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Time Warner Cable dials in phone service

AOL Time Warner's cable division begins selling unlimited local, in-state and domestic long-distance telephone service to subscribers.

Read more about DSL, telephony
AOL Time Warner's entry into voice service Thursday highlights the latest headache for regional phone companies, whose lock on the so-called local loop is looking increasingly precarious.

Time Warner Cable's "Digital Phone" includes unlimited local, in-state and domestic long-distance telephone service for $40 a month and will be initially available only in the Portland, Maine, area. Combined with similar offerings from cable providers such as Comcast and Cablevision Systems, major local phone companies across the country--sometimes called RBOCs (regional Bell operating companies)--are close to seeing the collapse of the last barriers to local phone competition.

"This is one of the big fears among the RBOCs, that cable companies will make a major push in local telephone markets," said Mark May, an analyst at Kaufman Bros. "Cox and Comcast have launched local services, and cable operators have made inroads offering telephone service at significant discount to the RBOCs."

After years of delay, real competition is finally making its way into the local residential telephone market, promising enormous industry upheavals similar to those that shook the long-distance market nearly two decades ago.

The number of local telephone lines controlled by the nation's major phone companies has been dropping steadily since 2001, according to analyst Norm Bogen. In the first half of 2001, the RBOCs saw the number of local phone lines on their networks drop by about 2 percent. Since then, the trend has continued, with the Bells losing 4 percent of their local lines by the first half of 2002.

Bogen said there are three reasons for the declines. The main reason is the growing number of people replacing landline phones with cell phones, he said. But he added that more people are also choosing Internet-connected phones as a second phone line rather than going the traditional route. Consumers can choose between services provided over broadband connections using special software from companies such as Vonage DigitalVoice, as well as cable phone services such as Time Warner's offering announced Thursday.

Calling plans are the latest weapon cable providers are using as they battle for dominance of U.S. broadband services market. Nearly 60 percent of all U.S. homes get broadband from their cable television provider. The rest of the homes wired for broadband in the United States use digital subscriber line (DSL) connections from telephone companies.

The race to attract broadband customers has led some DSL services to slash prices; for example Verizon cut prices by about 30 percent in recent months to about $30 for its voice service customers. Most cable broadband services by contrast charge between $40 and $50 a month, although they say they provide superior performance for the price.

As Time Warner's announcement Thursday shows, however, much more is at stake than broadband market share: While cable voice services are still in their infancy, the potential threat of a voice upgrade to cable broadband has turned what was once a fight over data services into an all-out war for telecommunications service in the home.

Cable and telephone companies use bundles of steeply discounted services to attract and keep customers. Cable companies sell television and broadband access at discounted rates, but only when bought as part of a package of services. Telephone companies offer similar deals on telephone and broadband connections.

Until recently, telephone companies didn't worry about cable adding voice services into their bundles. But the growing sophistication of voice over IP, which turns voice calls into digital packets for dispatch over the Internet, allows cable companies to sell cable TV, telephone service and broadband connections on one bill. That's one more service--specifically cable television--than telephone companies can offer.

Comcast said it has signed up 1.4 million voice service subscribers in the first quarter of 2003, down slightly from the December quarter. That accounts for 16.5 percent of the company's cable subscribers in the areas where the service is offered. Cox, meanwhile, said it has signed up 782,546 voice service subscribers in the first quarter of 2003, accounting for 19 percent of its cable subscribers.

"We operate in a competitive market and we have a pretty good track record when going up against competition," said Keith Cocozza, a Time Warner Cable spokesman. He would not discuss the cable company's future release plans specifics, only saying: "We are going to take our time in the beginning."

In their current form, these new cable company phone services pose little threat--more like a novelty act--in places like Coatsville, Pa., where Comcast is trialing its telephone service. But if they were to be expanded substantially, "then the best way to describe this would be: 'wow,'" said In-Stat/MDR senior analyst Daryl Schooler.

"What does any of the major phone companies have on their bundle? Local and long-distance and data," Schooler said. "This move by the cable guys gives them local, long-distance voice, video and data all over one pipe."

There is very little evidence yet to gauge the effectiveness of cable companies' move into voice services. Both cable and DSL providers continue to add new subscribers, despite the economic doldrums. The largest VoIP provider for now is Vonage DigitalVoice, which has about 25,000 subscribers.

Digital Phone subscribers will get all the amenities they are used to, including caller ID and call waiting. They can also keep the same phone number if they are switching from another telephone service provider, according to a description of the calling plan from Time Warner Cable.

Whether the $40 a month charge includes a converter--a small box that changes telephone signals to digital signals for transport over the Web--was not immediately clear.

News.com's Jim Hu contributed to this report.