Dial "C" for Cable
Cable operators are rolling out telephone services, hoping to lure customers from traditional phone companies
By Harry Berkowitz
Staff Writer
September 7, 2003
newsday.com
Are consumers ready to sign up for a new kind of telephone service from the same cable TV companies that bring Emeril Lagasse and SpongeBob SquarePants into their living rooms?
Are they willing to risk some inconvenience -- such as the shutdown of phone service in a blackout -- and to abandon such traditional phone companies as Verizon Communications and AT&T or Sprint for a lower price and extra features?
Opening a new front in the telecommunications wars, cable television companies including Cablevision Systems Corp. and Time Warner Cable are betting that consumers will be eager to do so if it means they can make unlimited local and long-distance calls for a flat monthly fee as low as $34.95.
The companies say that despite some drawbacks, such as the lack of a backup power supply for phones, they should find it easier to introduce an Internet-based phone service to consumers than it was to start selling high-speed Internet access, since they don't have to explain what phone service is.
In the metropolitan area, their chief competitor for phone service is the traditional phone company, Verizon Communications -- the same as it has been for high-speed Internet access, an arena in which cable companies so far have trounced Baby Bells.
"It has the potential of being a huge service as long as we can keep the value there, which I think we can," Tom Rutledge, president for cable and communications at Cablevision, the biggest provider of cable television and high-speed Internet service in the area, said in an interview.
The company, which has been testing its new Optimum Voice service since January, mostly in Nassau County, and is beginning to market and roll it out this month, expects to be offering it by the end of November to the more than 1 million customers who get Optimum Online. That would make Cablevision the first cable company in the nation to offer so-called Voice over Internet Protocol (VoIP) service throughout its subscriber area.
Optimum Voice charges $34.95 per month for unlimited local and long-distance calls, including five extra features such as call-waiting.
"The big selling point is the price," said Gerald Campbell, senior vice president for voice services at Time Warner Cable, the second biggest cable operator in the metro area and in the nation, which has begun offering its phone service in Portland, Maine, charging a monthly fee of $39.95. "It's for people who do a lot of talking."
For cable TV companies, phone service is the new frontier, the best way they see to boost revenue as cable TV subscriber levels flatten and growth of high-speed Internet customers slows.
Although some cable providers, especially Atlanta-based Cox Communications, have distributed a somewhat more traditional circuit-switched phone service -- including backup power -- the IP version is much cheaper to install and operate.
Cablevision will spend about $150 to add each Optimum Voice connection, including the extra switching capacity, a modem and installation, or 75 percent less than it would spend to add a circuit-switched customer, Rutledge estimates.
That's why Cablevision stopped marketing its earlier circuit- switched phone service two years ago, after it topped 12,000 customers, and why it is bullish on the new service. Cox, however, says there still are some bugs to work out before it offers VoIP service widely.
With Optimum Voice, regular corded or cordless phones connect directly into a special cable modem from Motorola that Cablevision provides and that also links home computers to the Internet for Optimum Online service. VoIP service, which transmits voices partly in the form of concentrated "data packets" on the same network that supports high-speed Internet service, sounds like any other phone service, unlike earlier Internet- based phone services that used home computers for connections.
Time Warner has signed up 3,400 of its 108,000 cable TV customers in Portland for phone service since launched the service in May. Later this year, the company will begin offering the service in Rochester, N.Y., and part of North Carolina. It has not said when the service may reach New York.
"We are saving on average at least $100 a month," said William Dwyer, 42, a Portland resident who runs a Web development company from home and who signed up for the Time Warner phone service early this year during the test stage and dropped Verizon. "Having a cellular phone for backup was more than enough to make me feel comfortable if there is a power outage."
Dwyer said among the most attractive features is getting a single monthly phone, cable TV and Internet bill.
"This is a very real threat to incumbent telephone companies," said Charles Golvin, senior telecommunications analyst at Forrester Research, who predicts 4.8 million customers will have VoIP service by the end of 2006.
The Baby Bells, already losing market share for phone service to an array of competitors, say they won't give up ground to cable without a fight and that cable companies will have a much harder time luring phone customers than they have had attracting high- speed Internet customers.
"I don't think when you move into a new home you say, well, I'm going to call the cable company and get my dial tone," said Lois Dioro, Verizon group manager for bundling services. "People still think you get a dial tone from your telephone company and you get entertainment from your cable company."
To succeed, cable providers must convince consumers otherwise: to abandon -- or at least cut back on -- telephone companies they are used to, despite some drawbacks to VoIP.
In Portland, 86 percent of the Time Warner Cable phone customers said they were shifting their old phone numbers to the new service, indicating they were abandoning the traditional phone company, said spokesman Keith Cocozza. More than one-third of inaugural Optimum Voice customers said they would replace their old phone service with the new one, according to Tanya Van Court, vice president of product management for Optimum Voice.
The Baby Bells are responding by pushing their own all-you-can-call packages, including phone connections, newly discounted DSL service, perhaps cell phone service and in some cases -- with the help of satellite-TV partners -- television service.
The combination of television, Internet and phone service on a single bill is a great way to keep as well as attract customers, analysts say.
"Telephone companies like Verizon will have to get more aggressive in rolling a video product into their bundle" to meet the threat from companies such as Cablevision and Time Warner, said Aryeh Bourkoff, a media analyst with the investment firm UBS in Stamford, Conn.
Steve Wechsler, 38, of Lindenhurst was willing to take the plunge into cable phone service.
He signed up this year for a test version of Optimum Voice, which at first piggybacked on the Lightpath commercial phone service offered by Cablevision but which the company has upgraded with a "soft switch" from Siemens Corp. That version uses software rather than a more expensive physical "circuit switch" to route calls over the same network that provides Internet access, although it hands off to traditional phone companies if the person on the other end of the call does not have Optimum Voice.
Before signing up, Wechsler and his wife, Arlene, used to wait until after 9 p.m. to make most out-of-town calls from home -- to save money -- and would try to keep them very short.
"Now we can make long-distance calls throughout the day," talk for an unlimited time, and know the bill will never be more than $34.95 per month, including local calls, Wechsler said.
So far, Wechsler, who says that usually he cannot tell the difference between connections over Verizon and Optimum Voice, is willing to overlook the drawbacks, some of which the company says will disappear, as long as Cablevision does not further increase phone or Internet fees.
Wechsler said that sometimes Optimum Voice calls have not gone through on the first try. And he was cut off midcall during three phone conversations in the first few months he had the service. "It took several minutes before I got a dial tone again," he said. "It was annoying."
Those bugs have been ironed out and the service is virtually as reliable as conventional phone services, Cablevision said.
Rutledge said that unlike Internet service, the price for Optimum Voice should remain steady or even drop, even with the addition of more features, as long as Cablevision's costs for connecting with other phone companies do not jump. Both Cablevision and Time Warner throw in five extra features, such as caller ID and call waiting, as does Verizon.
Rutledge said that some features not yet available will be added early next year, including free voice mail, operator and directory assistance, directory listings, self-installation and the ability to transfer an old phone number to the new service and to connect the service to extensions.
The Time Warner service plans to add voice mail by the end of this year and already offers the other services.
The companies also expect to allow customers to forward voice mail messages to other phones and even to e-mail addresses. Eventually, Campbell of Time Warner said, customers will be able to see caller-ID flash on their TV screens and to communicate via videophone on TV sets.
Optimum Voice customers need a prepaid card to make calls outside the United States or Canada, while Time Warner customers can do so for an extra per-call fee -- another feature Cablevision plans to add next year.
Link Hoewing, assistant vice president for Internet and technology policy at Verizon, said consumers may not be willing to overlook the drawbacks of cable phone service, especially the lack of backup power.
"During the blackout, at a time when people have to think about it, it really comes to the fore," he said.
Analysts, however, say the lack of backup power is not a major stumbling block, especially since consumers with cordless phones lose service in power outages anyway.
"The [cable telephone] service may initially have some kinks that have to be worked out, but the compelling nature of the product is the bundle and the attractive pricing," Bourkoff said.
Probably by the second half of next year, Cablevision will offer a battery- backup device for a one-time fee, Rutledge said. Time Warner still is considering whether to offer such a device.
Cablevision says many of its phone customers use cell phones as backup, some already have standby power and most do not mind the differences with regular phone service all that much. Time Warner Cable says nearly 70 percent of its phone customers in Portland indicated they have cell phones as backup.
Some companies go a step further than the cable TV providers, offering phone service that travels directly over the Internet, at least for part of the connection. One such service is Vonage Holdings, based in Edison, N.J. It has signed up 45,000 customers since it began service in April 2002, charges $39.99 per month for unlimited calls, and lets customers choose out-of-town area codes for their phone numbers. Vonage customers, however, must get their DSL or cable modem Internet connection from another company.
Cablevision stresses that its phone service is $25 cheaper per month than Verizon's flat-rate phone service, called Verizon Freedom, which charges $59.95 per month in New York State. Despite Optimum Online price increases and a Verizon price cut for DSL, Cablevision's combination of Internet and phone service, costing $79.90 per month for cable TV subscribers, is $10 cheaper than Verizon's equivalent package, which charges $89.90 per month for unlimited calls and DSL service.
But Verizon says it takes more than that to draw away customers. "Ten dollars isn't enough of a price difference to make people really seek out an alternative means of data or communications," Dioro said.
"Their argument that price doesn't matter is the craziest thing I've ever heard," Rutledge responded.
In a survey it conducted, Cablevision says, more than eight of every 10 introductory Optimum Voice customers expressed satisfaction. "People discover it's functional, useful and reliable," Rutledge told analysts in a conference call. "While consumers are wary of it initially as a primary line, they quickly change."
So far, Cablevision has bought equipment enabling it to connect 100,000 lines.
An optimistic Rutledge says the company may have trouble keeping up with orders.
"The biggest issue may be that demand may exceed our ability to operate," he told analysts.
Cox Communications, based in Atlanta, the cable phone leader, has signed up 839,000 customers, or 13 percent of its 6.15 million cable TV subscribers, for a circuit-switched phone service, while it is beginning to test Internet-based phone service in Roanoke, Va.
Its average phone revenue is nearly $50 per month and its profit margins have approached 38 percent. In some markets, such as Omaha and Orange County, Calif., one-third of all homes have signed up for its phone service.
"Cox will not launch VoIP until the technology is ready for widespread deployment and when it makes prudent business sense," the company said in a white paper, urging caution so consumers are not turned off by a potentially troublesome version of phone service.
"Despite outstanding issues, Cox is prudently bullish on the potential of VoIP," the company said. |
