- The Washington Times - Monday, May 13, 2002

It's not just Ma Bell and her babies anymore. New competitive players are emerging in the area of local and long-distance phone service, and from a source that may surprise some: your cable company. After some delays in deployment and customer reluctance, cable-phone service is finally emerging as a viable alternative, as both Denver-based AT& T Broadband and Atlanta-based Cox Communications have reported skyrocketing subscriber rates and revenues from the service.
Cox's Northern Virginia office says by the end of 2003 it will begin offering phone service to Fairfax residents, who are already offered cable television and high-speed Internet. It's all part of a network upgrade in the area that has Cox spending about $1 million per day. Meanwhile, AT&T; Broadband recently notched its one-millionth cable- telephone customer, and anticipates a further rollout next year, particularly if its merger with Philadelphia-based Comcast Corp. goes through. It also made its first profit on the service last month.
"If you look at the numbers, the conversion rate for this service is phenomenal," says Charles Golvin, a senior analyst with Forrester Research in Boston.

What is it?
The phone service offered by cable companies such as AT&T; Broadband and Cox is not that different from that offered by traditional phone companies, which use digital circuit switches. Customers can usually switch to cable-phone service without noticing a change in service or quality.
Industry observers say that within a few years, however, an emerging technology, called voice-over Internet Protocol, or VoIP, will become more widely used. VoIP involves sending voice signals over the Internet. Though not yet widely used, it is seen as the future of cable telephony because it is cheaper and easier to deploy. Most cable companies are testing the technologies and plan to roll out service in the next few years.
Comcast and AOL Time Warner, two of the largest cable firms, say they are waiting for VoIP technology to improve before offering it sometime next year. AT&T; Broadband says it eventually plans to switch its customers to VoIP service.
Industry leaders say VoIP technology is the future of cable telephony because it offers the greatest cost savings for both the cable companies and consumers. Some small companies have already begun offering VoIP telephony service at great values in some markets.
Edison, N.J.-based Vonage Inc. started VoIP service last month, offering unlimited local and long-distance calls for $39.95 a month. Cable companies say they should eventually be able to offer basic unlimited local plans for about $10, or less than half of what traditional phone companies now charge.

What's taken so long?
Most cable companies now like to be referred to as "full-service providers." Rather than offering just cable television service, most now offer high-speed Internet and telephone service. But, analysts say, the expansion into these areas has been slow going.
"We've been hearing about cable telephony for nine, 10 years now," says Elizabeth Ussher, vice president of Global Networking Strategies for the Meta Group, a technology analysis firm in Stamford, Conn. "It hasn't really been something that's taken off."
Cox and AT&T; Broadband started phone service in 1997 in select areas, but sizable increases in customers did not begin until last year, when the companies entered more markets. These two companies, currently the largest cable-phone providers, still only offer phone service to about one-third of those who receive cable.
Other cable operators, including AOLTimeWarner and Comcast, have not started cable-telephone service, choosing instead to start other services such as video-on-demand, while testing VoIP service in some markets.
Those companies that have delved into cable telephony have been stymied because of timing and cost, analysts say.
Most companies chose to emphasize the rollout of digital cable and high-speed Internet, which were more popular and had higher profit margins. And, offering phone service can be costly and complicated, especially with regard to back-end systems, like billing.
"Integrating the billing systems is different," says AT&T; Broadband spokeswoman Sarah Eder. "Doing it is a technical challenge. The back-office stuff is making it challenging."
But Cox and AT&T; Broadband have figured out ways to be cost-efficient on service upgrades. In many markets, Cox chose to install the infrastructure for phone service at the same time as upgrades for digital cable and high-speed Internet, saving time and money. AT&T; Broadband saved money because of parent company AT&T;'s already heavy involvement in phone service.

On the verge
When cable-phone service was introduced, customers didn't flock to it. For years, fewer than 10 percent of those customers offered cable phone service chose to sign on, mainly because customers weren't in tune with the idea of getting service from someone other than their local phone company, analysts say.
"People may complain about the phone company, but the phone company works," says Chris Talbott, a director at the Eastern Management Group, a telecom consulting firm in Bedminster, N.J.
But there are indications that cable-phone service is finally catching on, as companies expand to new markets. AT&T; Broadband now has more than 1 million cable-phone subscribers, and in the areas where they are offered the service, more than 15 percent of customers choose cable-phone service over traditional providers.
Cox passed the 500,000-customer milestone last month, with about 14.5 percent of people offered the service choosing to sign up. Revenue per customer has increased over the past year, and both companies have made money off the service. Cox, in fact, has shown gross margins above 30 percent.
"We've been thrilled with the penetration," says Cox spokeswoman Amy Cohn. "We're real bullish on the service."
Customers appear to be attracted to cable-telephone service at least in part because of price.
Cable companies have been able to offer phone service at about 10 percent less than traditional phone companies, and service quality has been comparable.
"There are three main reasons people adopt cable telephony, and that's price, price, price," says Mr. Golvin of Forrester.

The bundling phenomenon
Another strategy the cable companies have employed with some success is offering several services together at a discount. Many customers have latched onto cable-telephone service because they like the idea of getting cable television, high-speed Internet and phone service from one company and saving money on one or more. The idea of getting one bill for all services has proven to be popular as well.
Analysts say that while cable-phone service is proving to be a viable business on its own, cable companies hope bundling will prevent customers from switching to other companies for services such as television and high-speed Internet. This has become particularly key in the past two years, as cable operators have lost some television market share to satellite providers DirecTV and DishNetwork.
"Bundling solidifies the relationship with the customer," Mr. Golvin says. "The churn of cable television's customers comes from satellite. That continues to be threat."
About 20 percent of Cox customers receive more than one service from the company, and AT&T; Broadband says that about 71 percent of its phone customers also subscribe to another service.
"It does help us with customer retention," Miss Cohn says. "Our bundled customers are more sticky. We think customers enjoy the idea of doing business with one company."
Cable companies' phone service offerings have been a key issue in discussions surrounding the pending merger of AT&T; Broadband and Comcast. Consumer groups and many members of Congress are concerned that the resulting company would wield too much power over cable television content.
While the merger is unlikely to be blocked, observers say that Congress could impose some restrictions, or even push for some regulation of the cable industry. But cable telephony has been used as a bargaining chip by the two firms, who argue that a merger would speed the deployment of phone service to compete with traditional phone providers.
AT&T; Broadband says that its expertise in the area of cable telephony will be applied to Comcast, which has yet to roll out telephone service of its own. The two companies say that immediately after the merger is finalized, the new firm will deploy telephone service to Detroit and Philadelphia, markets currently served by Comcast.
Observers say that if AT&T; Broadband and Comcast can prove they can compete head-to-head with traditional phone companies, thus offeringconsumersa choice, Congress may be more willing to approve the merger with little or no conditions.

The future
Eventually, perhaps as soon as 2004, VoIP service will be the common phone service offered by cable companies, because the cost to roll it out is relatively small, analysts say. Already, sales equipment for IP telephony are on the rise, and smaller IP telephony providers are gaining some market share.
Currently, though, most analysts say VoIP telephony isn't quite ready to take hold because it is still imperfect technologically. The sound is less clear, calls are periodically dropped, and companies are still working on ways to offer services like voice mail and caller ID. And, law enforcement agencies say that VoIP phone calls are hard to track. But VoIP technology has shown enough promise to make analysts believe it will be a significant competitor to traditional phone companies in the next few years.
"It's something the traditional telecom companies are going to have to pay attention to," says Mr. Talbot. "They're going to have to confront this, no doubt about it."


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