Cable Making Push Into Telephony

Big cable operators have started an aggressive push into telephony services this year in a move that will, they hope, provide the next big growth driver once high-speed Internet expansion slows down.

While cable telephony promises additional revenue, most operators are taking a measured approach to rollouts given the cost of the new product and the fact that it will further increase competition with phone companies, which are all looking at defending their turf by launching video services down the line.

Amid the recent telecom merger mania, telephony remains a hot topic for industry observers.

"Telephony is the latest big service focus for (cable) operators," said David Joyce, who until recently covered the cable sector as an analyst.

Cable giant Comcast Corp. last month unveiled its telephony rollout plan for this year, saying it will make the service available to 15 million homes and to the remainder of its 40 million homes next year. It inherited more than 1 million telephone users when it acquired AT&T Broadband a few years ago.

Comcast CEO Brian Roberts spoke of the massive rollout of its telephony service with all the excitement of a proud parent but promised a careful expansion. "We're on a steady march," he said. Comcast is aiming for 8 million phone customers within five years, he said, a 20% penetration level.

Roberts said the first new telephony package will offer a $39.95-per-month plan, which will include all domestic calling. He emphasized — as traditional telecoms rushed to get legislation protecting them against competition — that Comcast is not doing this to squash the phone companies. "It is not our desire to do this to hurt phone companies," he said.

Instead, Comcast believes it can build value for existing users with digital phone services and strengthen its bundling efforts to fend off satellite competition. "It makes us a better competitor," Roberts said.

In a recent research note, Friedman Billings Ramsey analyst Alan Bezoza also welcomed Comcast's focus on getting attractive telephony services out. "We view (the) recent internal voice acceleration as a positive and look for the power of the bundle to help insulate from competitive threats," he said.

Time Warner brass this month also affirmed that its TW Cable unit will aggressively push cable telephony services this year (HR 2/7). High-speed Internet service "remains TWC's largest near-term driver of profit, and the market is still expanding," said Don Logan, chairman of TW's media and communications group, in the conglomerate's fourth-quarter earnings conference call.

But phone-service rollouts have gone well so far and will be a key focus in the future. TWC ended last year with 220,000 telephony subscribers and hopes to "significantly increase" that figure this year, Logan said.

Cablevision Systems was one of the first cable firms out of the gate with telephone service — based, like in the case of most peers, on Voice-Over-Internet Protocol technology — and has used the product in a discounted bundle that industry observers said has been successful.

On Wednesday, Cablevision said it will continue to discount its "triple-play" package to new customers. The current package — about $140 per month for all three — will be reduced $25 per month to $115, the company said.

Cablevision has aggressively marketed its bundle in hopes of fending off competition from telecoms like Verizon Communications, which said it will sell video service this year.

According to some, cable has the edge. "VoIP is less expensive to implement because it can be provided on a single network instead of requiring separate technologies for voice, video and data," accounting firm PricewaterhouseCoopers said in its latest five-year "Global Entertainment and Media Outlook" report. "Cable operators have an advantage over telephone companies in providing VoIP because of lower costs, thereby making them an even more formidable competitive threat."

Most cable operators are in varying degrees of being able to offer VoIP, with Cablevision, TWC and Cox being leaders in the space, Vintage Research analyst William Kidd said this month in a research report. "Cablevision is arguably doing the best of our peer group, having launched the service in 2003 and working out the kinks by 2004."