(NTOP) Cable VoIP: Build Versus Buy
by Dawn Orlinsky, Director
Net2Phone
8/4/2004
Converge Network Digest
convergedigest.com
Peer pressure does not generally apply to business decisions, but in the case of cable telephony it seems that if you’re not in it, then you’re the one left home without a date to the dance. Analysts and industry figures long have been touting that offering the triple play is a necessity to remain competitive in the current telecommunications market, and it seems as though the cable operators are all listening.
As cable telephony deployments launch across the U.S., the RBOCs are watching nervously to see how big a bite these new competitors will take out of their customer base. Indeed, recently Goldman Sachs proclaimed that “the cable telephony threat is paramount…and it will almost certainly take a significant amount of market share from the RBOCs.” A similar report from UBS concurred, noting "Cable operators have a significant time-to-market advantage, which will allow them to win the race to offer bundled services and to attain the early converting high-end customer.” Meanwhile, Blaylock & Partners, another leading financial analyst, proclaimed in reference to the attractiveness of a bundled offering, “The real power of IP communications is not in the ability to packetize voice, but rather in the ability to integrate voice communications with data communications.”
It is clear that the potential is there for cable operators to gain a significant share of the RBOCs business — most cable operators already know that they are the best positioned to take advantage of a bundled offering. But as they say, you have to be in the race to win it.
Risks
For cable operators looking to offer telephony, developing and managing a telephony operation is very different from a video or high-speed data franchise. Due to additional technical and operational complexities, many operators must weigh the risk associated with a cable telephony deployment. Financial risks, waste of precious resources, as well as customer risk are all factors that could jeopardize the franchise.
These risks all have to be carefully evaluated by a cable operator before embarking on a telephony deployment. This dilemma is magnified for small and mid sized cable operators who do not want to miss the window of opportunity by taking one to two years to build a high quality grade telephony deployment, and do not have the capital to risk on a service they have never delivered. Today, operators can choose to deploy a cable telephony service on their own, or mitigate the risk by outsourcing development to a hosted service provider. Operators are now facing a “build versus buy” decision regarding a voice solution.
Challenges
The challenges for many operators who are considering rolling out phone service are the additional capital expenditures, the complexity of integrating the technical solution with existing HFC and back office infrastructure, and the ongoing operational differences between a video plant and a phone solution. The complexities of a two-way plant, enabled for voice telephony with CLASS 5 services, include but are not limited to interfaces to the PSTN, transaction-based billing, and voice customers who have different expectations with regard to the availability and quality of telephony service. A hosted telephony solution offers operators the ability to enter the cable telephony space more quickly and efficiently, eliminating the headaches associated with initial deployment while greatly improving the service quality and reliability offered to the cable customer.
Factors
Cable operators have unique circumstances driving their business decisions to build a voice offering. There are a number of technical, operational, and financial factors causing operators to fully evaluate and sometimes defer their cable telephony initiatives.
· Technical
– Traffic and IP network engineering
– Product/element selection and integration
– Standards-based element interoperability and ongoing maintenance
– Future applications
· Operational
– Telephony network operations
– Billing & back office integration
– PSTN & toll interconnect agreements and ongoing cost-effective management
· Organizational
– Telephony skill gaps & experience
– Back office support and processes to support telephony
· Financial
– New capital constraints
– Increased operating expense putting pressure on EBITDA
Larger operators may have the resources to take the time necessary to research and integrate the billing and back office systems, negotiate the PSTN and toll interconnect agreements, and integrate the different products and network elements necessary for a telephony deployment. In short, larger operators have the financial and human capital to effectively address all of the issues that must be faced in order to build a cable deployment; but still may wish to seek an outsourced solution to gain time to market advantages and mitigate the previously mentioned technical risks inherent in any new deployment.
To support this argument, many large operators have already successfully built internally and launched cable telephony deployments in their footprints. For instance, Cox has more than 1 million circuit-switched customers and is currently rolling out a VoIP platform as well. Meanwhile, Cablevision currently has more than 100,000 subscribers, and Time Warner has nearly 50,000 VoIP subscribers respectively. In addition, according to a recent report by UBS, almost all of the Tier 1 operators in the United States are planning to offer their three-product bundle to their entire footprint by the end of 2005. This is a clear example of how large cable operators can and are using their own resources to build a telephony deployment on their own.
While all of the Tier I operators in the US have only started rolling out VoIP telephony services, they have been developing the service over the past 2-4 years. Tier II cable operators lag the Tier I operators in terms of rollout plans as they do not have the research and development resources to develop and test phone service over their networks.
This barrier can be addressed by offering operators with a hosted cable telephony solution that is financially and operationally more attractive than building the capability on their own. With a hosted solution cable operators have a reliable, scalable, and more cost effective alternative to building their own solution and accelerates their time to market considerably. Operators in the United States such as Bresnan Communications, Northland Cable Television, as well as Liberty Cablevision of Puerto Rico, and Altice One in Belgium, Luxembourg and France have all chosen an outsourced model to compete with the incumbents in their footprint. [ntop]
One successful example of a hosted telephony deployment is that of Liberty Cablevision of Puerto Rico. LPR originally launched their service in a trial of cable telephony service to 200 residential customers, under the brand name ‘Liberty VoiceLinks’. Based on the positive response to their service, in May 2004, LPR launched telephony service across 90% of their footprint, approximately 300,000 homes passed.
Almost immediately, LPR began experiencing a high sign up rate with its customers, and saw that customers were using the service in line with that of traditional telephony service. LPR sees an average of over 1000 minutes of use per month per VoiceLinks subscriber and 35% of those minutes are for inbound phone calls. The high level of outbound voice traffic combined with inbound minutes indicates that subscribers are not simply using the VoiceLinks service to make outbound LD or local calls; they have adopted their cable phone as their primary telephone line.
Business Rationale
Early entrants into cable telephony have built platforms around traditional constant bit rate (CBR) solutions. Recognizing the capital-intensive nature of CBR and the ongoing operating expense associated with maintaining a traditional telephony plant, operators are exploring VoIP solutions that are DOCSIS and Euro-DOCSIS compliant. A cable operator’s implementation team must work with engineers to design an optimal VoIP topology for the MSO that uses its HFC network and IP Backbone and connects to the PSTN.
Research indicates that deploying a video, high-speed data, and voice bundle reduces churn for triple play customers by up to 50%. For households that are neither video nor high speed data customers, a voice offer presents the operator with a cross sell opportunity for its other services. Cable operators are finding that their existing video customers are actively seeking phone service alternatives to the ILEC. In addition to more fully utilizing their existing plant, operators expect to reduce the effects of churn on its business as subscribers are less likely to switch to an alternative such as satellite when the subscriber is fully engaged in the triple play.
It is understood that the decision to outsource is not an easy one for any company. Cable telephony is a capital-intensive initiative with little financial flexibility. In addition to the up front capital burden, operators must confront the ongoing operating expense of the traditional model, which further weighs on the financial returns. Lastly, a hosted solution enables the operator to speed deployment to its markets by at least one year both from technical deployment and operational/process perspectives. The traditional argument of build on your own versus buying the telephony capability becomes the emotional crux of the issue facing operators who wish to pursue cable telephony.
Traditional vs. Hosted Business Models - Equates to a build versus buy argument
This chart delineates the potential financial performance of a hosted solution versus the traditional approach of building on their own.
[graph comparing cash flow for hosted and traditional telephony.]
Illustrative domestic U.S. example based on 350,000 digital two-way ready homes passed.
The build versus buy dilemma is one that cable operators are currently wrestling with both across the United States and internationally. As telephony becomes an increasingly necessary service to provide to customers, the only sure thing is that cable operators must offer a bundle to retain customers and keep up with their counterparts.
About the Author
Dawn Orlinsky works in the Corporate Communications Department of Net2Phone, supporting Net2Phone Cable Telephony and Net2Phone Global Service with its public relations and corporate communication activities. As a leader in Voice over IP, Net2Phone offers VoIP services to consumers and businesses via cable operators, ISPs, wireless operators and telecom providers worldwide. Prior to working at Net2Phone, Ms. Orlinsky worked on a variety of accounts at several high profile public relations agencies including Ketchum Public Relations and Hill and Knowlton.
About Net2Phone
Net2Phone provides PacketCable, SIP and wireless VoIP solutions around in the world. As leaders in enabling telecom service providers and cable operators with turn-key hosted VoIP telephony services, Net2Phone has routed billions of retail VoIP minutes globally, servicing more than 100,000 users in the US as well as hundreds of thousands of more overseas. Net2Phone's hosted SIP platform provides partners with residential broadband telephony, calling cards, prefix dialing and enterprise services in over 100 countries. Net2Phone's PacketCable platform provides cable operators with the ability to deliver a primary line replacement service with guaranteed QoS and features such as E911. Traded on the NASDAQ under the symbol NTOP, Net2Phone's strategic partners and investors include Liberty Media Corporation (NYSE: L; LMC.B) and IDT Corporation (NYSE: IDT; IDT.C). |
