Were AT&T Broadband to be sold to the highest bidder, cable's overall telephony momentum would probably slow down substantially, at least in the short-term, industry observers and analysts said.
But at the same time, the National Cable & Telecommunications Association talked up cable as a growing competitive force for voice services earlier this month at the National Association of Regulatory Utility Commissioners conference in Seattle.
The NCTA backed up those claims with a detailed, 11-page white paper that offered the following conclusions: MSOs have spent mountains of money to test and deploy telephony services — and consumers are clamoring for them, because cable's prices typically undercut what the incumbent telcos charge by 10 percent to 20 percent.
Those incumbent telcos aren't making things any easier for cable operators that offer phone service. "Anti-competitive" ILEC behavior involving number porting and trunk provisioning continues to persist, the NCTA claims.
According to the report, roughly 1.3 million telephone customers in the U.S. buy phone service from their local cable operator, a figure that's growing by more than 70,000 customers per month.
The residential telephony efforts of just two MSOs — AT&T Broadband and Cox Communications — represent more than 90 percent of those totals. As of June 30, AT&T Broadband had 848,000 phone subs and Cox had 344,524.
"Excluding AT&T, the cable-telephony industry is in its infancy," said Jeff Halpern, senior U.S. telecom analyst at Sanford Bernstein & Co. "But Cox has done an impressive job, having come into this not as a telephony provider, but as a cable provider."
Still, "when I look at the impact that cable telephony is having on the RBOCs, the numbers that matter are the AT&T deployment numbers," he added.
Although cable has managed some telephony successes, its momentum in that area is a relative point, considering the industry's basic footprint covers just north of 69 million households. There's a lot more work to be done.
In part, that's because only about 29 percent of AT&T Broadband's plant is telephony-capable at present. By comparison, 57 percent of the company's cable networks are equipped to deliver high-speed data services.
THE COMCAST EFFECT
Of course, the NCTA paper was presented while the world was examining and scrutinizing the implications of Comcast's unsolicited — and subsequently rejected — bid to acquire AT&T Broadband.
Were that deal to go down, some analysts believe, it would sap some steam from cable's I-think-I-can telephony freight train, at least in the short-term.
That's partly because Comcast is not a huge fan of the circuit-switched approach, and continues to pin its telephony plans on voice-over-Internet protocol, a fledgling platform that's expected to cost 10 percent to 20 percent less than its circuit-switched granddaddy.
While Comcast, as a successful AT&T Broadband suitor, would continue to support that MSO's existing telephony subs, it's still questionable how aggressively Comcast would support the service until VoIP is ready to take a starring role.
"I don't think Comcast will market [circuit-switched] service. I certainly do not expect to see more deployments of it," said The Yankee Group senior analyst Michael Goodman.
By the same token, Comcast is "not going to rip out what's there already," he said. "They're not interested in reinventing the wheel just to offer telephony. I think they'll service customers that they [AT&T Broadband] already have and, more or less, that will be it until IP telephony rolls out."
Among the reasons: traditional circuit-switched techniques remain cost-intensive for cable operators to deploy and sustain. For example, Cox's cost per telephony subscriber runs at about $610 when switching, network-interface units and other equipment component costs are factored in, according to the NCTA's white paper (see chart).
Comcast cable unit president Steve Burke — speaking during a conference call on July 9 — cited published reports that said AT&T Broadband was losing $500 million a year on circuit-switched telephony. Comcast president Brian Roberts also surmised that a $50,000 IP router from a company like Cisco Systems Inc. would handle the same traffic as a $20 million circuit switch.
Then, during a conference call last Tuesday, AT&T Broadband execs forecasted that its cable telephony business could turn the corner and become profitable in about nine months, as it adds more subs and cuts costs from the system.
Halpern said AT&T Broadband remains economically and operationally justified in its decision to roll out cable telephony using circuit-switched technologies, largely for three reasons: its namesake, its experience with lifeline voice services and its internal business synergies.
SEEKING VOIP BIDS
While the AT&T brand carries weight with consumers, the company's cable unit also holds a cost advantage over other cable operators.
That's because AT&T Broadband has agreements in place with AT&T Business Services, which owns local switches. Instead of buying a $20 million switch, AT&T Broadband can tap into equipment that's already paid for and owned by its corporate cousin – an option that other MSOs simply can't dial up.
"They have a potentially lower hurdle of capital to go into a market initially," Halpern said.
At the same time, AT&T Broadband is making some quiet moves behind the scenes pertaining to VoIP.
Sources familiar with the situation confirmed that AT&T Broadband has sent out a request for information (RFI) to the VoIP vendor community, including its largest telephony-equipment supplier, Arris Interactive LLC.
sister publication Broadband Week, citing unidentified sources, reported earlier this month that the RFI involves a system-wide VoIP implementation that outlines an aggressive paper-to-trials timeframe. AT&T Broadband spokeswoman Sarah Eder declined to comment on the report or to give further details about the RFI.
Still, an RFI is an extremely preliminary move — it typically requests vendors to submit a report that details what technology is available and state-of-the-art today.
Presently, AT&T Broadband's lone VoIP trial is in Boulder, Colo.
"But we're looking at every type of technology," Eder said, noting that an IP migration will be part of the MSO's plan once the platform can duplicate the quality and reliability of circuit-switched voice services.
Industry analysts and observers don't foresee VoIP emerging as a viable, deployable platform until early 2003. While the core technology is considered solid, VoIP's management and provisioning elements are not insignificant challenges.
Today cable-based VoIP is limited to small trials conducted by the likes of Time Warner Cable, Comcast, Charter Communications Inc. and Armstrong Cable.
"All meaningful phone today is circuit-switched, and that will be the case over the next 18 months," predicted Kinetic Strategies Inc. president Michael Harris.
In addition to back-office questions, VoIP also has slowed because equipment vendors still have not received passing grades for DOCSIS 1.1, the underpinnings of cable's PacketCable infrastructure.
Harris said primary line VoIP will also continue to be held back until soft-switching platforms stabilize and can offer the same features as a class-5 switch.
With the exception of AT&T Broadband and Cox, most MSOs are exploring secondary-line IP telephony services as a way to siphon off incremental revenue from incumbent telcos.
Time Warner Cable, for example, is conducting field trials of LineRunner, a second-line IP product, in Portland, Main and Rochester, N.Y. LineRunner's base service runs $9.95 per month, plus a bit more when features like caller ID and voice messaging are added. By comparison, primary line services typically generate more than $50 per sub.
But LineRunner does not run over a powered network, and therefore is not considered a lifeline service.
Revenues differences aside, second-line doesn't necessarily mean second-class in terms of operational and technological know-how.
"Telephony isn't trivial, primary or secondary, circuit-switched or IP," Harris said. "In the telephony businesses, there's a significant ramp period for plant and operations. The longer you wait, the longer it will take, regardless of the technology you use."
Because the majority of cable operators that plan to offer voice services have opted for the IP route, AT&T has not enjoyed much success forming cable telephony partnerships using the circuit-switched approach.
Insight Communications Co. is moving forward on a cooperative voice deal it signed last year with AT&T Broadband. Insight has rolled out primary-line cable telephony in Louisville, Ky., a system that serves 25,000 marketable homes.
So far, Insight has signed on 1,500 customers there at an average of 1.4 lines per sub, an Insight spokeswoman said. Before the year is out, Insight plans to launch telephony in Evansville, Ind., Lexington, Ky., and Columbus, Ohio, respectively.
Insight, which is plotting plans to eventually offer phone service to its 1.5 million subscribers, has agreed to pay AT&T a monthly per-line access fee and handle network-upgrade expenses. In turn, AT&T absorbs the installation, maintenance and back-office connectivity costs associated with the service.
Matt Stump contributed to this story.