TELEPHONY WILL TRANSFORM CABLE
November 30, 1998
Electronic Media:
For all those media executives whose eyes
glaze over at the mention of ''telephone
services'' and who don't understand all the
fuss over AT&T's pending merger with TCI,
here's a wake-up call.
Cable television's now embryonic telephony
services -- bundled with high-speed data
and digital programming options -- will eclipse
existing cable revenues and profits. That
could happen as early as five years from
now.
The math is simple. Today, cable television is
a $25 billion business. Long- distance and
local telephone is a $200 billion domestic
business.
Cable operators who hitch themselves to a
long-distance carrier have the potential to
collectively snare at least one-third of the
existing telephone market, industry analysts
predict.
The winners will be operators who can bundle
and market the right mix of digital
programming, high-speed data and telephony
at the right price.
Since subscribers relying on their cable
company for telephone service will be less
likely to cancel, churn rates could be
reduced by half, analysts say.
The money in cable telephony
But, there will be tangible economic
advantages to cable telephony, which are
only now being understood.
''Twenty months ago, it was difficult to find
anyone to talk about the values of cable
telephony and high-speed data. You got
laughed out of people's offices,'' observes
Tom Wolzien, analyst at Sanford C.
Bernstein.
Mr. Wolzien estimates there could be as
much as a 75 percent return rate on the
$325 per cable subscriber amount required to
provide telephony services. That investment
should increase the value of a cable system
by $240 per cable subscriber.
To look at it another way, Mr. Wolzien
estimates that cable operators collectively
will invest $11 billion in equipment to build a
nationwide cable telephone service. That
cost will be considerably underwritten by a
major telephone company partner, and the
resulting returns will be shared.
You may think AT&T is getting into cable TV
but, in fact, it simply wants to use cable's
broadband pipeline to expand its telephone
dominance. Other long- distance and local
telephone companies are sure to follow suit
with their own cable-related acquisitions and
alliances in 1999.
Mr. Wolzien estimates that in a best-case
scenario, $61 billion in revenues could be
generated from telephony-related services
within the first decade. More than half of
that figure could fall to the bottom line as
profits.
Not a bad business.
That makes cable telephony -- both circuit
switched or the digital transmission of
telephone signals through Internet protocol
telephony -- the most misunderstood,
best-kept secret in television today.
Cable stocks generally have more than
doubled this year driven by a number of
factors, the least notable of which are
conservative predictions that telephony and
data each will command better than 30
percent market penetration in 10 years.
From concept to reality
Generally speaking, analysts have not
factored telephony investments and returns
into their cable company models simply
because it has been more of a concept than
a reality until recently.
When they do, there also will be some
potential downside to consider.
Technical and cost risks associated with
cable telephony could dramatically reduce
returns on an estimated $325 per subscriber
investment to a mere 16 percent in the early
years.
The delay of full-service telephony
implementation, now set for the year 2001,
could cut cable telephone's potential market
share growth to 30 percent from what Mr.
Wolzien says could be, at best-case
scenario, a 50 percent market share.
On the way to a digital-based IP telephony
existence, cable operators already are using
more immediate, but more expensive, circuit
switched technology to convert program
subscribers to paying telephone customers.
Cox Communications has more than 14,000
residential telephony customers, 75 percent
of whom take its branded Cox long-distance
service for an average monthly cost of $60
each.
Cablevision Systems has more than 1,100
circuit-switched residential telephone
customers paying an average monthly bill of
$80.
Both companies expect to break even on
their telephony services before launching IP
telephony in 2000.
Jessica Reif Cohen, analyst at Merrill Lynch,
says residential telephony can add as much
as 17 percent to cable valuations in 1999.
In that context, it is easy to understand the
importance of AT&T's bid to secure
long-term, full-service telephony agreements
with Time Warner, Comcast Corp. and other
major cable operators.
AT&T needs a string of national cable system
links to launch local telephone service to
protect its long-distance base, since TCI's
systems cover only about one-third of the
United States. Sources say AT&T may end
up paying as much as $10 per cable
subscriber for such access.
Cable operators must be aligned with a
branded long-distance carrier to quickly and
competitively grow a lucrative telephony
business. The only major cable operator that
has said it is prepared to go it alone is
MediaOne.
The importance of bundling
AT&T's next round in the battle for telephone
supremacy is already under way: to protect
the bundling options that will make cable
telephony a gold mine.
Knowledgeable observers expect Washington
regulators to approve the proposed TCI
merger while requiring the combined company
to meet the same open-market standard as
local telephone companies.
Last week, AT&T issued its toughest
ultimatum yet, warning that the inability to
bundle all of its branded services -- including
TCI's 45 percent owned @Home high-speed
Internet access provider -- would ''seriously
jeopardize'' the economics of the pending
merger.
Online service providers such as America
Online and regional Bell companies are
demanding equal and open access to cable
lines even at a price. AT&T argues that
because it is taking the financial and
competitive risk, it should enjoy the primary
benefits. So, it wants TCI subscribers to pay
for @Home first and all other services
second. That's because AT&T understands
the values inherent in bundling its branded
long-distance and local telephone services
with @Home's high-speed connections and
TCI's popular TV programs.
The latter two businesses are substantial
enough today to make cable TV television's
brightest star. But it is the telephone
services -- that are arguably more pervasive
and less expendable than television -- that
will transform cable into a supernova. And
that's what the AT&T-TCI merger is really all
about.#
[Copyright 1998, Crain Communications]
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