Does it take two (or more) to tango?
The cable industry and a troupe of partners have been invited to the VoIP (Voice-over-Internet Protocol) dance. Just who shows up with whom, however, is driving the deployment phase of the business and creating an interesting, albeit unlikely, set of relationships. Now well past the trial stage, the VoIP business model is taking to the homes and prompting cable operators to seek strategic partners to help deliver key functions of the complicated, yet potentially lucrative, VoIP business.
The likes of Level 3, MCI, Sprint, Vonage and other voice service providers (VSPs) are teaming with cable operators to build and deploy VoIP services. A few short years ago, those alliances would have been unheard of. Yet with the VoIP revenue stakes rising, equipment costs falling, and the cable industry's understanding of the business heightened, conventional wisdom suggests that strategic alliances and partnerships are now an integral part of the VoIP business.
"It's a joint communications market, with all parties coming together in a period of transformation. Competitors could be partners tomorrow. ILECs are leveraging their business and Sprint is playing lots of sides while other chess pieces are moving around the board and growing into a duopoly between cable and voice service providers," says Kate Griffen, analyst for the Yankee Group.
VoIP is expected to serve 17.5 million U.S. households by year-end 2008, with cable projected to capture a 56 percent share of the local VoIP market by year-end 2005, a Yankee Group study projects. Meanwhile, the U.S. telephone market has moved north of $200 billion, which the cable industry is eager to tap into, reveals a Diffusion Group report.
Hybrid PacketCable VoIP architecture using a VSP for PSTN call termination.
Chasing a piece of that market through a VoIP business is presenting the cable industry with several crucial decisions, the most important being whether to build and deploy a VoIP business model on their own or tap the help of significant others.
"We challenged the mutual assumption of several types of partners and explored it," explains Mark Barber, vice president of telephony for Charter Communications. "But we always came back to our initial assumption of a few key partners. The migration process is painful and daunting from an economic perspective. You never partner until you fully understand the issues and processes."
Charter recently signed agreements with Accenture (a telephone provisioning company), Level 3 (a long-haul network provider) and Sprint (a long distance service provider). The agreements will allow Charter greater cost efficiencies and faster time to the VoIP market. "We had to find help with speed to market issues and Level 3 and Sprint offer that. With Accenture, we can push orders electronically, saving cost and time," Barber says.
The agreement follows a Time Warner Cable/MCI/Sprint strategic partnership struck in December of 2003, a watershed deal that essentially opened the door for similar agreements connecting a growing number of the major MSOs to a veritable smorgasbord of equipment manufacturers, service providers and VSPs.
"They (Sprint) have all the right expertise in areas where we're weak," says Calvin Craib, senior vice president of business development for Mediacom Communications Corp., which signed a multi-year agreement with Sprint to provide telephony services. "It's a good marriage of complementary skill sets. We buy certain services and pay on a monthly basis per customer. We'll do the marketing, sales, installations and trouble calls and Sprint will assist in provisioning capabilities, switching, delivery of enhanced 911 emergency service, number portability and other features."
Mediacom will deploy VoIP as a stand-alone service in early 2005.
For Sprint, a company that raked in $26 billion in 2003 and sports 26 million customers worldwide, the decision to partner with top MSOs was inevitable.
"It's far more effective for cable companies to leverage our assets like scaling, time to market and our cost curve. That was the strategic foundation for our decision to partner with cable operators. It's always been our strategy to focus on the top tier of cable, but we're also embracing the smaller operators because our solution is so scalable. It's very meaningful for us to get into cable," says Mike Smith, director of business development for Sprint cable solutions.
Sprint's relationship with cable now extends to smaller operators such as Sunflower Broadband, yet its agreements with Time Warner and Charter are the keys to its success in the VoIP business. Adds Smith: "Telephony is complex, so it's smart to minimize the number of players. Two willing business partners make it much easier."
Minus those partners, the road to VoIP is bumpier, at least for most. "The shortest distance between two points is through partnerships with ILECs, and with softswitch costs coming down, there's little capital required to get into the market. But most cable operators will leverage their networks and not go it alone," predicts Michael Greeson, founder and principal analyst for The Diffusion Group.
Even Comcast Cable, the nation's largest MSO, is planning to partner with Sprint and AT&T for physical connectivity to the public network. "We control the quality of service to our customers, but these companies have vast, complete networks. We don't want to spend that capital to build the infrastructures. We'd rather lease them," says Rian Wren, senior vice president and general manager of telephony for Comcast.
Yet Comcast, Wren notes, will handle the vast majority of the VoIP functions in-house and take a methodical approach to deployment, using few partners. "We have complete capability to do VoIP, but there are some companies with very sophisticated capabilities to do advanced services like voice recognition, so we could partner with them," he says.
Comcast is trialing VoIP in three markets with 1,000 customers, including beta stage testing in Indianapolis, where it is serving real customers. "We will test a few pricing package scenarios and roll out VoIP early next year," concludes Wren.
Voice-over-IP telephony over cable architecture–wholesale partnership.
The partnership scenario for companies such as Vonage, however, is changing. With an estimated 52 percent of the VoIP market, and by far the leading provider of "best effort" VoIP service, its role in the VoIP space is expected to change dramatically as the giant cable MSOs penetrate deeper into the business.
"We created a brand that shook the tree after the cable operators were waiting on VoIP. We proved it was a business and now offer them all parts of VoIP, and some operators are looking at that as a path to VoIP. But we want to be a turnkey provider and not break out our assets and water down our value," says Phil Giordano, Vonage's VP of sales and business development.
Vonage's strategy is to partner with tier-two and tier-three cable operators who don't have the capital or resources to do VoIP on their own, along with ISPs such as Earthlink and in the 10,000 retail outlets where Vonage is present, Giordano notes.
But it's the big MSOs that represent the pot of gold for Vonage. And though it has no agreements with the major cable operators, the company is actively pursuing those partnerships, citing a 24- to 30-month return on investment. Concludes Giordano: "We're working with the larger ones (MSOs) for eventual service to them and want to convince them that we can help their VoIP business."
Net2Phone is moving deeper and wider into the VoIP partnership arena, as well. It currently provides turnkey VoIP service to Liberty Cablevision in Puerto Rico, two cable systems in Europe and two in the U.S. It also just signed a commercial VoIP deal with TV Cidade, the third-largest cable MSO in Brazil.
"Given the scale of VoIP, operators need these relationships, especially the small- to mid-size systems. It's very difficult to build them on their own. That's where strategic-type relationships are helpful with local access equipment vendors, CMTS and customer premise equipment. Those are the companies that have crucial equipment for telephony and VoIP," says Michael Pastor, president of Net2Phone Cable Telephony LLC.
Partnerships with, and between, companies such as ARRIS, Cedar Point Communications, Cisco Systems, Motorola, Terayon Communication Systems and others are crucial.
"What's most critical for us is around the softswitch. So, we have tight relationships with Cedar Point and with Motorola and a master service level agreement with Level 3. We simply must have these strategic agreements," Pastor explains.
For partners such as Cedar Point, which provides the switching fabric that replaces Class 5 circuit switches, partnerships with companies such as Net2Phone and a wide variety of CMTS vendors and others is critical for its VoIP business.
"We need to provide customers with lots of horsepower and have good relations with companies that can provide that, because operators need much more than just a softswitch for their VoIP business and have had to adapt it to their own business models," says Andy Paff, president and CEO of Cedar Point. "To do that, they need third-party support in the beginning."
ARRIS, too, is knitting together partnerships with cable operators and their supporting casts. It supplies eMTAs (embedded multimedia terminal adapters) and CMTSs for VoIP deployments.
"We had to form relationships and agreements with other equipment providers so we could bring our expertise regarding telephony networks and SIP (Session Initiation Protocol) together," says Jeff Brooks, senior director of product management for ARRIS. "We have to work with Cedar Point, Syndeo [Corp.] and others and have formed re-seller agreements with Alopa (an OSS company now part of C-COR Inc.), Nuera Communications (gateways, trunking, access) and Ellacoya (IP space, policy management)."
Yet for the top eight or 10 MSOs, reaching out to partner with a bevy of vendors and VSPs to roll out VoIP service usually runs counter to their corporate strategies of customer control and cost-efficiencies. For example, Cox Communications' VoIP trial in Roanoke, Va. was launched and managed solely by the MSO. The results convinced the company to expand its VoIP deployment to Tulsa, Baton Rouge, West Texas and Southwest Louisiana later this year.
Nevertheless, Cox, with seven years of circuit-switched business experience, understands the need for partnerships in the VoIP business. "There was no outsourcing at Roanoke except for the hand-off of local calls to Verizon or long distance calls. We look at each market to determine if partners make sense and are looking at options for partnerships to reduce capital upfront. Eventually, partners might make sense for us," says Mike Pacifico, director of marketing for Cox Digital Telephone. As one example, Cox has already hired VeriSign Inc. to handle Communications Assistance for Law Enforcement Act (CALEA) compliance for the operator's VoIP services.
For VoIP newcomers such as Adelphia Communications, however, its partnership with AT&T's SIP-based CallVantage service highlights the need of some MSOs to enter into strategic agreements. The marketing-lead arrangement with AT&T requires the phone company to offer Adelphia as a preferred broadband provider.
"We have identified a few partners and are working with other partners. For us, VoIP is a greenfield opportunity and very compelling from a margins perspective. It's comparable to the revenue per unit from data customers with an opportunity to create hot spots being an even more compelling revenue stream with VoIP. So, we will partner with VSPs to leverage their staff and equipment so we can focus on the next generation of delivery," explains Tom Buttermore, vice president of data and voice engineering and operations for Adelphia Communications.
Identifying just who's partnering with whom requires some focus as well. HomeNet Communications entered into a strategic partnership with NetCentrex. VoIP Inc. is offering VoIP service to smaller cable operators, and Accenture has partnered with Charter Communications to provide the MSO with automated provisioning processes at about one-third the cost–equal to about $5 to $12 per order.
And the list of dance partners goes on.
"By taking over certain services for ILECs, CLECs and cable operators, we can allow them to focus their resources on market readiness, customer insights and core competencies. Now, we have to work with all software and network equipment providers to help scale an MSO's ability to drive voice into the marketplace," says Myke Miller, partner, Accenture Communications High Tech group.
It's likely to take a diverse slate of partnerships and strategic alliances to move the vast majority of cable operators into the VoIP business. Says Gleeson of the Diffusion Group: "If you partner with a Sprint, MCI or AT&T, it offers credibility to subscribers, and cable is looking at partnerships as the easiest way into the consumer market. It just makes more sense to partner with them because of their captured audience and the existing infrastructure."
The decision to take on partners and enter into strategic agreements also affect the cable industry's time to market.
"Competition in all sectors is heating up and we need all three services (video, voice and data) up and running. That's what Wall Street is looking for. It's a window of opportunity, and the longer you delay, the less of a claim you get on the market. We're in a period of 'deliberate haste'," concludes Barber of Charter.
Speed-to-market issues aside, most experts agree that with the right partners and right business models, VoIP is destined to become a valuable addition to the triple play of services. Concludes Greeson: "Offering voice in the triple play package is a very powerful model and having access to VoIP service is significant. And developing partnerships is the smartest move."