VoIP Strategies Emerge in Cable Industry
By Michelle L. Hankins - April, 2005
billing world
Sure, everyone is hawking voice over Internet protocol (VoIP) service, but who's going to be smiling when all the shouting is over? Business models that build on existing infrastructure may give some key advantages to cable operators.
Industry experts agree that voice over Internet protocol (VoIP) is ready for prime time in the U.S. market. Last year alone, Time Warner Cable was adding an average of more than 10,000 VoIP subscribers per week and was on target to close out 2004 with more than 200,000 VoIP customers.
Cable operators are going aggressively into the household, whether there is a computer present or not. To cable companies, winning a VoIP customer is not about a price war for the one service, but about the war to win the customer for all services. It's about the bundle.
These companies are "looking to displace whatever phone service you have in your home currently," says Scott Ortiz, director of product management for voice service at CSG Systems. "They're starting in a very controlled manner."
The way cable operators market VoIP services is different from the AT&Ts and Vonages. In many instances where cable operators are providing VoIP, the customer may be largely unaware of it. The operators do not go out of their way to market their voice service, because "it is not something they want to highlight to customers," says James Morehead, senior director of product marketing for digital service providers at SupportSoft Inc.
"Cable companies are doing the right thing to hide much of the complexity … making the learning curve seem as low as possible," says senior analyst Joe Laszlo at Juniper Research.
The cable operators typically market VoIP as part of a triple play service—cable television, voice and high-speed data. Meanwhile, companies like Vonage highlight VoIP as a next-generation, futuristic service, while still others use price to attract customers.
Cable VoIP Models
Basically three models sum up how cable operators are offering VoIP. According to Ortiz, in the first model an outsourced provider delivers the service, usually for a cable operator with little network infrastructure. Under this arrangement, the outsourced provider gets a percentage of the revenue per line. In the second model, the cable operator typically owns the last mile but outsources directory services, 911 service and interconnection with the incumbent local exchange carrier. In the third model the cable company provides services completely on its own—it could file for CLEC status, have its own network, interconnect with long-distance providers and basically own the customer.
Patrick Kelly, partner at market research firm OSS Observer, which recently released the report "Residential VoIP and its Impact on OSS," says that Comcast, Time Warner Cable and Cox Communications have all issued requests for proposals for their VoIP initiatives. Comcast, for example, has selected Cedar Point Communications as the primary supplier for switching systems. Comcast and Charter Communications are using Sprint and Level 3 to support their long-distance and PSTN network access. Time Warner Cable is using Sprint and MCI to support its voice offering and to supply directory assistance, voice mail and operator services.
Companies like Time Warner Cable, Ortiz says, enjoy tremendous benefits from working with wholesale partners, particularly the expertise they bring to the relationship. He also predicts that some cable operators might opt to acquire a CLEC, but he believes most cable operators will be aggressive and try to own their own network and customers. "My impression is that the MSOs are very bullish on it," he says.
"Wholesale partnerships make a lot of sense. I believe they'll continue this model for a while," says Mark Nicholson, Syndesis chief technology officer. VoIP is about connectivity to the entire national and international community, and since this is what companies like Sprint and MCI do, he says, "you'll see a lot of partnerships in this area rather than recreating [the networks]."
William Stofega, senior research analyst with IDC's VoIP Services Program, says service levels spelled out in contracts between Time Warner and its partner telcos keep quality of service up to snuff. "Those agreements they have with Sprint and MCI are pretty watertight," he explains. LNP and 911 are just two of the additional voice services and requirements that give cable operators an incentive to stay with the wholesale model. "I don't think cable providers really want to be in that business now," he says.
This model "could be a really smart strategy early on in the game," says Laszlo at Juniper Research. "It depends on how much their partners become their competitors."
As for the investments that cable companies have already made in circuit-based telephony, they will likely continue to use this technology into the future. Managing just one network is easier, but cable operators will be in no rush to rip out their circuit-based technology any time soon, Laszlo asserts. "I don't think it's a short-term scrapping of one system for the other," he says.
Indeed, Cox Communications has stated that it views VoIP as a "complement to its circuit-switched deployments." The company has said it will not relinquish its circuit-switched business, but will instead use its existing technology to launch VoIP in more markets, particularly where it is not cost-effective to launch traditional telephony networks.
Laszlo points out that Time Warner's cable systems are much more decentralized and that the people who manage these individualized systems have more autonomy in their upgrade plans, which further fragments the company's operations. "It will be a very patchwork kind of deployment we'll see from them," he suggests.
Yet Morehead at SupportSoft believes the regionalized flavor could be the cable operators' strength: these decentralized companies may be better positioned to serve customers' needs.
Billing and OSS
"Voice is a very complex service to deliver and to deliver well," Laszlo says. Cable operators will need to efficiently manage their voice networks to truly provide a real-time, latency-sensitive service. Back-office complexities will include regulatory compliance, complex taxation, access charges and billing—to name a few.
OSS Observer's Kelly predicts that commercial OSS spending to support VoIP services will rise from $17 million in 2004 to $620 million in 2009.
According to Kelly, many cable companies have already invested in billing and customer care, and the main challenges going forward are IP activation, quality of service and self-care. After acquiring customers, controlling churn will become a key issue, which will drive investments in managing QoS—a company must track a customer's usage to watch for latency and echo, for example. There will be a need for more diagnostics from the network, and more troubleshooting in the network itself.
Morehead says that validating that the VoIP service is working correctly after installation is critical. Cable operators will need to verify the QoS and troubleshoot to know if a service is working correctly. Operators need to supply information about jitter, latency and packet loss to their customer service representatives, so they can manage service quality calls and complaints.
SupportSoft is partnering with Brix Networks to troubleshoot for VoIP. A provider cannot afford to have an engineer on each tech support call, so the two companies are working to leverage network information and present it in a flow chart to the CSR, to walk the CSR through the next steps to take when dealing with a customer.
Morehead believes that most cable operators will find billing for VoIP to be a natural extension of billing for and managing high-speed data. He believes most cable operators will look at how they serve high-speed data and see how they can expand it to also serve VoIP customers.
Because the service no longer depends on the network, OSSs need to be media-neutral. Previously OSSs wrapped around the service, but now they must support any service or application irrespective of the network it travels on.
CSG's Ortiz says cable operators will need a clear view of the customers and the services to which they subscribe. All this information will need to be provided to CSRs on a single screen. To be effective in VoIP, cable operators will need to reduce operational support costs and provide more self-care to view statements and make payments online, change product features and self-manage an account electronically. Cable companies also need a view of the equipment inventory out in the field. And they need a solid API strategy to bond with their trading partners to obtain information from the point of order capture to inventory management to provisioning of the service.
When it comes to the back-office systems, IDC's Stofega believes the cable industry is positioned well. "Their systems are in much better shape than telcos," he says. Cable operators can offer one bill, but what is difficult for them is handling next-generation services. Particularly, how these companies meter out services such as games could prove to be challenging. Likewise, Stofega says, the Tier 2 and Tier 3 cable operators are in less solid shape than their larger counterparts.
Telcos have gone through many mergers, so their systems are many and disparate, and encompass a lot of customized technology. Many cable companies, meanwhile, have been on upgrade plan without as many mergers to contend with. "They've had some time to get their networks in order," Stofega says.
The Truck Roll
Although most cable operators are willing to do truck rolls to deploy VoIP services, too many of them will eat into VoIP's already meager profits.
In their search for "the magic bundle," cable operators' hope is that customers will sign on for several services so that a technician can handle the whole package in one truck roll. The end result will be a high revenue-generating customer. "The strategy is contingent on the bundle," Juniper's Laszlo says.
Cable companies are taking a hit right now with the cost of a truck roll. But when next-generation handsets become available that are simply plugged into a jack and the customer is ready to go, homes that have been rewired to support cable VoIP will be readily available sans the service visit. "They're making a bet toward the future," Stofega asserts.
"I don't think that sustainable," Kelly says. Cable companies will have to invest in automation. Cost is an issue, but managing requests for service also becomes an even greater issue when demand increases. A company must have enough skilled technicians to fulfill the requests for the service.
Maintaining customer premises technology and devices, such as modems, CPEs and set-top boxes, is becoming more complex, according to Derek Bell, director of product management at Syndesis. He says it would be better if end devices could be upgraded automatically without having to send a technician out to replace old equipment and install new devices. This approach could involve the CPE automatically downloading updates once a day and rebooting automatically to enact them.
But Nicholson at Syndesis believes the real cost to obtain a customer is in sales and marketing, not in the truck roll.
Cutting the Ties
One area that is likely to be contentious is the physical wiring at the customer premises. Today, some cable operators are rewiring the home to support their VoIP services. In doing so, SupportSoft's Morehead explains, "they disconnect the telco from the house."
"It's not that they're cutting the phone company's wire," Nicholson says. "They're disconnecting the connection to the phone company." The wiring inside the house is untouched, but to restore traditional phone service, the phone company would have to reattach the wiring on the network interface device, which is typically on the side of the house or in the basement.
Forcing traditional phone companies to send a technician out to reattach the wires in the house is costly. Either the telcos will have to bear the cost as a component of reacquisition or they will have to pass it on to the end customers, which could encourage them to stay with their current provider. Many customers may not be aware that this is going on; they know that they ordered new service from a cable operator, but not that any rewiring has taken place.
"Houses aren't wired or constructed for convergent services," Nicholson explains. "Houses are wired for traditional services." That is, coaxial jacks and phone jacks are not physically near each other in the home. For VoIP services to reach each phone jack, a cable operator would have to connect at the network interface point. In new homes, however, jacks are automatically wired for coax and a twisted pair. Perhaps in future home design, Nicholson says, wireless standards will decrease the need for a truck roll.
Morehead says disconnecting the wires to the traditional telephone provider is a "significant barrier" for customers to churn back to traditional voice service.
Differentiation Is Key
Nicholson believes it may be challenging for operators to get good take-up rates for VoIP simply because what it provides is not a new service, but rather a different way to obtain an existing one. What is the incentive to switch to VoIP service if it is very similar to what people already have? Cable operators will need to differentiate themselves by offering special features, such as concurrent calling, allowing the user to conduct multiple voice sessions over one line; distinctive rings by phone number; or voicemail that is readable via a television.
Juniper analyst Laszlo points out that cable companies will have networks across which they can transport these calls that don't rely on the public Internet as do companies like Vonage. This infrastructure will provide a more valuable guarantee for QoS and help cable companies differentiate themselves.
Cox Communications believes that it is differentiated from competitors by owning and operating its network infrastructure end-to-end, including a nationwide OC-48 IP backbone.
Problems Not So Easily Solved
Traditional telephony is designed to supply power to the phone for some time after power outages occur, but VoIP requires electricity in the home for the customer to obtain a dial tone. Instead of attempting to build complex systems that supply power over the line, however, Laszlo believes cable operators will continue to rely on a battery installed in the home. Cox, for example, provides backup power in the subscriber's multimedia terminal adapter.
In this model, when the power goes out, the network operations center is notified. If the backup battery fails, the company must send a technician out.
Stofega at IDC says power outages are definitely an issue, since there is no way a cable company could replicate the power that traditional telcos supply. "That's a huge cost for telcos to keep everything working," Stofega says. "We'll see if there are other strategies to power up their networks."
Bell at Syndesis says there have been some initial discussions in the industry about supplying power via Ethernet.
Currently, however, many customers do not seem concerned about power; the key issue for them is 911. In fact, wireline carriers have already begun launching a marketing campaign to say that their offering provides true connected 911 service, as opposed to best-effort service. To be successful with VoIP, cable companies need to offer equal services for 911. "The expectations for VoIP service will be the same" as for voice service, Nicholson says. "There are only so many people who are willing to sacrifice quality for cost."
Laszlo believes that although some VoIP providers cannot guarantee 911 service, cable companies will be among the first to really offer 911 the way traditional phone companies do.
Who Will Dominate?
"The whole game is to differentiate yourself and not become a commodity," says IDC's Stofega. "It's clearly a battle with the telcos." However, he warns, "Anyone can offer a bundle. That works for now." But what happens when a telco starts to converge services and offer IP TV? Then the traditional companies would have VoIP, television and wireless services. "That's their trump card," Stofega says.
However, if the cable companies begin offering wireless and telcos begin offering video, not much differentiation is possible via service offerings. "You've got to get something unique," Stofega explains.
There will be many people who cannot swallow the idea of best-effort service in the foreseeable future. In this light, Kelly at OSS Observer does not think the Vonage business model will play out. "For them, it's a matter of time," he says.
For the ILECs, VoIP cannibalizes their existing voice service. The net result is that the time may be ripe for cable companies to win this space by leveraging triple play offerings to their advantage. |
