How Phone Can Help Small Ops

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New York — Cable telephony isn't just for the big boys. At an industry conference here last week, two small-market MSOs — Sunflower Broadband and General Communication Inc. — said that not only has telephone service presented a strong new revenue stream, but it has beaten back competition from direct-broadcast satellite and incumbent telcos without the need for deep discounting.

At Sunflower Broadband, which has about 40,000 cable customers in and around the Lawrence, Kan., market, offering telephony was initially a means of survival. Sunflower launched a circuit-switched telephone product in 2001, mainly as a defensive move against the incumbent regional Bell operating company, SBC Communications Inc.

'GET IN FIRST'

“We thought that it was a matter of time before SBC entered the video business,” Sunflower general manager Patrick Knorr said at the Kagan Cable VoIP Summit here last Wednesday. “We felt we wanted to get in first.”

While its entrance into the phone market may have initially been a defensive move, Sunflower has made a big dent in Lawrence, capturing about 20% of the telephone market (12,000 access lines) in just four years.

That, Knorr said, was achieved without deep discounting.

Knorr said that Sunflower's most popular bundle — which it calls Broadband Basic — offers basic local and long distance phone service (with caller ID), expanded basic cable and high-speed data for about $85 per month, a discount of about $3 per month if the services were purchased separately.

Its most aggressively discounted package — a high-end offering priced at $150 per month (a $40 discount) — has take rates much lower than the less-expensive service.

“[That] told us that it's less about the discount than it is about the bundle,” Knorr said.

Telephone service has proven to be a big retention tool for the MSO, Knorr added. DBS penetration in Lawrence is about 6%, while Sunflower has about 80% video penetration.

In neighboring Eudora, Kan., where Sunflower does not offer a telephone product, video penetration has dipped from 75% to 67% in the past four years.

“There is a direct correlation between telephone service and retention,” Knorr said.

At GCI, the largest MSO and local-telephone company in Alaska, the results have been similar.

Already a local and long-distance telephone service provider, GCI began offering dial-up Internet service in the mid-1990s and began offering cable-television service in 1998 through a series of acquisitions.

GCI senior vice president of corporate development Richard Dowling said that the Alaskan MSO initially began bundling long-distance service with a dial-up Internet service that it offered for free.

“That did two things: It reversed the market-share erosion we were experiencing in LD [long distance], and it floored the price — we no longer had to reduce the price of LD because the stickiness of the free Internet created a barrier to leaving us,” Dowling said. “We went from zero to 60% market share in two years.”

While GCI offers circuit-switched telephone service, Dowling said, it is in the process of shifting those customers onto its digital local phone network. Already, about 11,000 of its 75,000 telephone customers have switched over to the VoIP network, with 25,000 customers expected to be switched by the end of this year.

GCI'S ADDING SUBS

Dowling added that CGI's bundle of voice, video and data has attracted new customers. GCI's most expensive bundle — 150 minutes of long distance, local phone service, 130 channels of video, Litespeed data service (64 Kbps downstream and 32 Kbps upstream) and one digital converter box costs about $79.99 per month.

Since launching that package, new long-distance subscribers have increased 19%; new local-telephone customers are up 20%; cable customers rose 28%; and Internet subscribers have increased 31%. Monthly average revenue per subscriber is about $127, he added.

GCI has managed that success without offering a feature-rich, all-you-can-eat phone package, like the larger MSOs.

“We haven't seen the need to do that,” Dowling said. “We don't discount phone service, other than through bundling. If the consumer trusts you, you don't really have to discount. And even without discounting, we got to 50% market share.”

The heavy discounting appears to be coming from the RBOC side, according to Net2Phone Inc. cable telephony president Mike Pastor. Pastor talked about one of his customers — Northland Cable Television — which is facing some stiff RBOC discounting in North and South Carolina from BellSouth Corp.

Northland offers an unlimited local and long-distance telephone package priced at about $37.99 per month, well below the $60 price tag for a similar offering from BellSouth. But in the past two weeks, the Baby Bell has come out with a new pricing structure targeted specifically at Northland subscribers for $27.90 per month.

While it's still early, Pastor said that hidden charges in the Bell South offering (it doesn't include long-distance calls) are likely to turn off customers. And BellSouth appears to be getting a little anxious, sending out letters to win back Northland customers that sound more like they're from a jilted boyfriend than a dumped service provider.

“This was mailed out to Northland customers last week,” Pastor said. “'Please come back. We promise to be really, really good to you from now on.'”

NOT GIVING IT AWAY

Earlier in that conference, telephone-service executives at Comcast Corp. and Mediacom Communications Corp. said their Internet protocol-based launches are moving along aggressively — and the service won't be sold cheaply to consumers.

Rian Wren, Comcast's senior vice president and general manager of telephony, challenged an analyst's contention that voice-over-Internet protocol phone service should be sold at close to cost in order to add phone customers in a hurry — and defend high-margin, high-speed Internet service.

“Why would you want to give anything away unless you are truly adding value to your business,” Wren asked rhetorically, saying discounts in one area should only be done to boost cash flow in other parts of the business. High-speed data service, several years after launch, hasn't had to be discounted much, and Comcast expects strong demand for a $39.95 all-distance calling plan (as part of a bundle) to persist at least for several months, he said.

Marco Rustici, senior director of telephony at Mediacom, said his MSO “will in fact be launching in this quarter” and expects to be marketing VoIP to about 1.5 million passed homes by year end. He agreed VoIP won't need to be heavily discounted, saying market research has indicated a VoIP service priced below $29.95 (as part of a bundle) would be received skeptically by consumers who'd raise questions about service quality. “For us, we're looking at the mantra of applications, applications, applications” to drive demand, not pricing.

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