Who's the fairest one of all?
... part II
To achieve penetration levels north of 30 percent, AT&T Broadband's technology and marketing efforts must work hand-in-hand, Hockemeier says, adding that the MSO must not only ramp up its telephony footprint and install flow-through provisioning in those markets, but also must bolster its marketing efforts.
"I'm a big fan of direct selling," he explains, intimating that his door-to-door sales teams can close about one out of every two in-home presentations they make. "Ultimately, direct selling will account for 30 to 35 percent of our sales. As Tony (Werner) delivers more footprint, we finish one area and move on to the next, and leave a few folks behind to do re-market."
That strategy has demonstrated some mettle. AT&T Broadband is installing upwards of 2,000 phone customers per week, up from the 1,000 subscribers per week it was installing in November 1999, says Hockemeier.
As simple math would suggest, however, those installation numbers will need to rise considerably to meet Armstrong's forecast. To that point, Hockemeier argues that history is still in the making, and he expects more of the MSO's phone markets to come on line and make a bottom-line impact. "We've only got six markets really contributing much to the production right now, and the other three are about to come alive," he says. "Let me try to dramatize how steep this curve is. We had 1,000 installs in November, 3,000 in December and 6,000 in January, and I'll probably do nine or ten (thousand) in February. Almost on a daily basis, we're setting sales and installation production records . . . It's almost something that I've come to expect at this point."
Moreover, Werner points out that AT&T Broadband has only cut loose the marketing efforts in roughly 900,000 homes passed, a figure that should approach 4 million in short order, he says. At the same time, he expects the telephony ramp to tilt in the same direction as the company's @Home cable modem service. Indeed, AT&T Broadband has been connecting an average of 1,500 new @Home customers per day, and as many as 2,000 on good days.
At the same time, MediaOne may be part of the AT&T Broadband picture very soon, a move that would push AT&T Broadband's realm beyond 26 million homes passed, and obviously pump up the MSO's base of phone subscribers.
Though an entirely new company will come into the fold, AT&T Broadband hopes the technological compatibilities between the two MSOs will enable AT&T Broadband to hit the ground running. Excluding MediaOne, AT&T Broadband plans to end 2000 with 3 to 3.5 million telephony-ready homes. With MediaOne, that figure is expected to soar to 6 to 6.5 million.
"On a whole bunch of fronts, the actual consistency (between AT&T Broadband and MediaOne) is astounding," says Werner. "On component selection and network infrastructure, we've been very, very consistent. MediaOne may have a couple of other phone vendors above and beyond what we have, but the way they service and the way they do everything is fairly consistent."
Aside from infrastructure concerns, expect the AT&T name itself to help drive higher penetration in MediaOne's digital telephony markets. "Considering AT&T's brand equity, I believe the first impact (of the AT&T-MediaOne merger) will be that the AT&T brand name should generate a lot more penetration than the MediaOne name does now," believes Tellabs Group Manager for Marketing Tom Ruvarac, whose company currently supplies equipment to AT&T Broadband in Portland, Ore.; and to MediaOne in Richmond, Va.; Jacksonville and Pompano Beach, Fla.; Boston, Mass.; and areas of New Hampshire and the Twin Cities.
Consolidation also has had its effect on Cox, which has been snapping up cable companies and expanding its presence, as well. Unlike AT&T Broadband's pending acquisition of MediaOne, several of Cox's purchases have included systems with infrastructure that isn't highly-advanced, which turns the company's overall scalability map into a moving target.
"It's an interesting picture because we've made several acquisitions over the last several years, changing the ramp on (two-way installations) significantly," says Young. "A lot of our acquisitions were not up to what we would consider the Cox standard, so our overall numbers take a dip down before we can start ramping up again."
Though Cox does not publicize its projections on a product-by-product basis, the MSO expects to have 68 percent of its enterprise upgraded to 750 MHz and 74 percent of its plant two-way activated by year-end 2000. By year-end 2001, Cox hopes to raise those figures to 80 percent and 84 percent, respectively. On the phone front, meanwhile, Cox plans to have more than 60 percent of its homes ready for phone service by 2004.Economics of the upgrade
Of course, reaching scale requires plenty of equipment-and plenty of equipment costs plenty of money. Though it needs to move to scale to reach the 400,000 phone customer plateau, AT&T Broadband believes it can cut the variable capital per circuit switched telephony subscriber to $590 from the initial $840 (see Table 2) as home battery costs disappear and Network Interface Units (NIUs), Host Digital Terminals (HDTs) and switching and transport equipment costs decline steadily. Though AT&T Broadband hasn't chopped that number to $590 yet, it's approaching it quickly.
"Assume that we're between those two markers today, with a steady curve heading toward $590," says Werner. "There are a number of things that are in there to make costs go down. For the terminal equipment and the NIUs, it's a matter of scale and competition that's getting us there. For switching and transport, which is going to drop subtly, it is just a matter of starting to have better network utilization and better capacity as we move out."
AT&T Broadband made a major move on that front in February when it inked a monster deal with Arris, the telephony equipment co-venture of Nortel Networks and Antec. Under terms of the extended deal, which will be in effect for three years, AT&T Broadband hired Arris as its exclusive supplier of phone equipment in eight of the MSO's nine major telephony markets: Chicago, California's Bay Area, Denver, Dallas, Hartford, Pittsburgh, Salt Lake City and Seattle. The agreement also gives AT&T Broadband a clear IP telephony migration path.
"What I needed was a vendor that could match my forecasts and my requirements," explains Hockemeier, who reiterates that he will continue to seek out other vendors as AT&T Broadband expands its cable telephony footprint."
Though Cox hasn't publicly said what its per-customer telephony equipment forecasts are, it does expect to see costs drop as scale is achieved and more MSOs get into the game. "The biggest thing that drives down the cost of equipment is volume," Young concurs. "We've been fighting that since we launched (telephony) because we've been among the few rolling out some of those technologies.
The home battery cost dropping from $55 to zero is a function of AT&T Broadband making the move to network powering, a factor that also renders installation cost savings, says Werner. "As we move from the home battery to network powering, the installation goes faster. And, as we improve our processes on how quickly we can provision new phone customers, that will drive installation to a couple hour time frame versus a three- or four-hour timeframe," he explains.An IP future?
While IP telephony and the work being done on the PacketCable standard move at a brisk pace, both AT&T Broadband and Cox haven't invaded that space with as much vigor as some other MSOs.
Cox seems content to continue employing circuit switched technology as it weighs the options of IP as an access migration path while the technology evolves from the larval stage to a proven system.
"We aren't testing IP currently, but we are surveying the technology very actively right now and plan to test at least some parts of it this year," concedes Young. "There are still several holes in terms of the kinds of service we provide, which make it not so attractive right now, but we will be testing some access technology. Our strategy is wireline LEC replacement telephony, and IP just isn't quite there yet."
Initially cool on the IP front, AT&T Broadband's migration to IP is starting to heat up, thanks in part to its equipment deal with Arris, which is developing an advanced IP module called PacketPort that combines the features of its VoicePort technology with cable modems based on the DOCSIS 1.1 specification. Such an arrangement allows MSOs to install the new cards and provide IP telephony and circuit switched services over the same platform, says Mike Wearsch, president of Antec's digital systems division.
Though AT&T Broadband has yet to launch an IP field test, such trials could come as early as mid-summer 2000 when PacketPort becomes available, says Werner. "There may be an IP market trial this year," he says.
Until vendors begin deploying the equipment based on DOCSIS 1.1, costs involved in IP telephony could be one of the factors affecting AT&T Broadband and Cox's migration to IP telephony, explains the Yankee Group's McCormick. "(For IP telephony), there's a need for a converged set-top box that will handle telephony as well as high-speed data and programming. Without that, you're talking about three different pieces of equipment, (and) that makes it a very difficult economic proposition to provide all of these services to the home."
Werner, however, sees that obstacle as a potential opportunity to drive the take rate of bundled services. Under ideal conditions with DOCSIS 1.1, he explains, each customer who signs up for @Home could be a prime target to market the company's IP voice service to, and vice versa.
Spearheaded by the Herculean efforts and bold predictions of the cable telephony avant-garde of AT&T Broadband, Cox Communications and MediaOne, it appears that what once seemed a mere fantasy just a few short years ago is quickly advancing to an extremely lucrative reality.
Recent telephony figures from those three MSOs, coupled with a public prediction from Armstrong, show promise, and have fueled optimism within the industry. However, those predictions will have to hold their own when December rolls around, when it's determined whether 2000 signified the year that the cable industry threw down the gauntlet of competitive telephone services, and put a real scare in the ILECs.