Forum: Telephone Service is Fulfilling the Promise of Broadband

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There's been a great deal of speculation in recentyears about the willingness and ability of cable TV operators to join the competition forproviding telephone service to consumers. At MediaOne, we left the speculation behind thisyear and jumped into the telephone market with both feet. As we have upgraded our networksto interactive broadband, it hasn't been a question of whether we could afford to getinto the telephone market, but rather, could we afford not to? We believe the marketopportunity is too great to pass up.

MediaOne Digital Telephone Service during the first half of1998 has launched successfully in Atlanta and Los Angeles and will roll out in at leastone more market this year. Initial results bear out our contention that the return will bewell worth the investment.

MARKET OPPORTUNITY

Americans are spending hundreds of billions of dollarsannually for telephone services, and the demand for additional services is generatingsteady growth. Currently, revenues for

U.S. telecommunications carriers exceed $220 billion ayear. In MediaOne's service areas alone -- we currently pass 8.4 million homes in 17states -- telecommunications carriers earn more than $20 billion annually, nearlyequivalent to the annual revenues for the entire cable television industry.

Our analysis of the market for residential and businesstelephony in our service areas indicates that a penetration of just 10 percent in ourmarkets could yield annual revenues of about $500 million. A 30 percent penetration ratecould generate about $1.3 billion in revenues annually. It's hard to ignore that kindof revenue potential in an industry where growth in our core business, multichannel video,is chugging along at a steady but mature 2 percent.

And this is real revenue potential, because our researchshowed that within our service areas, there is a high incidence of consumers who are opento the idea of signing up for service from an alternative local service provider. We alsofound a strong willingness among consumers to purchase telephone service at our pricepoints, which are set in our current markets at a discount of about 25 percent to theincumbent regional Bell operating companies.

Looking closely at our specific service areas -- ourmarkets are above average in attractiveness for telephone service when compared tonational averages -- we find that many of our existing and potential customers fit theprofile of consumers who would be open to a competitive telephone alternative. They earnmoderate to high incomes, have a propensity toward multiple telephone lines, use severaladvanced calling features, own personal computers equipped with modems, and are moderateto heavy users of long-distance services. By offering well-designed service packages thataddress their needs, we would appear to have a major opportunity to earn their business.

THIS IS BROADBAND

Opportunity isn't the only factor that makes usbullish about the telephone business. A variety of other forces -- some planned, someserendipitous -- have aligned to support our entry into telephony.

One of the most important is MediaOne's commitment tothe notion of a broadband market. With the upgrade of our plant to interactive broadbandalmost half complete, we have created a network with copious bandwidth that canaccommodate -- and really begs for -- multiple applications. As a broadband provider, wealready have made significant investments in upgrading our network and improving customerservice. The robust nature of broadband technology offers us the opportunity to leveragethose investments across additional product lines. In that sense, the provision ofresidential and business telephone services is a very logical extension of theapplications we can offer on this great platform.

Our earlier trials, and now the actual deployment oftelephone service, have demonstrated that the broadband technology is sound. Howsuccessful we are in the telephone business, therefore, depends solely on our ability tomanage it, market it, and drive growth. With the wealth of domestic and internationaltelephony expertise resident within MediaOne, we are confident of success.

TIME IS RIGHT

Another factor fueling our optimism is our ability to movequickly and entrepreneurially into this new market. We believe that the incumbenttelephone providers in our markets are competitively vulnerable. They are riddled withinflated cost structures and are less nimble in their ability to create innovativemarketing initiatives or modify their existing programs. We credit our legacy as anentrepreneurial cable company for these advantages.

In addition, we acknowledge that timing is right for ourentry into the market. Many legislators and regulators at all levels of government haveindicated a desire for legitimate competition in the local exchange market. Policy makersare encouraging telecommunications providers to create viable facilities-based competitionto offer alternatives to both residential and business customers. With our broadbandnetworks, the "facilities" part is already there. We need only go the extra mileand condition the network, and develop the marketing muscle, to facilitate the roll-out oftelephone service. As MediaOne has done so -- and continues to do so in preparation fordeployment in other markets -- we've been gratified by the interest and support ofregulators, legislators and other important public policy constituents.

Our interest in telephony is driven strongly by market andinternal forces as well. We have acknowledged as an industry that the increase inpenetration of our core product, multichannel video, has slowed in recent years, from theboom levels of the '80s to maturity in the '90s. To generate growth, therefore,we are looking to produce enhancements of our core video product -- with innovations suchas advanced analog and digital -- and to the introduction of new lines of business, suchas telephone service and high-speed Internet access, all of which can spawn new sources ofrevenue. At MediaOne, a primary business goal is to drive stronger revenue growth --perhaps double or triple current levels -- from our existing customer base. All of this isfacilitated by our broadband network.

In simple terms, we must derive more "productunits" from our existing households. Prior to the introduction of new services, andbased on industry averages for cable penetration, we could expect to derive about 60product units from every 100 homes passed. By layering data and telephone services overour multichannel video offerings, we could derive, say, 110 product units from the same100 homes. Clearly, the provision of competitive, well-packaged and reliable telephoneservices helps us achieve that goal.

A GOOD START

We are encouraged by the early results of our telephoneroll-out. Customers in the Atlanta and Los Angeles neighborhoods in which we are marketingMediaOne Digital Telephone Service have been highly receptive to the product. The productpenetration in marketed homes is averaging 10 percent, with some areas as high as 19percent -- significantly better than we had anticipated. We're also gratified todiscover that as we market telephone service in a given area, the penetration of ourhigh-speed Internet access product, MediaOne Express, also has increased. That'sencouraging us to look more closely at how we can market, package, and bundle our varietyof services to stimulate even higher take rates.

In our image advertising, we talk about the ability ofbroadband to simplify and enhance the lives of our customers. MediaOne Digital TelephoneService reinforces that message and speaks to the true advantages of broadband technology.By providing multiple high-quality and reliable services on a single platform, we can makeit easier and more affordable for our customers to enjoy the benefits of exciting newproducts and services. And we can achieve our business goals of generating growth andestablishing ourselves as a major competitor in an increasingly complex marketplace. ForMediaOne, that makes the provision of telephone services a winner on all counts.

Greg Braden is vice president, digital telephone servicesfor MediaOne

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