Comcast Plans Major Rollout Of Phone Service Over Cable
By PETER GRANT
Staff Reporter of THE WALL STREET JOURNAL
January 10, 2005; Page B1
Comcast Corp., the nation's largest cable-TV operator, is set to announce today an ambitious push into the phone business, a major escalation in the telecom wars that promises to pose one of the biggest challenges ever to the U.S.'s phone giants.
After two years of keeping Wall Street and the telecom industry guessing about his phone strategy, Comcast Chief Executive Brian Roberts will detail his plans at an investor conference in Phoenix.
"There is going to be a profound change in what a phone is in a home and we're going to be part of that process," Mr. Roberts said in an interview.
Comcast plans to market an Internet-based phone service to 15 million homes by the end of 2005 and to practically all 40 million of the households that have access to its systems within 18 months. The company hopes to have eight million phone subscribers within five years, or 20% of the homes its cable lines pass by.
The move represents a pivotal moment for Comcast, which stunned the media and telecommunications industries one year ago with its ill-fated, unsolicited bid for Walt Disney Co. Many saw that as a sign that Mr. Roberts wanted to turn Comcast into more of a content-owning company because he feared that TV-delivery and telecom services were becoming commodities.
Comcast's embrace of phone service follows launches by other cable companies. It means Comcast will remain primarily a provider of TV service, high-speed Internet hookups and now voice calling, though Mr. Roberts plans to keep increasing the company's position in content, such as owning TV shows, as well.
Because of its sheer size, Comcast's plan will greatly intensify the growing war between cable and telephone companies, which are steadily invading each other's bread-and-butter businesses. Cable companies that have entered the phone business, such as Time Warner Inc. and Cox Communications Inc., have become the most effective competitors to the nation's local Bell telephone giants since they were created by the breakup of the AT&T Corp. monopoly in 1984. Cox, which has been offering phone service for over seven years, has close to a 40% share in some regions, like Omaha and Orange County, Calif.
Comcast's move is likely to accelerate the rapid shrinking of the Bells' local phone business. Already, consumers have been cutting off their traditional phone lines, substituting them with cellphones and Internet phone service from startups.
Now, with cable companies pushing Internet-based calls, the technology could quickly catapult from a niche service into the mainstream. Time Warner, for example, had signed up 200,000 Internet phone customers by the end of 2004.
"This is a growth engine we're counting on for the next five to 10 years," said Steve Burke, Comcast's chief operating officer. Comcast decided that it would wait to roll out phone service until it could offer features such as call waiting and operator assistance, as well as 911 emergency service. The cable modems used in the phone service will have back up batteries so the service won't fail in a power outage, a feature not offered by some early cable-based phone service.
Telephone companies have responded by offering discounted packages of services including television through alliances with satellite-TV operators. Over the past few months the two largest Bells, Verizon Communications Inc. and SBC Communications Inc., have announced multibillion-dollar plans to lay their own fiber-optic networks to deliver interactive TV and even faster Internet service. But those plans are only just being launched. Cable companies spent $65 billion upgrading their networks in late 1990s.
"The telephone companies are way behind the curve," said Glenn Greenberg, managing director of Chieftan Capital Management Inc., a money-management firm owning over 20 million shares in Comcast. "It's going to cost them a bundle of money to be the third one in the market to offer the same channels."
Phone companies are making up for the deficiency by offering bundles that include wireless service – something most big cablecompanies don't yet offer. Still, phone companies feel the pressure.
Just since the start of this year, BellSouth Corp. has noticed a sharp increase in cable advertising for phone service in its entire nine-state region in the South. "There is no doubt that cable is a serious threat," said Jeff Battcher, a BellSouth spokesman.
Philadelphia-based Comcast, whose networks can provide service to one in three U.S. households, hopes to gain phone subscribers by offering features different from traditional phone calling, using Internet technology. Initially, Comcast will enable subscribers to check voice mail from a Web site. The company will test a videophone service and is also developing a call-waiting service that whispers the identity of a caller. It also is exploring phones that serve as traditional landline phones in the home and turn into cellular phones when they're taken outside.
Comcast is opting to focus on those features, rather than heavy discounts. Its initial offer will be $39.95 per month for unlimited domestic service, for customers who also buy cable and high-speed Internet services. Consumers who want only phone from Comcast will be charged $54.95, which is in the range of comparable offers from telephone companies. By comparison, Vonage Holdings Corp., which offers Internet-based phone service, charges $24.99 a month for
unlimited calling in the U.S. and Canada.
This approach is typical of Comcast and Mr. Roberts, who prefers adding new features to cutting prices. Comcast will offer promotions for customers who buy more than one of its services. But these incentives won't be as attractive as the one offered by Cablevision Systems Corp., which is charging new customers less than $90 a month for a bundle of digital cable, phone and high speed Internet for the first year. Some analysts doubt whether Comcast's pricing strategy is sustainable given the industry's intense competition.
Comcast executives said they always knew the company would offer phone service but they deliberated for years over the timing of the move. In late 2002, Comcast acquired AT&T's cable-TV operations, inheriting its fledgling phone business delivered over cable lines using old-fashioned circuit-switched technology. The service, which had about 1.4 million subscribers, put Comcast into the phone business sooner than it had planned.
Comcast executives found billing problems and high costs meant the unit was losing an estimated $250 million a year. They were astonished at how complicated and risky the telephone business is compared with cable, which essentially is a business of buying television feeds wholesale and selling them retail. Cable companies incur relatively little additional cost when customers don't pay their bills. When phone customers don't pay their bills they can leave behind hundreds of dollars in long-distance charges that the cable company may end up eating.
Comcast decided to continue running the AT&T cable-phone business it inherited but expand it no further, eventually making it generate some $200 million a year in profit. Meanwhile, the company began experimenting with Internet technology to deliver phone calls at a much lower cost.
Mr. Roberts dismissed speculation that Comcast is pushing into the phone business because its bid for Disney failed. "We only want to go into telephone if it's profitable," he said. "We now believe that it is." |
