May 2004

Cable Telephony Today

BY ELAINE SMILES

There is no doubt that cable telephony is here; news releases and deployment progress attest to that. But the playing field is not as wide open as it appeared to be several years ago when it was assumed that cable operators � or multiple system operators (MSOs) as they prefer to be known � were the only threat telcos were seeing on the horizon. MSOs are now aggressively touting cable VoIP plans, and telcos have sat up to take serious notice. In addition, the marketplace is also full of competition from Internet voice providers such as Vonage and Net2Phone.

Cable MSOs are entering the phone market for two main reasons: to retain premium television subscribers in the face of erosion to Direct Broadcast Satellite and to increase the average revenue per user. Cable MSOs with telephony plans can be roughly grouped into two camps depending on which opportunity best solves their current pain: the Internet VoIP type service or primary line telephone service with VoIP delivery. Most of the recent MSO cable VoIP momentum announcements have been in the primary line telephony camp, using PacketCable VoIP architecture, specifically, Charter, Cox, Time Warner, and Cablevision to name a few (see sidebar entitled Notable Cable VoIP Deployments). However, some MSOs are deploying a different variety of residential primary line in which the MSO opts not to provide battery back-up and other regulatory requirements.
Fortunately for the cable operators, they have the opportunity to compete equally well in both the crowded broadband voice arena with their dominance of residential broadband, as well as primary line telephony with their extensive coax network. In addition to a residential customer base which the MSOs have, this market share battle is one that will not be won at the micro level of voice-only communication, but instead at the macro level of whole-home communication � phone, video, and data. Evidence of how the telcos are gearing up to defend their space with bundling and new service offers demonstrates their recognition of this direction. Success in this whole-home communication market will be decided by several key attributes: convergence, bundling, and new services. To date, cable operators have had the early advantage in most of these key criteria for success.
Bundling of commercial offerings to consumers has proven to attract premium subscribers as well as reduce customer churn. Cox Communications included churn reduction statistics in their VoIP whitepaper in 2003 that pointed to a 50 percent reduction in subscriber churn when residential customers subscribed to all three services (TV, broadband and residential telephony). Ted Rogers of Canada�s Rogers Communications reported at The Western Show in December 2003, that eight percent of the company�s subscribers take all three available services (television, broadband, and cellular phone) yet they contribute to 28 percent of the company�s EBITDA (earnings before income tax, depreciation and amortization).

Service providers of choice will be those who can bundle today�s television, video-on-demand, full-featured broadband (tiered services, parental controls, and the like), and high-quality telephony. While broadband services are arguably commoditized, and telephony service is not always differentiable, Cable MSOs have the bundling advantage today with their wealth of television and video capabilities, broadcast infrastructure and in many cases, the vault of content they own themselves.

Convergence of the network, where all services are integrated and provided over one medium, delivers an advantage to the service provider in terms of cost efficiencies and by enabling new services � a fundamental advantage over the service provider who offers a commercial bundle of services while needing to maintain multiple, disparate networks to deliver them because of regulatory or infrastructure limitations.

A converged video/voice/data network is a service-centric network:

• utilizing a single, standards-based packet network;
• enabling any service, any device, any where;
• servicing multiple markets for diverged revenue streams: residential and business telephony, primary line, long-distance, broadband and multimedia;
• capable of allowing services to cross network domains with a rich set of services information, like application priority, end-point device awareness, and media type appropriate delivery;
• enabled by a single OSS system that integrates and simplifies services provisioning, network element management, and single point provisioning for network elements and services activation.

Few North American MSOs have deployed large-scale telephony networks using circuit switched technology and none have invested in facilities-based long-distance or tandem TDM networks. While MSOs have impatiently waited until cable VoIP solutions were ready to deploy, they have aggressively been completing their physical plant upgrades to enable high-bandwidth bi-directional services. Cable operators are now leveraging their broadband network investments and advancing their VoIP deployment plans to bring the attractive economics of a converged triple play to customers today.

New Services integrating televisions and broadband with voice and multimedia communications are the key to differentiate one �whole home communications� service provider from another and to provide the high dividend of customer retention.

Rich end-user services experience:

• completely integrated, multimedia applications that can be accessed anywhere from any type of device and retain the users� profile;
• services on-demand, period based, or usage based.

Service benefits:

• improves customer loyalty (lower churn, drives brand awareness) with differentiated and programmable multimedia services;
• drives top line revenue growth with new service bundles that deliver higher margins than today�s existing services;
• enables cost-effective new customer attraction and growth.

With a converged network and the full triple play, cable operators have the best opportunity to offer a multimedia communication experience for consumers, which blurs the lines between service silos. Phone and broadband, for example, can be integrated with video calling, click-to-call, and high-value collaboration features. Consumers are looking to have more control over their communications � like being able to view their television program without interruption from non-essential telephony calls, and having a single number where people can reach them at multiple locations.

Alternate Telephony
But what about that other category of competitors � the broadband VoIP-only service providers offering inexpensive-to-free Internet calling? Aren�t they able to knock one leg off the cable triple play stool? Most likely not.

Internet voice, broadband VoIP, soft second-line voice � whatever you call it, there is a growing buzz about increased choice which consumers have for alternative telephony. Some of these non-facilities based providers have an independent voice offer and some are pairing up with broadband carriers offering a share of revenue stream, which, while not overwhelmingly generous to the carrier, at least allows them to be in the game. Some of these also use an adapter to allow consumers to make regular phone calls over their broadband service. Other offers, such as Skype�s only offer PC-to-PC internet calling for free (for now).

Micro Versus Macro at the Finish Line
Although the new broadband telephony alternatives are looking attractive, they deliver a micro service to a relatively small and limited market of cost sensitive and high-technology subscribers. While commoditization of basic voice and lowering price points may prove attractive to this niche market in the short term, long term success in this market and others will require the delivery of innovative, value-added services.
Here is where the macro whole-home communications offer comes together, and the subscriber attraction moves from low cost to a value added proposition.
With their early lead in all three of the major criteria for success in the whole home communications market � bundling, convergence, and services � cable operators currently have the advantage over traditional telephony companies who are racing to upgrade their networks to deliver the voice, video, and data triple play. With their breadth of portfolio and richness of service set, MSOs also have the advantage over Internet voice companies who are rushing to market with a service based on a low-cost value proposition.

Sidebar: IT Q&A

Elaine Smiles is Director Cable Marketing at Nortel Networks, an industry leader and innovator focused on transforming how the world communicates and exchanges information. For more information, please visit the company�s Web site at www.nortelnetworks.com.

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