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VoIP spells bundle of issues for cable giants

Tue, 06/01/2004 - 8:00pm
Scott Moritz

Copyright 2004 TheStreet.com Inc.

The cable industry's Bell-ringing days are a ways off yet.

Eager to offer consumers the full range of television, Internet and phone service, outfits such as Comcast, Cox and Time Warner are very publicly eyeing plans to offer Internet calling.

The cable giants' phone ambitions would seem to set up a clash of the titans over dominance of the nation's telecom turf. Local phone giants Verizon, SBC and BellSouth already are struggling to stem the erosion of local access lines. Now, some investors see cable's voice-over-Internet-protocol, or VoIP, challenge as a likely replay of the wireless tide that swept away customers by the boatload.

But the battle of the communications bundle is forging some odd pairings. Some cable companies aren't ready to go it alone in the calling business and have enlisted telcos such as MCI, Sprint and Level 3 to provide big pieces of the phone service puzzle. Other companies must yet decide exactly how they'll provide the cable voice service that consumers supposedly are so ardently demanding.

To date, cable's VoIP battlegrounds have been confined more to press releases and test markets than to homes and office towers. Full deployment appears years, not months, away. In the meantime, the cable giants continue to weigh two vexing options: Trying to replicate costly but high-quality phone company service, or substituting cheap Net calling technology — while using telcos to connect the calls.

To date, Cox and Comcast (via AT&T Broadband) have tried conventional circuit-switched phone service — the kind with clear calls and an independent power supply in case of outages. But now, after trying the expensive high road, the big cable players are seeing advantages to the lower road, as VoIP, with all its shortcomings, starts to gain acceptance.

There are perils to both approaches, say analysts. You could spend a lot to rival the Bells in sound quality and also provide features such as 911, federally mandated call-tracing and eavesdropping along with uninterrupted power. But after all the cost and effort, the companies could well end up in the same position as the Bells, watching hefty investments fester as customers flee to cheaper services.

Or, you could cut corners by offering low-budget unlimited calling plans as reliable as your 'Net connection and as clear-sounding as a cell phone. VoIP upstarts such as closely held Vonage of Edison, N.J., offer $29.99 calling plans using cable modem and digital subscriber lines, or DSL, connections. Even Ma Bell AT&T says it is entering the 'Net calling market with a $39 monthly plan. And, of course, each of the Bells has outlined plans to offer VoIP in certain markets.

But some cable companies are starting to favor a compromise of sorts. Time Warner Cable, for example, has embraced resale of telco service. Lacking phone expertise but looking for a quick entry into the business, Time Warner was among the first big cable companies to announce plans to sell phone service using the using the networks of MCI and Sprint.

Time Warner will essentially feed its customers' VoIP traffic over to MCI and Sprint's phone lines. MCI has a couple similar deals in the works with other cable companies, say people familiar with the plans.

This bond among crosstown rivals, the cable and long-distance companies, is similar to the Bells' agreements with satellite broadcasters that allow phone companies to offer TV programming as part of a bundle of services. And in both cases each arrangement serves to buy time as cable hones its own voice services and as the Bells find a way to beef up the networks to carry a host of advanced digital services.

Companies like VoIP specialist Vonage "are living on borrowed time," says ABI Research analyst Vamsi Sistla.

But for now, says Sistla, the market is likely to be divided into two camps: Consumers who feel they must have so-called lifeline services like the 911 service and always-available dial tone they get with conventional phone companies, and those people who are looking for bargains.

Sistla says cable companies will likely have greater success selling VoIP service in areas where people use a lot of cell phones.

Consumers who don't demand high quality and dependability will be attracted to VoIP as a cheaper alternative, says Sistla. Especially, says Sistla, since "the cell phone is becoming our primary line, and our home line is acting more and more like a backup line."

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