Cable raises its voice

Cable operators large and small are muscling in on local phone providers.

Ben Charny Staff Writer, CNET News.com
Ben Charny
covers Net telephony and the cellular industry.
Ben Charny
6 min read
For 130 years, traditional telephone operators have been kings of the home phone castle. But watch out--Ma Cable is making herself heard.

As never before, cable providers, from the giants on down to small operators like Northland Cable TV, are winning the phone wars against local phone giants BellSouth, SBC Communications, Verizon Communications and Qwest Communications International, collectively known as the Bells.

Each week, cable operators are adding hundreds, thousands, even tens of thousands of new local phone subscribers, while significant numbers of the Bells' local phone customers cut their home phone lines.

The result is the "Revenge of the Cable Giants," as organizers of next week's Spring 2005 Voice on the Net Conference & Expo in San Jose, Calif., put it. Once given no chance in the phone business, cable operators are now at the tipping point of becoming a legitimate threat to topple the Bells.


What's new:
Internet telephony is helping cable companies become a significant challenge to local phone providers.

Bottom line:
Although the local giants still have many millions more customers, their numbers are slowly shrinking as the cable companies steadily rise. Look out, Baby Bells.

More stories on this VoIP

"It's now cable's show," said InfoTech Research analyst Warren Williams. "The cable operators' voice business is starting to blossom. They have everything to gain, while the Bells have to worry about the effects of price cuts or even (offering) their own VoIP services."

VoIP, short for voice over Internet Protocol, allows a phone to be plugged into a broadband data connection, sending calls mostly over the unregulated Internet--which keeps the service cheaper than traditional telephony. A number of companies sell just VoIP services, but lately, the cable companies have been adding the service and offering it to their millions of existing broadband customers.

To be sure, the Bells still dominate the home phone industry; each still has tens of millions of phone lines in service. There are about 3.5 million U.S. cable phone subscribers. But growth rates are heading in the opposite direction. The number of cable phone subscribers is skyrocketing, with Time Warner Cable reporting a 1,000 percent increase last year.

At the same time, homes served by traditional local phone lines are dwindling. Qwest, the smallest of the Bells, lost about 88,000 lines just in the last three months of 2004. As of Dec. 31, BellSouth had 21.4 million access lines in service, down 4.1 percent for the year.

Top-tier cable operators each add between 6,000 and 11,000 new phone subscribers per week; telephone revenue per operator is set to pass $1 billion this year; and subscriber rolls bulge at a rate of 1,000 percent a year. The Bells, on the other hand, each lost up to 5 percent

of their local-line customers last year as local-phone revenues declined hundreds of millions of dollars.

"Cable is definitely leading the charge," Williams said.

And they're charging en masse, which could further accelerate the trend. Most cable operator are getting into the voice business, led by Comcast and Cox Communications, which now have ambitious plans to blanket their territories using a new technology over the next few years. Even scores of tiny cable operators are taking on the Bells at their own game--and winning. Northland, which specializes in very small markets, introduced an unlimited North American calling plan using broadband two weeks ago in a small sliver of North Carolina. About 500 people a week are signing up, many of whom are coming from incumbent BellSouth.

Cable's voice foray not only represents an incursion into the Bells' territory, it's also a defensive move against competition from satellite television. In the 1990s, the cable giants invested an estimated $75 billion to $80 billion to upgrade their networks into their current network of hybrid coaxial lines, a move in response to digital satellite services that could offer more channels and a clearer picture.

The investment is paying off for cable since broadband Internet access has become an incredibly profitable business. Modernizing their networks also opened the door for selling digital cable, high-definition TV, digital video recording and, of course, voice.

The Bells aren't standing still. Each local provider is investing billions of dollars to upgrade its antiquated copper wire networks with much faster, more efficient fiber-optics to better compete with the cable operators and their multifaceted service packages--including TV programming.

Cable VoIP actually represents a second major challenge to the Bells. Much of the Bells? line loss now is thought to be the result of "cord cutting," in which customers replace their home phone service with a cell phone. But only the hardiest of souls will cut the cord, given cell phones? notoriously unreliable service. On the other hand, VoIP services feel much like the old-style lines they?re aiming to replace.

Breaking the circuit
The rapidly changing dynamic results from cable's embrace of VoIP, which allows any Internet connection to double as a phone line. The Bells use circuit switches, which--while time-tested--are also antiquated, expensive to operate and wasteful of bandwidth.

The difference between the two technologies is dramatic. VoIP calling plans from standalone providers such as Vonage are about $20 a month cheaper than the Bells', owing largely to VoIP's operating efficiencies and the calls being unregulated, while the Bells face state

and federal rules. Cable companies often sell their voice service for significantly more as an individual service, but the cost drops dramatically when packaged with other services.

Also, while it can take years to install traditional phone equipment, VoIP expansion can be lightning-fast. To go into the VoIP business, a company doesn't actually need to own or operate its own network. So VoIP has allowed practically anyone with a modicum of venture capital to become a phone service provider in just a few months.

One such VoIP-only provider, Vonage, is the largest provider of Internet calling in the United States. But Vonage's lead might not last much longer against cable operators, which own their own networks and have huge existing customer bases. At Time Warner Cable's current pace of 11,000 new subscribers a week, it will pass Vonage by year's end.

Rousing the giants
At first, the nation's top two cable operators, Cox and Comcast, were hesitant to invest the time and money in VoIP service, pointing to its untested-in-combat experience. The companies preferred the more expensive, but proven, circuit-switched route used by traditional phone companies. Seven years ago, Cox became the first cable operator to offer voice service, but it used circuit-switch technology to put together its "triple play" offering of voice, television and Internet connectivity.

That move mostly earned Cox jeers--critics said "Ma Cable" had no place in the phone business. But with the Bells only able to counter with a double-play bundle of voice and data, Cox began to draw customers. At present, the cable carrier has about 1.2 million phone customers using circuit switches.

And in the last several months, Cox has aimed to increase that success with a complete embrace of VoIP. After using VoIP services to expand into five new markets, Cox plans on blanketing the rest of its territory using the technology. At the same time, Comcast has made a similar commitment, with plans to use the software to reach 15 million or more homes this year.

Other cable providers are making similar moves. VoIP service suppliers such as Net2Phone have made it possible for even the smallest of cable operators to get into the phone business, forcing the Bells to brace for an assault on more of their turf.

"It's one thing when the big cable companies can do it; Cablevision, Time Warner Cable, Comcast, they all have the resources," said Sarah Hofstetter, a cable phone veteran at Net2Phone, which supplies cable operators with VoIP to resell. "But when even the small guys can go head-to-head with the Bells, then (their) competitive edge of even the last mile is lost."

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