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AT&T finds itself trailing in cable-based phone service

For all the fanfare surrounding AT&T's cable acquisitions, companies such as Cox Communications, MediaOne Group, and Cablevision sprint ahead with their own cable-based local phone services.

AT&T shocked the industry with multibillion-dollar plans to offer telephone service over its newly acquired cable networks, but its competitors may be quietly beating Ma Bell at its own game.

Cable operators, eager to grab part of the $100 billion phone market, have focused on technology upgrades necessary to offer telephone service. But for all the fanfare surrounding AT&T's cable acquisitions--most notably Tele-Communications Incorporated--companies such as Cox Communications, MediaOne Group, and Cablevision have sprinted ahead with their own cable-based local phone services.

Cox, a mid-sized cable operator, has aggressively offered residential and commercial local telephone service since September 1997 and now serves more than 80,000 customers in seven markets. Residential and commercial telephone services comprise about 4 percent of Cox's total revenue.

In contrast, AT&T--soon to be the nation's largest cable operator if its MediaOne deal is approved--hopes to use those networks to rake in local phone revenue and circumvent Baby Bells such as SBC Communications. But AT&T still only offers cable telephone service in limited trials around the nation.

"Cox and MediaOne are the two that have rolled out [local phone service] the fastest and have been the most aggressive," said Bruce Leichtman, a cable industry analyst at The Yankee Group. "They're not trials; they're for real."

Road map?
Cox offers residential local phone service in San Diego and Orange County, California, Omaha, Nebraska, Oklahoma City, Oklahoma, and Connecticut, having turned on about 120,000 phone lines as of the end of September. Cox also offers commercial service in New Orleans and in much of Rhode Island. The company has quickly added customers by undercutting incumbent local phone company prices.

According to executives, Cox's price for a single phone line is about 10 percent lower than the competition's, and the company discounts additional lines by 50 percent. Executives believe their long distance and international calling rates--Cox resells wholesale minutes from long distance carriers--are competitive.

"If we can get [potential customers] to take out their phone bill and compare it to our offering, we've got them," said Chuck McElroy, vice president of new services support at Cox.

Executives said they intend to target higher profit-margin commercial customers next year, and will aggressively market to the existing 4.7 million cable TV customers and high-speed Internet service subscribers. Additionally, the company plans to increasingly market services such caller ID, call waiting, and three-way dialing.

"We haven't really pushed or promoted the premium services, which have high margins," McElroy said. "I still think there's a lot of upside here."

Playing it safe
AT&T is taking a more cautious approach in marketing its telephony offerings. The company offers some commercial service in Fremont, California, and the Chicago suburb of Arlington Heights, and has ongoing trials in Denver, Dallas, Seattle, and Pittsburgh.

The company, which will only say it currently serves "thousands" of local telephone customers, plans to serve hundreds of thousands next year, and millions in 2001.

"We want to build a foundation that will let us scale this to millions of customers," said AT&T spokesman Mark Siegel. "We want to have good operational, back-end processes…to ensure we'll be able to be as successful as we know we can be. Technology is not the issue. The issue is scale."

Granted, AT&T hasn't owned its cable networks long, which partially explains its slower deployment.

"Given the amount of time AT&T has owned the TCI systems, I wouldn't expect them to have lots of [telephony] customers," said Jeannette Noyes, research manager for residential and small business communications at International Data Corporation. "Cox and MediaOne are ahead because they were planning on it ahead…These things have a long lead time in terms of development."

Analysts said Cox's networks are geographically clustered into large metropolitan regions, making deployments easier and more cost-effective. AT&T, like most cable companies, is swapping systems to do the same.

AT&T also is hampered by its older cable systems, which need technology upgrades before the company can offer telephone service and high-speed Net access.

"Cox is ahead because their [networks are] just more advanced," the Yankee Group's Leichtman said.

Industry observers suggest AT&T is mindful of TCI's reputation for poor customer service. The company is proceeding cautiously, the say, so as not to stumble when it tries to offer service nationwide.

The careful approach could pay dividends.

After all, Cox has had its share of problems. The company initially faced several major service problems including fiber-optic cuts, a service outage in its Orange County market, and back-up power issues.

"We started this business on unproven technology," said McElroy. "Three years ago no one was offering telephone service over cable. But we think most of those things are behind us."

Today, Cox's biggest headaches include allowing new customers to retain their old phone number when switching over, the ability of caller ID systems to display the name of the incoming caller, and the company's ability to offer cable TV and phone service on the same monthly bill. Certain brands of dial-up modems also have problems connecting to an Internet service provider over Cox's cable telephone wires.

AT&T would like to avoid those same pitfalls. And eventually the two divergent cable telephony strategies may meet. For one, AT&T is in the process of acquiring MediaOne, which will boost the company's cable-based voice plans considerably. Cox and AT&T could strike their own telephony alliance, allowing each to offer service over the other's networks.

AT&T has a similar proposed alliance with Time Warner Cable--it has yet to be finalized--which prompted Cox, Comcast, and MediaOne to band together to negotiate better terms with AT&T for a comparable alliance.

Neither Cox nor AT&T executives would comment on the status of the negotiations, or whether they're even ongoing.