Cable is already competition-tested in its video and high-speed Internet businesses, from satellite-TV providers, Bell telephone companies and other telecom providers. Now a new set of competitors looms.
These rivals — peer-to-peer Internet telephone-service providers — could be poised to attack cable’s newest cash engine: voice-over-Internet protocol telephony.
Cable has shown exponential growth in phone service in a relatively short period — Cablevision Systems Corp. rocketed from zero to more than 500,000 VoIP subscribers in less than a year. And Time Warner Cable, which made VoIP available in its 31 service areas in December, has signed on 614,000 telephone customers in six months.
Last week, eBay Inc. struck a deal to spend $2.6 billion (half in cash and half in eBay stock) for Luxembourg-based Internet telephone service provider Skype Technologies S.A.
Gaining access to Skype’s 54 million users — about 2 million of whom are paying customers — will give eBay a major inroad into the European and Asian markets, where the majority of Skype’s customers are located.
eBay also will gain another way for buyers and sellers in its auctions to exchange information.
But what has some cable analysts biting their fingernails is the potential for the Skype service to severely undercut cable telephony pricing.
In a research report last week, Fulcrum Global Partners media analyst Richard Greenfield said that while Skype might not pose an immediate threat to cable telephony, it is only a matter of time before it has an effect on pricing.
Greenfield wrote that the combination of eBay and Skype is particularly daunting because eBay has the power to bring Skype — which has largely been on the fringes of U.S. telephony — into the mainstream by incorporating it into its Internet auction site.
While Greenfield admitted that users that want E911 service and full-home wiring may stick with cable phone, he asked, “At what price?”
Free or nearly free VoIP from Skype and similar services in the testing stage from America Online Inc. and Google Inc. “will make it harder for cable industry investors to believe MSO VoIP price points anywhere near the current $35-$40 are sustainable,” Greenfield wrote.
Cable could be compelled to offer voice as a free add-on to high-speed data service in the future. “VoIP will increasingly be seen as a low-cost incremental feature of a cable operators’ broadband offering, similar to what we are increasingly seeing with video-on-demand programming and [digital video recorders] for cable operators’ digital video offering (incremental ARPUs are likely unsustainable),” Greenfield wrote.
CALLING FROM PC
Before investors start to panic, Skype is a long way from being a direct competitor to cable phone: Users can only make calls from their PCs and the vast majority don’t even have telephone numbers.
Skype offers free Internet calling between its users and charges a fee for calls outside the Skype community (about 2 cents per minute). For less than $40 per year, users can acquire a phone number so that callers on the public switched-telephone network can call them.
Skype also offers a service called Skype Zones that allows users to make calls over Wi-Fi networks for less than $8 per month.
All three offerings are considerably below the $35 to $40 monthly average cable operators charge for telephony.
Still, Skype has a minimal presence in the U.S. — just 13% of revenue is derived from North America while 48% comes from Europe, 27% from Asia and 12% from other countries.
CEO Niklas Zennstrom said Skype is working with hardware vendors to develop devices that would untether callers from their PCs. But Sanford Bernstein & Co. analyst Craig Moffett said those who see Skype as a threat to cable and the regional telephone companies are overlooking one key aspect of the service.
“Skype is not a subscription killer; it cannibalizes calling occasions,” Moffett said. “It is tremendously powerful as a threat to international long distance. For someone who is calling home to their family in India or Ireland, it’s a very significant threat, because it’s fairly easy and the cost avoidance is sufficiently high that it’s attractive to schedule a computer-to-computer phone call. But Skype is not a replacement for a fixed-line phone.”
EYES ARE ON GOOGLE
Skype isn’t the only online telephone service to sprout up in recent years. America Online Inc. started offering a free test service in April, called AIM Triton; Yahoo! Inc. is said to be developing its own PC voice service; and Google is beta testing an instant messaging and PC-to-PC voice offering called Google Talk.
A $4 billion secondary public offering, completed Sept. 13, also has fueled speculation about Google’s interest in launching a full-blown VoIP service. And reports that the search-engine giant has been quietly snapping up miles of “dark fiber” (fiber optic lines that have been laid but do not carry traffic) has served only to increase the speculation.
While a dark fiber network could give Google the infrastructure to compete with cable VoIP, it is more likely that the search engine giant would use that infrastructure to eliminate third parties that hand off traffic from ISPs to Google servers. According to computer trade magazine Business 2.0, Google pays $60 per Mbps per month to such third parties, and eliminating them could potentially save the company millions of dollars.
Also serving as a roadblock to a full blown VoIP offering is that none of that dark fiber Google is reportedly buying is “last-mile” fiber.
Making that direct connection to customers’ homes could cost another $100 billion, Cablevision chief operating officer Tom Rutledge said last week.
“You can’t reach consumers with dark fiber, unless you want to do what Verizon said they want to do and build a complete fiber network,” Rutledge said in an interview. “It does not exist to the last mile. It would be a huge upfront cost [to build out that last mile nationwide]; at least $100 billion. We have a huge physical infrastructure and it cannot be replicated in any short period of time. If you have enough money and enough time, you can build another one – you can’t build a better one, you can only build another one.”