Rival sectors stalking lucrative 'triple-play'
One-stop shopping: TV, phone, Internet services back at top of company agendas
August 25, 2003
Barbara Shecter and Mark Evans
Financial Post
nationalpost.com
[James Robbins is CEO of Cox Communications, one of the first companies out of the gate in the cable-telephony race.]
[Ted Rogers is CEO of Rogers Communications: A report has predicted that getting into the telephone business will cost Rogers $500-million to roll out to 30% of its basic subscribers.]
In what is shaping up to be a major battle for customers, Canada's cable companies appear poised to leap into the local telephone business.
The promise has been made to investors and consumers before, but events this summer -- some triggered by the cable companies themselves, others by the federal communications regulator -- suggest the plan to offer customers a "triple play" of communications services, including TV, phone and Internet, is moving back to the top of the agenda.
And that means the fireworks are about to begin between firms whose traditional business has been telephone service and those who have concentrated on the delivery of television signals.
The renewed interest among cable companies in the telephony business reflects the move toward one-stop-shopping for communications and entertainment services. What's at stake is the lucrative "triple play" -- selling telephone, television and high-speed Internet access services to consumers.
In the United States, cable behemoths Comcast Corp. and Cox Communications Inc. are already treading on the traditional domain of the telcos, aggressively chasing customers and offering them deep discounts on their local telephone service.
Cox boasts more than 838,000 customers paying US$50 a month for phone service, according to David Pugliese, vice-president, product management and marketing, with Cox. In the second quarter, Cox added 56,170 telephone customers, and has logged year-over-year growth of 45%. The Atlanta-based cable company's market penetration is 18.3%, and telephone revenue for the first half of the year has reached US$223.5-million.
Philadelphia-based Comcast, meanwhile, has 1.36 million subscribers, penetration of 14.9% and revenue of US$430-million.
Then there's Eastlink Communications Ltd., a small Halifax-based cable outfit that has managed to grab roughly 30% of the local phone business in some markets in the Maritimes.
Its success is spurring Canada's cable giants -- Rogers Communications Inc., Shaw Communications Inc. and Cogeco Cable Inc. -- to jump into the game, too.
Rogers, Canada's largest cable company, revealed its hand two months ago when it asked the CRTC to temporarily ease conditions for new entrants to the local telephone market.
Executives at Rogers predict the technology that makes it possible for customers to phone people over the Internet will be up and ready in six months.
The phone companies aren't taking the threat lightly. BCE Inc. and Telus Corp. are swiftly moving into the cable companies' arena, ramping up broadcasting services such as television programming and pay-per-view. Last week, Telus won a licence to launch television service in parts of British Columbia and Alberta -- a move that made cable executives shudder.
Both sides are locked in a race to see who can steal market share from whom first. Unfortunately, the odds appear to be favouring the telcos -- not the cable companies.
The root of the problem for the cable companies: technology.
It not as much of a problem for companies like Cox Communications Inc., Comcast Corp. and Eastlink that got out of the gate first by embracing circuit-switch technology. While circuit-switch systems have limitations -- they can't handle large amounts of data and Internet traffic in an efficient manner -- the technology allowed all three players to jump into the cable-telephony business in the late-1990s and build up impressive market share.
Rogers, Shaw, and Quebecor Inc.'s cable arm, Le Groupe Vidéotron ltée, backed away from the notion of installing switch-circuit technology. In part, the decision was based on the expense of installing such a network. "We just couldn't make it work economically," said Rogers executive Alexander Brock of the circuit-switch experiment in Trois-Rivières, Que. in the late 1990s.
But the firms were also tempted by a new Internet-based technology called VoIP, or Voice-over Internet-Protocol. VoIP has the capacity to allow the cable firms to open the door to advanced communications services that tie voice data together with e-mail, instant messaging and video conferencing. As well, there are now hookups that allow VoIP calls over ordinary telephone handsets rather than clunky PC microphone systems. It's a big step up over circuit-switch systems that don't have those capabilities. In addition, the cable companies were attracted to VoIP because they could offer a premium price for the new services.
But installing a VoIP based system is not an easy task. In the late 1990s, Vidéotron began an ambitious experiment -- the first of its kind in North America -- that would have ultimately seen the cable company roll out VoIP technology across Quebec. But Vidéotron's new owners, Quebecor, predicted that taking on Bell Canada with unproven technology would lead to bankruptcy. In 2001, a year after it bought Vidéotron, Quebecor pulled the plug on the pilot project.
"We thought we might have driven the company bankrupt. That's why we pulled out [in 2001]," said company spokesman Luc Lavoie.
That was the last time Canadian cable executives talked seriously about getting into the local telephone business. But after years of delay resulting from concerns over the reliability of the cable firms' technology, and the costs involved, a wake-up call for Canadian cable companies is coming not only from its telephone competitors but from peers south of the border.
In the U.S., two of the largest cable firms, Cox and Comcast -- which have already grabbed notable market share in the residential and business telephone market through circuit-switch technology -- are preparing to embrace VoIP technology. And at least seven of the top cable providers in the U.S. are conducting trials with VoIP service, according to Sara Shah, an analyst at ABI Research in Oyster Bay, N.Y.
But despite the renewed signs of readiness, none of Canada's cable giants will put an exact time frame on when their cable customers will be able to buy local phone service from them.
Mr. Brock, the Rogers executive in charge of the VoIP project, acknowledges that, despite earlier problems including delays and interruptions to voice transmissions, the technology should be ready. But there is no date yet on when VoIP will be rolled out to Rogers customers.
"It's not as if the technology is going to be the gating issue at the end of this year," says Mr. Brock.
Ron Perrotta, vice-president of marketing and sales at Cogeco Cable Inc., Canada's fourth-largest operator, said his company is watching developments at Rogers very closely.
He stressed that the "triple play"of TV, high-speed Internet and local phone service is viewed as "an important commercial offering" that will, at some point, be available from Cogeco.
But technology is not the only issue when you're taking on an incumbent like Bell which has more than 99% of local residential phone customers in Ontario and Quebec.
In a recent report, UBS Warburg predicted that getting into the telephone business will cost Rogers $500-million to roll out to 30% of its basic subscriber base.
The analysis assumed that the service would be launched in 2005, but some industry watchers suggest waiting even that long while haggling over issues like the regulatory environment could cost the cable companies their chance to get into the telephone business at all.
One of the larger threats faced by the cable companies are third-party carriers like Edison, N.J.-based Vonage, which offers telephone service over other carriers' high-speed Internet networks. That means Rogers customers would simply sign-up for telephone service using a third-party carrier -- bypassing their Internet provider altogether.
"By the time Rogers and Shaw believe the technology is ready, it means it is ready for [third-party service providers] as well," says telecom consultant Mark Goldberg.
"There is no reason for customers to buy service from the infrastructure provider. [If] I buy service from either Bell or Rogers, once I have that there, I don't need them to get my voice service... Customers at the end of the day don't care about the technology. They are buying dial-tone."
Mr. Goldberg added that Canada's biggest cable companies may have given up the chance to grab their share of customers when they shunned the circuit-switch technology.
Cox, for example, is planning to migrate some of its circuit-switch customers over to VoIP by initially blending the technologies -- something it is able to do having already invested in the circuit-switch network.
Which has some cable executives asking whether they have missed their chance. Certainly, that appears to be the thinking at Quebecor. Two years after it walked away from its VoIP experiment, the media conglomerate shows no willingness to embrace the technology.
"We're not moving there tomorrow or next month or before the end of the year," says Mr. Lavoie. "I can't tell you about 2004 because it's not really even on our agenda."
With the telephone companies breathing down the cable firm's necks, it probably won't be long before it is.
WHO'S ON FIRST: These three cable pioneers are offering a convergence triple-play: cable, phone and Internet service.:
Comcast Corp.:
Philadelphia
Subscribers: 1.36 M
Penetration: 14.9%
Revenue: US$430-M
COX COMMUNICATIONS INC.:
Atlanta
Subscribers: 838,716
Penetration: 18.4%
Revenue: US$223.5-M
EASTLINK COMMUNICATIONS LTD.:
Halifax
Subscribers: 40,000
Penetration: 16%
Revenue: n/a |
