Cable Sprints Into the Wireless Game

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The nation’s three largest cable-system operators are close to signing an agreement with Sprint Nextel Corp. to supply wireless telephone service to their subscribers.

The deal, if completed and executed rapidly, would make Comcast Corp., Time Warner Cable and Cox Communications Inc. the first large suppliers of four major forms of communication: television, Internet access, telephone and now, wireless services.

According to a cable-industry executive familiar with the negotiations, the cable consortium will likely sign a Mobile Virtual Network Operator (MVNO) deal — essentially a wholesale agreement — with Sprint Nextel that could be signed in November.

The deal will initially involve giving the cable operators the right to resell Sprint Nextel wireless-telephone service under their own brand names and bundle it along with their current offerings of video, voice and high-speed Internet service, this executive said. The agreement with the three operators allows for the relationship to expand and include additional products and services.

One such future service could allow a cable network to handle the handoff of a call from a network inside the home to the cellular network outside. That would make it possible to use the same handset both as an Internet protocol-based home unit and as a cellularly linked mobile phone.

A wholesale arrangement would get cable companies into the mobile phone business, but “it’s not game-changing,” said Neil Sequeira, a partner at Cambridge, Mass.-based General Catalyst Partners and former managing director of technology at Time Warner Investments.

The next phase — the dual-purpose phone — would be more compelling to consumers and provide a capability that service providers can promote as a simple way to extend a home phone into a mobile phone, or the reverse.

“You really touch the consumer directly,” he said. “They can buy different products and services. It’s a really integrated approach.”

The technology to create such an integrated service is available now, from companies such as BridgePort Networks of Chicago. Cable companies could boost their competitiveness if they started to offer such a service in the next two years, he said.

The cable operators are trying to cash in a fast-growing piece of the telecommunications market in which they do not yet participate.

Domestic spending on wireless communications is expected to reach $158.6 billion in 2005 (a 9.3% increase over 2004), growing to $212.5 billion by 2008, according to the Telecommunications Industry Association.

Currently the wireless telephony market is dominated by four major players — Cingular Wireless, a joint venture between SBC Communications Corp. and BellSouth Corp.; Verizon Wireless, a partnership between Verizon Communications Inc. and Vodafone Group plc; Sprint Nextel; and Deutsche Telekom AG’s T-Mobile. Together the four pulled in $99.5 billion in revenue in 2004.

To date, the growing pie has eluded cable operators.

Among cable operators, only Cablevision and Mediacom offer some variation on the quadruple play — Cablevision allows its cable customers to order Sprint cell phone service via its Optimum Store Online, but does not bundle wireless with its triple-play voice, video and data package. Mediacom has the right to resell Sprint wireless service in conjunction with its own voice-over-Internet protocol service (which uses the Sprint backbone). But Mediacom only began marketing any phone service about a month ago.

Time Warner Cable has been testing a Sprint-branded service in its Kansas City market.

If cable companies sell wireless services under their own brands, that will raise the stakes in their increasingly heated competition with telephone companies. Verizon Communications has launched its FiOS voice, video and data service in Keller, Texas, and plans to expand into six more markets by the end of the year. SBC, which announced its $10 billion Project Lightspeed initiative last year to build a fiber-optic network capable of delivering voice, video and high-speed data throughout its footprint, has applied for franchises in Texas but has not yet begun to offer the service.

For its part, Sprint Nextel gets access to a large base of potential customers. The three cable operators combined have 38.7 million TV subscribers and pass a total of 70.8 million homes. Sprint Nextel, the third largest wireless carrier in the country, currently has about 44 million wireless subscribers.

On the cable side, Comcast in particular has said it was shooting for a way to let a home phone double as a mobile phone.

But a resale agreement with Sprint Nextel at least can be considered to be getting it a foot outside the door, into mobile service.

A wholesale deal also seems to fit into Comcast’s wireless strategy. In an interview with the Financial Times in July, Comcast chairman and CEO Brian Roberts said the Philadelphia-based operator does not necessarily want to own a wireless carrier.

“We don’t want to own wireless per se, but to make our products available through wireless devices,” Roberts told the newspaper.

According to the cable executive familiar with the negotiations, the deal is in the term-sheet stage — meaning that particulars of the deal have been worked out on paper but have yet to be formally agreed upon. A deal, that executive said, could come as soon as next month; cable-branded wireless services could start by early next year.

Pricing for the wireless service hasn’t been worked out yet, but according to the cable executive familiar with the negotiations, discounting will be possible.

“There’s a pricing mechanism going into this, so obviously whatever discounting arrangements individuals want to come up with is going to affect profitability,” the executive said.

Sprint Nextel has done other wholesale deals, most notably with British entrepreneur Richard Branson’s Virgin Group, which resells Sprint service under the Virgin Mobile name on a pay-first-then-talk basis.

The cable companies joined forces last October to investigate offering a wireless service, including whether to buy a wireless carrier outright. While the group initially toyed with the idea of buying out Nextel Corp., according to cable-industry executives with knowledge of the consortium’s thinking, that idea was scrapped after considering the cost of such a deal and Sprint’s announcement that it would buy the carrier in December.

The consortium originally included St. Louis-based Charter Communications Inc. but no longer does, according to the cable executive familiar with the negotiations. Other operators could get in on the deal at a later date. Officials from Charter, Comcast, Cox and Time Warner all declined comment.

Sprint already has a business relationship with most cable operators — it provides the nationwide wireline backbone to Time Warner Cable’s, Charter’s and Mediacom’s existing voice-over-Internet protocol phone services.

Sprint Nextel spokesman Nick Sweers declined to comment on whether a new deal is in the works, but added that his company is always open to expanding its relationship with cable operators.

“We continue to establish a growing number of relationships with cable companies,” Sweers said.

Wireless service is likely to become the fourth play in competition between cable and phone companies in residential communications.

Verizon hasn’t pushed the wireless service in its “triple-play” bundle of TV, Internet and phone service yet, mainly because the wireless business has been so successful on its own. But SBC has moved to create a “quad play,’’ bundling wireless service from Cingular service — the largest cell operator in the country, with more than 50 million customers — in its own voice, direct broadcast satellite video and high-speed data packages.

SBC offers a Connections Premier Pak — all-distance local and long-distance telephone, SBC Yahoo! high-speed Internet service, SBC/Dish Network satellite television service and Cingular Wireless service for $140.88 per month.

Fulcrum Global Partners media analyst Richard Greenfield said that a resale deal could be compelling in the short-term.

“It sounds like a smart strategy to start,” Greenfield said. “The question is … do they have to have more control over the technology over time?”

Greenfield added that the big question for the cable operators is how they will differentiate their wireless product.

“I don’t think that 'Time Warner Wireless’ particularly means anything,” Greenfield said. “What are the types of benefits that you are going to get? Are you going to be able to watch some TV over the phone? What is going to be the differentiator?”

Kent Gibbons contributed to this story.

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