Free for All (cable/telecom competition)
By ALMAR LATOUR
Staff Reporter of THE WALL STREET JOURNAL
September 13, 2004; Page R1
It's a mad, mad, mad telecommunications world.
In Omaha, Neb., cable giant Cox Communications Inc. has toppled the regional Bell and become the area's largest phone company. Over in New York, Cablevision Systems Corp. has signed up 115,000 phone customers.
Meanwhile, in the Southwest, telecom titan SBC Communications Inc. has landed 120,000 subscribers for the satellite-TV service it launched in March with EchoStar Communications Corp. Verizon Communications Inc. has built a fiber-optic network in a Texas town and will use it to offer "cable" TV service this fall.
The two industries are raiding each other's turf at such a dizzying pace that the lines between them are blurring like never before. Indeed, it's becoming almost impossible for communications companies to stay competitive without branching into a whole new business.
Nearly all of the large cable operators in the U.S. are offering phone service over the Internet. All of the regional Bells have formed partnerships with satellite operators to offer TV service, as SBC has done, and some, like Verizon, are building fiber-optic networks so they can offer television signals over their phone lines.
For consumers, the competition means lower prices and more choice -- but more potential confusion. Over the next 18 months or so, most cable companies and regional Bells will be ready to offer a bundle of services including TV, phone and Internet access. Customers will have to sort through all sorts of new pricing plans, introductory offers and competing claims. And they'll have to decide if they want to trust a company that's just getting into the telecom or entertainment business.
Convincing customers is just one hurdle the two industries face as they invade each other's turf. For all the early success stories, such as Cablevision and SBC, the competitors are still learning the ropes. Telecom companies, for example, must figure out what content to offer on their fiber-optic networks to make them more compelling than cable.
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Companies must also face the issue of scale. Head-to-head, all-out clashes between cable and phone companies have by and large been limited to a few markets so far. The next step is rolling out these services to millions of customers at a time, which could bring numerous technical and logistical challenges. Comcast Corp., for instance, is planning to offer phone service to 40 million customers by the end of next year -- the largest phone rollout yet by a cable company.
Then there are jittery shareholders. Cable investors are worried about the continued success of satellite-TV services, as well as the Bells' success at signing up broadband users. And telecom investors are leery of the big bets the Bells have made on unproved technologies and concepts, such as offering movies on demand over the Internet.
Shares of most large telecom companies are flat, after a brief bounce earlier in the year, although those of Qwest Communications International Inc. -- the Bell that got unseated in Omaha -- have plummeted.
"Management is looking around the corner, while investors are looking at the corner itself," says David Barden, telecom analyst at Banc of America Securities in New York.
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Finally, of course, there's simple supply and demand. All this cross-border activity means that there may be too many companies offering the same thing, which could lead to consolidation, particularly in the already crowded phone business.
Tech Support
What's driving all this activity? Largely, the spread of new technologies.
Over the past four years, the nation's largest phone companies have lost local phone lines by the millions as consumers fled to cellphones and e-mail. Many customers are giving up their second, and even their primary, phone lines. The intrusion by cable companies only made things worse, forcing the Bells to expand into other areas that promise more growth, such as wireless, high-speed Internet and television.
For their part, cable companies are feeling the pinch as satellite-TV providers sign up more customers, increasingly with help from the Bells. SBC, for example, has invested $500 million in EchoStar as part of its joint marketing deal.
On the other hand, technological advances are making it easier for telecom and cable companies to break into each other's businesses without making huge upfront investments. The development and spread of broadband Internet service lets cable companies offer phone service over the Net, which is much cheaper than running it over their cable lines. And phone companies are investing in new services, such as downloadable movies on demand, that run on broadband and that will, they hope, provide new revenue streams.
The nation's three largest phone companies are also each developing new fiber networks that will allow them to offer data-transmission speeds that are far higher than those offered by digital subscriber line or cable broadband today. Such networks, which are costly to build and will take years to complete, would allow the companies to offer hundreds of TV channels as well as other services such as online gaming, phone and Internet access.
Verizon has already started putting fiber into the ground in various spots around the U.S., including Keller, Texas. The small town's fiber network, expected to make its debut this fall, will likely be the first in the country to become available for use.
Meanwhile, SBC will spend up to $6 billion on new fiber technology in the next few years. The fiber will work in conjunction with a set-top box the regional Bell is jointly developing with EchoStar. The box will bring satellite-TV programming into the home, while the fiber will let users download movies on demand using a broadband Internet connection.
The set-top box, slated to hit the market next year, would make SBC a de facto cable company. "We're developing this because the broadband market is getting large enough to justify the rollout of new applications," says Ed Cholerton, SBC's vice president for DSL.
But the competition for the phone market isn't just going on in the wired arena. In the late 1990s, and most recently, last year, the three largest Bells snapped up stakes in the nation's biggest wireless companies with a series of mergers and acquisitions. The moves were designed to offset losses in the Bells' core local-phone business, but also give the telecom companies a leg up on their cable rivals, which don't have the infrastructure to offer competing wireless service.
Deals in the Works
SBC and BellSouth Corp. are in the process of acquiring AT&T Wireless Services Inc. for $41 billion to increase the size of their wireless holdings, while Verizon is trying to sort out its relationship with Vodafone Group PLC, with which it owns Verizon Wireless. Verizon has said it wouldn't mind owning all of Verizon Wireless, but it still must negotiate what price to pay to Vodafone for its stake.
AT&T Corp. has withdrawn from its consumer long-distance business, which is overcrowded with competition, but it has launched a nationwide Internet calling service and also plans to offer a wireless service, leasing rival Sprint's wireless network.
To beef up their offerings, wireless companies are investing in new products and services, particularly so-called "data" services, such as online games and other content that can be used on new generations of cellphones and other hand-held devices.
Meanwhile, a series of smaller players are entering the telecom market with their own set of applications. Skype Technologies SA, an Internet calling company with just 50 employees, is now offering rudimentary phone service in 22 countries, allowing users to use free software to make calls from computer to computer without an intermediary phone company. Skype aims to get revenue from selling add-on services such as voice mail, as well as calls that are made from computers to regular phones, for which the company charges as much as two cents a minute to anywhere in the globe.
In Japan, Yahoo Broadband, a unit of Softbank Corp. that formerly offered broadband connections to consumers, has just launched an Internet TV service with more than 20 channels, delivered via broadband.
Mr. Latour is a staff reporter in The Wall Street Journal's New York Bureau.
Write to Almar Latour at almar.latour@wsj.com |
