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Feature Article
August 2004

Will VoIP Save Cable?


As competition heats up between cable operators and Direct Broadcast Satellite (DBS), rolling out new bundled and enhanced services to the consumer is quickly becoming a requirement for growing market share and reducing churn. Numerous studies and market research confirms that cable subscribers who receive both broadband Internet access and cable TV services from a cable operator are much less likely to switch to DBS for their TV services or DSL (Digital Subscriber Line) for their broadband access.

Bundled Services Include IP Telephony
IP telephony is a natural progression for MSOs (Multiple Systems Operators) looking to outpace the competition by bundling voice, video (including video-on-demand, digital video recorders and High Definition TV), and data services � the so-called Triple Play � for residential use. Once upgraded to bidirectional fiber optics, MSOs can deliver telephone service over the same cable that currently carries digital video, high-speed Internet, and other advanced services to customers. Cable companies, including the five largest MSOs, have responded to this opportunity by becoming certified local exchange carriers offering competitive residential voice services in over thirty cities and fifteen states across the country.
The success of cable broadband versus DSL has clearly demonstrated that the cable operators can effectively compete with well-established ILECs for consumer loyalty and dollars when armed with a superior technology. Residential cable modem subscriptions have surpassed the subscription rate of DSL by about a two-to-one margin in the U.S. Cable modems continue to lead the competitive residential broadband market because of its broader availability, easier installation, and higher customer satisfaction levels compared to DSL. Now the cable industry is well on its way to delivering a competitive choice for local residential phone service, thanks in large part to the superior economic and technological advantages of VoIP.

A February 2004 NCTA (National Cable and Telecom-munications Association) Policy Paper, �Balancing Responsibilities and Rights: A Regulatory Model for Facilities-based VoIP Competition,� states the following:
Compared to circuit-switched telephony, VoIP offers lower rollout costs, increased flexibility, and more innovative and advanced services. More specifically, VoIP allows a provider to avoid the huge capital expenditures and investments needed to purchase and install circuit switches. Further-more, VoIP utilizes data paths that the cable industry has already in-vested in and built. These existing paths facilitate easy software changes and additions to service packages, as well as innovative combinations of voice, data, and fax services.

True Local Residential Phone Competition at Last?
Recognizing the importance of VoIP to their future, cable companies have joined the fight to keep VoIP free from the constraints of traditional telephony regulation and taxes. In a position paper published by the NCTA in February 2004, the cable industry advocates that policymakers adopt a �predominantly deregulatory approach to VoIP services.� The paper goes on to say that cable-provided IP telephony �can be the breakthrough that fulfills the vision of the Telecommunications Act of 1996 for vast numbers of residential consumers.� That vision, long sought but largely unfulfilled, is to provide the consumer with a true choice in local phone services.

According to the NCTA, the cable industry has invested more than $84 billion in upgrades and enhancements to cable technology since 1996 to enable them to fully support high-quality competitive residential phone services. The NCTA Policy Paper contends that with �the right regulatory framework, VoIP technology will increase industry investment, foster innovation, and provide consumers with attractive alternatives to POTS and to other communications services.�
With this goal in the forefront, many cable MSOs have now taken up the challenge, including Cox Communications, Armstrong Cable, Charter Communica-tions, Mediacom, Time Warner Cable, and Comcast Cable. All have begun trials or are launching IP telephony services to residential customers. Cablevision, for example, began offering Optimum Voice VoIP late in 2003 in its New York City service area of four million homes (sidebar).

Penetrating the Small Business Market
In addition to increasing competitive value and expanding market share among residential customers, MSOs are also looking to VoIP as a means to penetrate the small business market, long dominated by telecommunications incumbents. Indeed, according to a just-released market study by Insight Research Corporation (www.insight-corp.com), cable companies are actively targeting the small business telecommunications lines market, where numerous CLEC start-ups focused and largely failed to make inroads.

According to Insight�s report, �Cable Telephony in Small Businesses: The Competitive Threat to ILECs 2004-2009,� IP services for business customers represent a much higher-margin, per-customer opportunity for cable MSOs than residential customers. The report, published in May 2004, says that small businesses will purchase bundled voice and high-speed data services at three to four times the price of residential bundles of voice, data, and basic TV services. Once considered simply a conduit for TV programming, cable�s broadband infrastructure provides an ideal pipeline for the delivery of new advanced services, including high-speed Internet access and advanced IP-based applications for residential, SOHO and small business customers.

More than three million small and medium businesses are located within two-way capable cable systems, according to the report. When home-based businesses are added, the near-term opportunity created by this market is well in excess of 20 million lines. So while everyone in the telecommunications industry has focused on the competitive battle brewing between local telephone companies and cable television companies for residential telephone service, another battleground may be at the storefronts and industrial parks of Anytown, USA.

This study supports the idea that the key to delivering a sustainable market opportunity for the cable companies is bundled services. According to Insight�s analysis, the total cable market for phone services alone, including IP telephony for small businesses, will generate only $342 million this year; however, when voice is combined with cable modem services, MSOs could realize almost $2.5 billion in additional revenue from small business customers.

Enhanced IP Services Mean Business
Obviously, cable companies need to provide more than high-speed Internet and POTS-like telephony services to win the hearts and minds (and budgets) of the small business market. Advanced business services, like Web-based audio and video conferencing, unified messaging, prepaid phone cards, follow-me services, fax lines, hosted IP PBX, and IP Centrex services are essential. To effectively sway business customers from ILECs and other providers, it�s clear that a robust enhanced-IP services infrastructure � something beyond basic IP telephony � is necessary.

By leveraging managed IP-based network and the platform development capabilities of IP network providers, cable operators can bring myriad telephony solutions to the small business. And by private-labeling services such as prepaid long distance, calling cards, and Web-based conferencing, cable operators have a unique opportunity to bridge the gap between telephony and data services where the incumbent and competitive LECs have failed.

As an example, a major cable MSO is currently evaluating a real-time, on-demand prepaid conferencing application that would enable them to offer hosted prepaid conferencing services to small businesses and residential customers. Via SOAP/XML requests, the application could initiate conference calls 24 hours a day, seven days a week from virtually any phone, PC, or PDA without the need to make a reservation or rely on an operator. Business customers would simply dial a toll-free number and enter their unique conference ID and PIN to instantly begin a conference.

Another enhanced IP business service under review features a robust and fully featured Web-based platform that includes customized customer IVR (Interactive Voice Response), ACD (Automatic Call Distribution), PIN activation and management capabilities, POSA (Point of Service Activation), and Web-enabled customer service interface for a complete prepaid platform offering.

Cable companies are also actively looking at bundling IP Centrex and hosted PBX services with VoIP for enhanced PBX functionality with complete nationwide and international call origination and termination capabilities. The IP Centrex product offering provides traditional Centrex functionality, such as voicemail, forwarding, and Caller ID, while the hosted PBX product combines traditional Centrex functionality with enhanced features, such as find me/follow me, call screening, and unified messaging. These hosted solutions provide superior value, savings, and network management for small and medium sized businesses. By integrating fax, voice mail, e-mail, and wireless communications, cable operators can cost effectively acquire, retain, and grow business customers seeking improved efficiencies in mission critical environments.

VoIP Enables Many Opportunities
As cable operators seek out new revenue streams, bundled services such as broadband Internet access and residential IP telephony offer many exciting prospects to grow and protect existing residential market share. Some envision that VoIP will give the cable industry the opportunity to provide true competition for local residential phone services. Many believe that VoIP can also pave the way for enhanced IP-based feature and service offerings, equally attractive to small businesses and SOHO customers, a market largely untapped by most cable operators. Cable operators are actively investing and launching VoIP initiatives on all fronts, convinced that it is the foundation for exponential growth in future revenue and profits.

Michele Shannon is director of product management and marketing for Callipso, a leading enhanced IP services provider serving carriers, telecommunications resellers and the prepaid phone card market. For more information, visit the company�s Web site at www.callipso.com.

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