Phone fray attracts cable industry

CHICAGO--When Cox Communications launched the first U.S. telephone service over a cable broadband connection several years ago, few believed it could ever seriously compete in the local phone market.

But because of a recent regulatory twist of fate, Cox and the rest of the cable industry are now expected by federal regulators to join cell phone service providers as "the competition" to keep the nation's elite local-phone companies in check, say executives gathering here this week for Supercomm 2004, a key annual telephone industry event.

Regional Bell operating companies including Verizon Communications, Qwest Communications International and SBC Communications now face competition mainly from two fronts: cell phone service providers on one side and long-distance companies MCI and AT&T on the other. Tellingly, the Bells in 2001 for the first time in their history reported net declines in the number of access lines serviced. According to a May 6 report from the Federal Communications Commission, those access lines dropped from 187 million in 2000 to 172 million in 2002--a decline of about 8 percent.

But while the numbers of those cutting the cord and using only a cell phone continue to rise, AT&T and MCI suffered a dramatic blow last week when phone competition rules expired that guaranteed cheap access to the Bell-owned local networks. As a result, both companies are now discussing dramatically scaling back their local phone services.

Without the rules in place, it is once again extremely advantageous to own a network that covers the so-called "last mile" to the home. It's something that cell phone service providers, the Bells and top-tier U.S. cable TV companies have in ample supply. Meanwhile, the MCI and AT&T networks stop short a mile or so from their customers' homes mainly because of the enormous capital investment involved.

Cable executives attending the Supercomm show said they are ready to pounce on the opportunity the latest regulatory twist has presented and to fill any void that might be created by a possible departure of MCI and AT&T from the local phone business.

"We have been pounding our chests since 1997 about this," Cox spokesman Bobby Amirshahi said. "We do provide competition."

"It's cable's turn"
Sources say cable companies now face enormous pressure from federal regulators to step up their efforts, even though they've so far managed to attract only a couple million subscribers--trivial to giants like the Bells, which control 85 percent of the nation's local phone market.

"There was this wink-wink from Washington," said a broadband phone executive requesting anonymity. "The FCC, the Senate--everybody there wants competition and low prices. The MCIs and AT&Ts were the old guard. Now it's cable's turn."

Cablevision is one such example. On Monday, it said it added unlimited local and long-distance to its bundle of TV and broadband. The bundle's price, about $90, is not changing, however, meaning Cablevision is ostensibly making unlimited dialing free

Natexis Bleichroeder analyst Vivian Mamelak said regulators will make sure cable's battle with the Bells is as smooth as possible by letting cable operators continue operating unfettered by regulation, one of the main reasons they can undercut the Bells' prices for unlimited calling plans. By comparison, the Bell phone networks are heavily taxed and regulated.

"In our opinion, (the FCC) just shot a key group of competitors (AT&T and MCI) in the back," Mamelak wrote in an analyst's note. "Consequently, we believe there is now a much higher probability that the FCC will leave cable telephony alone."

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Aside from the regulatory twists, analysts have also applauded cable operators for putting their imprimatur on voice over Internet Protocol (VoIP) technology, a much cheaper alternative for adding a phone service over a broadband network. It's significantly less expensive than using circuit switches and can be rolled out much faster. After years of doubts about the technology, cable operators now have had a change of heart.

"U.S. cable operators will now move ahead with VoIP services in earnest," Mamelak predicted in her recent note.

For their part, the Bells are bracing for the cable onslaught. Verizon, especially, has been quietly trying to change its image from that of just a phone company to one that sells bundles of heavily discounted broadband, local-phone, long-distance and television service.

Bundling is a key strategy for the Bells, as they go up against cable companies in what's known as triple threat services of video, voice and broadband--a trend that's seen alliances between local phone companies and satellite TV providers.

"We consider ourselves a broadband company," Verizon spokeswoman Briana Gowing said.

Some local phone companies are also deciding that they don't need to sell local phone service anymore to some customers. To be sure, not all of the Bells are eager to go along with unbundling highly profitable local phone service from their other offerings.

Internet telephony has also increasingly become an important part of the Bells' business. They are using it deep inside their networks to cheaply transport long-distance calls, and are beginning to roll out their own local services using the technology. Qwest already sells a local VoIP service in Minnesota, while Verizon is expected to debut its home VoIP service soon.

VoIP may also help keep AT&T in the local phone market. The company's CallVantage VoIP service is just 3 months old, however, and will need another 18 months or so to rollout in earnest, AT&T has said.

"Don't count us out yet," an AT&T spokesman said.