Cable's early adopters of telephony
While analysts have pointed their fingers at the pending merger of AT&T and TCI as the first true sign of impending telecommunications competition, the fact is that a handful of operators are already taking it to the RBOCs. These MSOs are reaching out and touching thousands of subscribers by leveraging their upgraded networks to deliver not only video and high-speed data, but facilities-based telephony as well. As a result, these operators are finding it's no longer business as usual. Instead, it's a brave new world of technology, reliability and customer service.Taking the plunge
The jump into telephony is a big leap; there's never been any argument about that. But there has been a lot of heated discussion about just where cable companies should leap when they decide to take the telephony plunge. Conventional wisdom has said operators should take a more guarded approach, coming at telephony in a roundabout way. This logic says operators should avoid the pitfalls and considerable expense of lifeline service and concentrate on businesses or second-line service to learn the telephony ropes.
Operators on a telephony roll...
The ranks of operators who have taken the residential telephony plunge are beginning to grow.
|Cablevision Systems Corp.||Long Island, N.Y.|
|Comcast Corp.||West Palm Beach and Ft. Lauderdale, Fla., and Baltimore, Md.|
|Cox Communications Inc.||San Diego and Orange County, Calif.; Phoenix, Ariz.; Hartford, Conn.; Omaha, Neb. and Hampton Roads, Va.|
|Jones Communications Inc.||Alexandria, Va. and Prince George's County, Md.|
|MediaOne Group||Jacksonville, Pompano Beach and Plantation, Fla.; Los Angeles, Calif.; Atlanta, Ga. and Boston, Mass. suburbs|
|Rifkin & Associates||Atlanta, Ga. and Miami Beach, Fla.|
|Tele-Communications Inc.||Hartford, Conn. and Arlington Heights, Ill.|
|Time Warner Inc.||Rochester, N.Y.|
There are those who would disagree (see page 36). They've decided to jump in where it counts most-into subscribers' homes. Anyway you look at it, it isn't cheap, but according to these operators, it's a way of capitalizing on cable's strengths. And waiting for IP telephony, they say, is just putting off the inevitable.
"Getting into the phone business is an expensive proposition," says Tom Gorman, senior director of engineering/acting director of telephony at Jones Communications. "And I believe that people who are waiting for IP telephony are people who are just putting off a decision to spend a lot of money. Because I think that ultimately you're going to spend a lot of money on IP telephony as well. And that's because of the management issues.
"I think it's going to be a regulated industry. It's going to be tariffed. All the same implications that exist in the (circuit-switched) telephony industry are going to exist there some how or another."
For the folks at Cox Communications, the decision to get into residential telephony was not only a matter of timing, but just plain logical as well. "Cox has a network capable of providing two-way services," explains Chuck McElroy, vice president of new services at Cox. "The incremental investment to do circuit-switched phone was well worth the value of selling those services. "Based upon what I see right now, circuit switched offers some slight economic advantages today. Who knows what will happen as IP gets more fleshed out. Secondly, circuit-switched offers a much more reliable product in terms of voice communications. We don't have the latency issues. I think there's a reliability benefit to circuit-switched as well.
"The world is more familiar with circuit-switched. And that really impacts you more on interconnection with other networks and with provision of third-party services like operator services, signaling systems and other aspects of voice communications. I'm not certain how an IP gateway will mirror the features that a class 5 circuit switch provides. I'm not sure how you provide some of all the custom calling features through an IP-type platform. So, there are some unknowns about IP out there that give circuit-switched a slight advantage today."
Unlike other operators who are on the sidelines of telephony in general, operators who've decided to deploy facilities-based telephony are, at least for now, pretty much on the sidelines about IP telephony.
"For now, we believe IP telephony is coming," says Bill Sumner, vice president of operations and business development at MediaOne. "We believe that it's going to be a large application. But we don't believe the timing is soon. And we don't believe the availability or ubiquity of IP telephony is going to suit our markets.
"We have a strategy of primary line (service). We're taking on the whole enchilada. We're not going in with a second line strategy. So, we need powering. IP telephony doesn't power yet. IP telephony doesn't have full-featured functionality. It doesn't have things like call waiting and caller ID and things like that. It doesn't interface with the SS7 (Signaling System 7) network.
"There's just a lot of issues that today IP telephony doesn't look like POTS. It has some good business applications, and we believe it's a growing application. In fact, we're planning to have a small trial sometime in the first half of next year just so that we can play with it and stay current with it.
"But circuit-switched is here. The economics are viable. We think we can jump in and get appropriate levels of marketshare today. We have had this belief for several years. And I think we'll long have our circuit-switched stuff paid for by the time IP becomes a full, ubiquitous replacement for POTS that circuit-switched HFC stuff is today."Crunching the numbers
Just what does it take to make a business of residential telephony today? According to those who've done the math, there's no steadfast penetration formula. Every market has its own quirks. But those who have gotten into it, whether they've low-balled penetration projections or not, are continually surprised by the results.
"When we examined the business, we did a lot of market research," says McElroy. "And most of that research showed us we could achieve penetration levels of 20 percent or more. We soon found a lot of people either believed or didn't believe what the research said. Everybody had an opinion.
"So, we did some analysis based on the cost of the business and projected revenues to determine the break-even penetration rate. And that analysis showed high single digits, in the nine to 10 percent range. And that included a weighted average cost of capital of 14 percent.
"Said in a different way, if we launched telephone and captured a high single-digit return, we feel we would make the same amount of money as if we took our money and invested it and got a 14 percent return on it. That was the break-even to us. And we're clearly doing that."
McElroy reports that in the early nodes, Cox is getting an average 17 percent penetration. Officials at Cablevision Systems say their Long Island, N.Y. deployment is in the 15 percent range. In the competitive Washington D.C. marketplace, with its high concentration of MDUs, Gorman says Jones has done quite well.
"This marketplace is extremely competitive," explains Gorman. "You have a variety of people coming into the MDU market with a bundled package of some sort. They'll offer high-speed data, which has to be 56 Kbps modems. And they'll resell Bell Atlantic service, and they'll put a SMATV headend in, and they say they have a bundled package with one bill for all their customers. And they'll work with the MDU owners and share revenues."
Jones counters that threat by capitalizing on its exclusive video product. If subscribers take a bundled service from Jones, they get a discounted cable rate. "We offer telephone at a reduced rate from Bell Atlantic," explains Gorman. "If you take a bundled service, we'll reduce the cable rate by a couple of bucks a month as well. You get this great big bundled package, one-stop shopping and people like that. But more importantly, we gain contracts that last anywhere from seven to 10 years that keep us in the game in the cable business.
"So you have telephony that starts as a defensive strategy, because you have to defend what you've got. But we're at a point now where we're turning it into an offensive strategy. "As a matter of fact, as part of our offensive strategy, buildings in which we have gone back and re-marketed cable and phone, our cable penetration has gone up by six percent. And in the buildings we are in, we have in some places as high as 60 to 70 percent penetration over Bell Atlantic. That's 60 to 70 percent of their customers are choosing us. And that's in a region where our overall market penetration is approximately 30 percent."Putting it all together
The operator's ability to package a variety of services, one playing off another, seems to have struck a chord in consumers who've been given a choice. It's also given credence to the notion that consumers, at least those in initial launch markets, really do like the one-stop shopping convenience that a telecommunications-savvy cable company can offer.
As a result, those operators who take the telephony plunge might have a rosier future than many would suspect. This is particularly true if the operators concentrate on what they know best (i.e., their networks) and what they're learning all over again (i.e., customer service).
"We believe it's one of the reasons why we're kind of meeting and exceeding some of our targets," says MediaOne's Sumner. "The power of the bundle is playing very, very well with a very nice blending of traditional video, high-speed data Internet access and telephony. Subscribers like buying all three, and it's pretty much across the board.
"We are targeted, as most are, at the premium level of the market. That's where our packages are put together. If you compare a comparable package of what we're selling vs. what they can get from an RBOC, we're about a 20 percent discount. It's a little bit; it's not dramatic. So I don't think we're really buying our way into the marketplace. But consumers are really savvy. They expect something for the fact that they're bringing you all of their business. And they know that has value, so they expect something for that.
"But the biggest area of concern is service quality and the delivery process. We want it to be a very good customer experience. So we're working very hard at doing that. If you can do that, the power of the bundle is there."