Taking the Telephony Plunge: Why Now?


The concept of telephone service provided by cable operators is far from a novel one. At least as far back as the early 1980s, cable operators began experimenting with using their facilities to provide the "last mile" for long-distance telephone calls, thereby bypassing the local telephone companies.

As regulatory policies developed in recent decades favoring competition in the provision of local telephone service, the idea took hold that cable operators were among the most likely candidates to provide local telephone service in competition with the local Bell companies and other independent local phone companies.

Now, six years after Congress passed the Telecommunications Act of 1996 — a law hyped as encouraging widespread competition in the provision of local telephone service — far less of that competition has developed than was expected. Indeed, the competitive telephone industry that quickly grew after the 1996 Act shrank just as fast.

Despite the failures of the first wave of telephone competitors, and in part because of those failures, the cable industry is today in the best position to provide nationwide competition to the incumbent telephone companies. The largest cable operators recognize this potential, having already taken the plunge into telephone service.

Based on the uniformly positive reports from those MSOs now providing cable telephone services, as well as other market factors, the buzz is that all cable operators, even the smaller to mid-size ones, should seriously consider telephony as the next stage in the evolution of their businesses. Thus, voice service is being metaphorically referred to as the remaining leg of the three-legged stool, which along with video and high-speed-data service, will frame the future of the cable industry.

Here are six good reasons why now is the time for a cable system or MSO to be diving as quickly and as deeply as possible into the world of local telephony:

1. Cable telephony is very profitable. MSOs are reporting significant buy rates for their telephone services. AT&T Broadband alone claims to have close to one million cable telephone subscribers, reporting that its voice penetration exceeds 20 percent in 20 franchises, including 28 percent in parts of the Chicago and Salt Lake City markets. AT&T Broadband's CEO [Bill Schleyer] has been quoted as saying that telephony is even a better business than high-speed data, with higher revenue per household, similar cash flow margins, and greater penetration rates.

Cox Communications Inc., which was also one of the early adapters to cable telephony and is now adding 4,200 new voice subscribers weekly, said its revenue from voice services averages $50 to $55 per month, almost equaling its video service revenue. AT&T Broadband claims monthly revenue of $53.70, that includes local and long-distance voice services.

2. Cable telephony improves the profitability of the video and data services your cable system provides. Perhaps it's the benefit of a single bill or the ability to make a single service call for video, data and voice services, but for whatever reason, voice subscribers purchase more of all the services that their cable operator offers. Cox says that voice service drives its revenue in other service categories. For example, Cox says that 40 percent of its telephony customers also subscribe to the other enhanced services that the company offers. By contrast, its digital cable service penetration is normally only 22 percent and its data penetration is even lower.

3. Cable has less competition than it once did to provide competitive voice service, while demand remains high. With the difficulties encountered by the competitive telephone industry in recent years, fewer competitors are trying to break into the business of providing local telephone service. Yet, the demand has been created for competitive local phone service and the expectation exists that local competition will become a reality.

It is estimated that over the next decade, the regional Bell operating companies will lose 30 percent of their market share to new telephone providers. No segment of the telecommunications market is better prepared to provide this competitive service than the cable industry. Cable operators have a great advantage over other competitive telecommunications carriers in that cable companies already have the "pipe into the house," something that the competitive local exchange carriers have been fighting for over the past six years.

4. Cable telephony technology is here, either circuit switched or VoIP.
Although to date most cable telephony has been provided using traditional circuit-switched networks, the quality and interoperability improvements of voice-over-Internet protocol, or VoIP, technology is paving the way for cable operators to enter or transition into the telephony market at a substantially reduced cost. Indeed, IP cable telephony trials are underway by many large MSOs throughout the country.

5. Cable telephony differentiates cable from other multichannel video providers.
Cable operators must continue to find ways to differentiate their product from that offered by other multichannel video providers, especially direct-broadcast satellite. As the video product that DBS offers has grown to rival cable, and cable penetration rates are starting to show the strain, the need exists for a product that cable operators can offer that is unique to cable.

Satellite telephone technology doesn't allow for telephone service at any level of quality that would be acceptable to subscribers. Accordingly, a service package that includes video, high speed data and a facilities-based local telephone service can be offered only by cable operators and not by DBS providers.

6. Wall Street expects cable operators to provide voice service and financing is available for this purpose.
Providing cable telephone services helps to satisfy Wall Street's expectations that cable plant will be used to provide next generation services and as such, offering the services may be necessary to improve cable's stock prices. With the securities of cable operators remaining depressed, some analysts are seeing the chance for very significant gains in stock prices over the next year if
cable operators can provide additional services over their facilities.

On the flip side, the failure of the majority of the cable industry to provide these services in the near future could further depress the prices of cable stocks. Moreover, major financing sources for the cable industry have expressed interest in lending money to cable operators to help finance their expansion into telephony.

With so many good reasons for providing cable telephony, the few remaining naysayers are sounding like holdouts from the bygone, innocent days when telephone companies provided voice and cable companies provided video, with little competition for either provider. That world has gone the way of 12 channel cable systems and rotary telephones. Diving into cable telephony is a necessary next step for cable operators seeking to maximize value, develop new revenue streams, and preserve market share.