monopoly on local service to obliterate competition in the long-distance arena.

But the Telecommunications Act of 1996 promised a change in the landscape by giving the Bells a path into the long-distance market if they agreed to open their local networks to competition to the satisfaction of state regulators, the Justice Department and the Federal Communications Commission.

SLOW OUT OF THE GATE

The Bells got off to a slow start. It wasn't until December 1999 that the first long-distance application — Verizon's proposal to offer long distance in New York state — was approved. With the New Jersey approval, 75 percent of Verizon's 65 million access lines have been liberated from the long-distance restriction.

Thirty percent of SBC Communications Corp.'s access lines are now open for long distance, thanks to approvals in Texas and four other states. The company could win approval in California, which represents 32 percent of its access lines, as soon as November.

BellSouth Corp. has gained approval in Georgia and Louisiana and is awaiting FCC action in five more states: Alabama, Kentucky, Mississippi, North Carolina and South Carolina. With an FCC decision slated for Sept. 18, about 90 percent of BellSouth's lines could be deregulated.

Qwest Communications International Inc. has trailed the other Bells in its attempts to gain long-distance entry. Nevertheless, Qwest is awaiting FCC action by Sept. 11 on five applications in states that represent 34 percent of its access lines: Colorado, Iowa, Idaho, Nebraska and North Dakota.

Now that the Bells appear poised to seize big chunks of the long-distance market, some analysts believe that cable operators with telephony plans face a major challenge, should they attempt to penetrate areas where the Bells can bundle local and long-distance service with wireless telephony and digital subscriber line offerings.

"The more services that a consumer is going to subscribe to, the greater the stickiness of your offerings will be to them," said Yankee Group senior analyst Imran Khan.

Legg Mason media and telecommunications analyst Blair Levin said the addition of long-distance service to a Bell company offering puts a "big moat around voice customers. You get a nice package, a nice bundle."

In a report last week, Levin said the Bells would have the upper hand early, but would lose ground to cable in due course.

"In the heavyweight showdown, we believe that the Bells will have a short-term marketing edge but cable will have a long-term cost advantage," he wrote. "Each side currently has a key piece missing: For the Bells, it's video; for cable, it's often telephony and particularly wireless."

AT&T Corp. — which offers local phone service over AT&T Broadband cable systems, as well as lines leased from the Bells — and Cox Communications Inc. have been the most aggressive MSOs in terms of local telephony. Indeed, AT&T Broadband and Comcast Corp. have told regulators that their $72 billion merger will accelerate their entry into new local phone markets.

Cable operators today serve 1.7 million local phone customers over cable facilities, according to the National Cable & Telecommunications Association. The Yankee Group's Khan expects that number to grow to 14.25 million consumer households by 2007. That's nice growth in terms of percentage, but a market-penetration level of just 10 percent to 15 percent.

Khan's forecast for cable is not so robust, because he expects it to encounter stiff competition from the Bells.

"That's why the number is only like 14 million in 2007," said Khan. By contrast, he expects cable operators to go from 8 million high-speed-data customers today to 24.2 million in 2007.

AT&T ADVANCES

In New York, Verizon has done well. It now controls 30 percent of the market after 30 months, though the company won't say whether that is 30 percent of revenue, households or access lines.

In its latest quarterly report, Verizon said it served 2.4 million customers in New York. AT&T, by contrast, serves 1 million local phone customers in that state by leasing facilities from Verizon.

AT&T and Comcast plan to challenge the Bells if their merger is approved.

AT&T Corp. chairman and CEO C. Michael Armstrong, who will move to the new cable company as chairman, said AT&T Comcast Corp. would roll out local phone service to 1 million customers in Philadelphia and Detroit soon after closing. Verizon has offered long distance in Pennsylvania since last September. SBC is not authorized to provide long distance in Michigan.

Last week, Comcast announced that it has begun installing voice-over-Internet protocol (VoIP) equipment in its Philadelphia headends, in preparation for the launch of primary line residential service in the second quarter of next year.

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