Cover Story: Cox’s Mobile Mission

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Cox Communications is betting more than $1 billion it can build itself into a next-generation mobile voice and data player.

The Atlanta-based MSO is making the industry’s most ambitious run at the wireless market, with a commercial launch set for the second half of 2009. Privately held Cox sees an open opportunity to tap a new area of growth, boost customer loyalty and improve its competitive footing.

But some wonder if the quest will prove quixotic, given the extremely competitive nature of the already-saturated U.S. mobile phone business and the lack of a natural synergy with cable’s traditional wired infrastructure into the home.

“Structurally, this is a market that just isn’t very attractive,” said Sanford Bernstein senior analyst Craig Moffett, noting that the wireless market is growing more slowly and is more competitive than the U.S. broadband and video sectors.

Cox president Pat Esser recalled that cable’s entry into the voice market more than a decade ago was deemed misguided. Cox was the first cable company to offer voice service, he said, and in 1997 launched the original triple-play bundle of voice, video and data.

“People thought we were crazy then,” Esser said.

To hear Esser tell it, Cox’s drive toward wireless services is part of meeting customer expectations. “We think it’s important as a communications provider to offer wireless,” he said. “Our current customers and our next generation of customers are telling us they want and need mobility as part of their life.”

The company’s new wireless service, set to debut later this year, will “probably feel like a wireless voice service with deep data capability,” Esser said.

In a way, it’s like a relaunch — after a previous dud.

Cox initially will bring the service to market in partnership with Sprint Nextel, the carrier that was part of the failed Pivot venture with Comcast, Time Warner Cable and Bright House Networks. In March 2008, two and a half years after the joint venture was formed, Cox and the other MSOs pulled the plug and stopped selling the mobile-phone service.

What’s different now, Cox claims, is that it’s marching to the beat of its own drummer.

While it will purchase network access at wholesale from Sprint and other carriers, the cable company will control every aspect of the service, from billing and customer support to handsets and features.

“Within the [Pivot] joint venture, it was very much a shared-delivery model,” said Cox vice president of wireless Stephen Bye. “That was not what our customers expected from us.”

So far, the third-largest U.S. cable operator has spent some $550 million on wireless-spectrum licenses in Federal Communications Commission auctions, and Esser said Cox is spending more than that on the buildout of a 3G CDMA (code division multiple access) network in parts of 15 states.

Eventually, Cox plans to upgrade to a 4G network technology called Long-Term Evolution, or LTE — which is capable of delivering downlink speeds of more than 100 Megabits per second, with a network capable of providing service to 24 million people. (Cox has not publicly disclosed a price tag or completion date for the project.)

The last time a major U.S. MSO owned and operated a mobile-phone network was 1999, when Comcast sold its cellular operations with 800,000 customers to SBC Communications. To some analysts, it doesn’t make economic sense for a cable company to jump into the wireless business in the capital-intensive way Cox is.

Cable’s competitive advantage is that it has the best physical pipe into the home, according to Moffett. He’s skeptical that any MSO’s customer relationships are strong enough to be the primary bridge to a wireless offering. As for the argument that subscribers are looking for a wireless offering from their cable company, he said, “I have some sympathy for that argument … but it’s all too often a lack of excuse for the lack of macroeconomic rationale.”

Wireless continues to be “a question mark” for cable, added Leichtman Research Group president Bruce Leichtman. “It’s a very challenging market,” he said. “It’s not clear cable needs this fourth element of the bundle to compete [with telcos].”

Esser maintained Cox’s 10-year wireless business plans have a return on investment. As Bye put it, when asked about the wisdom of building out a Cox-owned wireless network: “My simple answer is, we’re in the business of making money.”

Whatever the merits of the strategy, Cox for now doesn’t have any company. Comcast, Time Warner Cable and Bright House — the erstwhile Pivot partners — have gone a different direction on wireless.

Those three MSOs are working again with Sprint, too, but instead of mobile phones they’re aiming to resell the high-speed WiMax data provided by Clearwire.

Comcast is starting with wireless broadband, as a complement to wired broadband, and plans to layer on voice and video services later, said senior vice president and general manager for wireless and voice services Cathy Avgiris. Comcast in late June launched High-Speed 2go service in Portland, Ore., which will provide download speeds up to 4 Mbps over Clearwire’s WiMax network footprint.

Clearwire “might be the perfect stalking horse for cable,” Moffett said, because it gives the operators the ability to offer a discounted wireless broadband service that “may never earn an interesting return on investment,” while Sprint and Clearwire foot most of the bill. Comcast has invested $1.05 billion, while Time Warner Cable put in $550 million and Bright House’s piece was $100 million.

“Comcast doesn’t really have to make money on its investment in Clearwire,” Moffett said.

Cablevision Systems, meanwhile, has also embarked on a data-only wireless strategy. It is investing $300 million over two years to create a Wi-Fi network across its New York-area footprint. The Wi-Fi service is free to its broadband subscribers, as an enticement to keep paying for Cablevision’s Optimum Online.

Cox could have gone the Clearwire route, Esser acknowledged. But “for us, we were looking offensively, and we wanted to control the customer experience from top to bottom,” he said.

Moreover, Cox believes voice is a critical component of a wireless offering — and that it needs to fish where the fish are.

“Wireless voice is what people use their phones for, predominantly. We don’t want to be a partial provider,” said Bye, who joined Cox in September 2006 after working at AT&T, BellSouth and Australia’s Telstra, among other companies.

Cox’s theory is that some portion of its customers will add the wireless piece to the bundle — call it a “grand slam,” said Leichtman, not the “quad play” — that will make building out, operating and owning the service pay back.

“We feel very confident that there’s a level of adoption that justifies of the level of investment we’ve made,” Bye said.

At the end of 2008, almost two-thirds of Cox’s customers took at least two services, and more than 33% subscribed to the triple play. The company has more than 6.2 million total residential and commercial customers.

Add wireless to the mix, the thinking goes, and the operator can boost loyalty and revenue per subscriber even more. “You build up trust with customers,” Esser said. “You make promises to them, and if you keep them, people will continue to buy products and services from you.”

Added Esser, “It’s a whole different dimension to the bundle. It’s another way to think about bundling: turning it horizontally to think about moving services out of the home.”

The hypothesis would appear to have at least one precedent.

Rogers Communications, Canada’s largest MSO, is also that country’s biggest provider of mobile phone services, with 2.31 million basic video subscribers and 7.98 million mobile customers. Rogers executives have said the fourth service in the bundle helps cut churn, and that wireless penetration is higher in markets where it offers cable TV.

But analysts said Rogers is a special case: It entered the wireless business in 1985, when the sector was in its infancy.

“Rogers was lucky enough to build scale early in the wireless business,” Moffett said. “Unfortunately, the window of opportunity to be an early entrant in the U.S. is long passed.” And at this point, he said, Cox may be in danger of rolling out a me-too wireless offering that’s insufficiently differentiated from the rest of the field to gain serious traction.

The wireless market is certainly crowded, with at least three providers in any given market and as many as seven in some. Cox will be squaring off against the two biggest providers, AT&T (79.6 million wireless subscribers) and Verizon Wireless (86.6 million), in all of its service areas.

The market also is fairly saturated. U.S. wireless carriers had 270.3 million subscribers at the end of 2008, according to trade group CTIA-The Wireless Association, which estimates that represents the equivalent of 87% of the total U.S. population.

“Wireless is a very marketing-intensive industry,” said Jeff Kagan, an independent wireless and telecom analyst. “This is a very loud, noisy business.”

Cox does expect to step up the marketing muscle. For one thing, said Esser, it plans to increase its bricks-and-mortar presence by launching retail stores that proffer the MSO’s wireless services. But while the business model attributes all the cost to the wireless unit, he said, the Cox stores will also be promotional vehicles for wired voice, video and broadband.

“We have marketing efficiencies,” Esser said. “We’re in a transaction-management business.”

Last week, Cox announced the hiring of Tracy Nolan, former chief operating officer of telecom marketing firm ACN, as vice president of retail overseeing all retail operations and sales strategy for current products and new wireless portfolio.

Cox will have cost advantages, too, Esser said. The MSO can “backhaul” voice and data from its own cell towers over its own fiber-optic backbone network. In addition, customers at home will be able to connect wireless devices through Cox’s DOCSIS network via Wi-Fi routers.

Ultimately, Cox wants to be able to offers customers a highly integrated suite of voice, video and data services to let content and communications seamlessly flow among different screens, whether that means accessing voicemail on the TV or flinging DVR recordings to mobile devices.

But will there be room for yet another mobile phone provider? Bye pointed out that wireline phone was saturated when the company entered that business.

“Quite frankly,” he said, “we think we can bring more competition to the wireless space.”

AIR SUPPLY
Details of Cox’s wireless business:

Spectrum holdings: 12 MHz of 700-MHz band covering 76% of its cable footprint; 20 MHz of Advanced Wireless Spectrum band covering 100% of its footprint

Amount paid for spectrum: $304.6 million for the 700-MHz licenses; $248.3 million for AWS licenses

Network partner: Sprint Nextel will wholesale network access to support the initial services; several other carriers will provide nationwide roaming

Technology partners: Huawei Technologies (CDMA base stations that are “LTE-ready”); Starent Networks (multimedia core networking platform); Berliner Communications Inc. (tower design and construction management)

Expected coverage: 24 million people

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