Ready or Not, Here Comes Cable’s VoIP

That rumbling sound off in the distance? Call it the coming rollout of
Voice over IP services for consumer and (eventually)
enterprise markets in the fourth quarter and throughout next year.

While many enterprise networks are examining the feasibility of deploying
IP-based telephony applications over data networks, cable providers are
sprinting to get new telephony services into the
marketplace for consumers. Voice services over their cable networks are only
the latest addition to their product bundles of video and high-speed data

After all, as broadband adoption in U.S. homes spreads and starts to
approach a saturation point (beyond 42 percent of the market), cable
operators still outpace their telco rivals for broadband market share and
will need a new growth engine to maintain that lead. And voice services,
which can be inexpensive to deploy through
third-party providers, provide healthy profit margins and are seen as the
next engine of growth for the cable modem market, already struggling to
withstand a pricing war by telcos’ DSL-based broadband services.

But networking experts also question whether these consumer-facing cable
telephony products are “fully baked” and ready to debut as carrier-grade
voice services running over congested data networks.

We’ll soon see. Number six cable provider Cablevision is
staking a claim
to becoming the first cable operator in the country to
offer a commercial voice service through its Optimum Online broadband
service, slated for later this month.

At a cut-rate price of $34.95 a month for unlimited local and long
distance calling, the new service, called Optimum Voice, is aimed straight
at the bottom line revenues of traditional long distance voice services of
AT&T and local service providers such as Verizon .

Number one cable company Comcast , which recently
its 57 percent stake in shopping network QVC for $7.9 billion (including $1.35 billion in cash),
is also in VoIP pilot tests with select consumer markets, but is staying mum
on its official rollout into the marketplace.

However, analysts expect the cash from the QVC sale to be put to work
financing a faster rollout of a VoIP offering, especially as Comcast spends
heavily on upgrading its entire cable footprint to a digital platform and
tries to stiff-arm price-cutting by DSL providers trying to slow Comcast’s
growth in high-speed data customers.

Analysts see regional bell operating companies as more vulnerable to the
erosion of traditional voice services from VoIP, compared to long distance

As Deutsche Bank said in a recent note, the Baby Bells are facing a
“titanic struggle to redefine their business model” in the face of
regulatory inspired competition, increasing cross-platform substitution
(cable, wireless) and technology-based competition from VoIP operators.

In the past 18 months, “the pressure has accelerated to the point that we
are seeing increasing impact on both revenue and profitability of the core
wireline business,” the note said. “It is no longer a theoretical
possibility but rather the market reality.”

And the pressure will be increasing in the months to come. Number two
cable provider Time Warner Cable (the cable division of Time Warner,
formerly known as AOL Time Warner), is planning an aggressive rollout of
cable telephony products later this year.

“We’ve been testing VoIP for the past several months,” Wayne Pace,
chief financial officer at the Time Warner parent company, said at a
recent investors’ conference. Pace said TWC’s VoIP trial in Portland,
Maine, has already signed up 4,000 customers since May.

“We’re comfortable with the technology and believe the opportunity to
bundle voice with data and video is very strong,” Pace said during the conference, held in early September.

The company is developing a plan to move
forward with telephony on a wide basis in the latter part of 2003 and in 2004,
he said. “But we’re only going to do it in a sound and responsible manner.”

But executing on that game plan might be a lot more difficult than it
sounds. Although the market opportunities
for cable telephony products are ripe right now, the technology’s ability to
scale up effectively is still largely unproven in the marketplace, said Jim
Lakin, president of the broadband division of Arris Group , a Georgia-based provider of voice and
data integration products for broadband local access networks.

With telephony, people are used to a better service than they are getting
Internet access, Lakin said during a VoIP panel discussion at Kagan Media’s
Broadband Summit in New York. “I’m not at all sure these [VoIP] systems are
fully baked right now.”

For example, he continued, if a cable operator’s data network experiences
a glitch or bottleneck, “you have to have the capacity to drill into the
network to find the source of the problem.”

If not, “you might be looking at [voice] subscribers
without service for six hours. That’s going to be a problem. If you have
200,000 subscribers without [voice] service for six hours, that’s going to
get into the newspaper.”

The recurring issue with voice services deployed over IP networks, he
added, is the complexity behind the simple-sounding prospect of integrating
two hardware platforms into one — and getting them to work together.

But Cablevision said it has tested its upcoming VoIP product extensively,
and that it wouldn’t roll the service out unless it was considered a
carrier-grade product.

In addition, Lakin said despite the uncertainty over
whether voice services will truly scale to carrier-grade service across a
cable provider’s plant, the revenue opportunities with VoIP are too enticing
for cable providers to wait any longer.

Lakin’s company Arris, and Merrill Lynch, both reckon that digital
telephony products represent as much as $30 billion in annual revenue to the
cable industry and as much as $3 billion in free cash flow a year.

“Voice over IP has arrived,” said Gerald Pearce, a vice president with
VoIP provider Net2Phone , during the Kagan Media
Broadband Summit. “The challenge is how to integrate it” into one’s own data
network, and whether to build it internally or buy a third-party provider’s
VoIP services.

Indeed, that is one of the issues slowing down rollouts — for now at
least — on the enterprise, even as telecommunications hardware providers
such as Canada’s Mitel and Cisco unveil new lines of routers and
next-generation IP-enabled phones that can deploy a wide range of digital
voice and unified messaging applications.

“Despite the breakneck progress of key standards like SIP (session
initiation protocol) , vendors have been slow in rolling out
standards-based enterprise VoIP solutions,” said Vijay Bhagavath, a senior
analyst for Forrester Research who covers telephony and VoIP on the
enterprise level.

“Instead, vendors like Cisco have necessarily adopted proprietary
technology to handle session initiation integration, and provisioning for
their enterprise IP PBX systems,” he said.

And although local phone providers such as Verizon have unclear
strategies regarding VoIP right now, long distance carriers have long seen
the threat that VoIP represents, and have been positioning their own
networks for the coming shift of voice revenues away from traditional
copper-based wireline services.

Forrester’s Bhagavath calls MCI the current leader in that trend, thanks
in large part to a number of voice over IP “thought leaders” working at the
long-distance provider, which is preparing to emerge from the largest
bankruptcy in U.S. corporate history.

And don’t count out the Baby Bells just yet, Deutsche Bank continued in its research note about the threats to the regional Bell operating
companies (RBOCs), or Baby Bells.

Although the investment bank said the next two to three years
represent a major paradigm shift in the RBOCs’ profitability models, “the RBOCs are
not without trump cards.”

For one, “neither UNE-P providers, independent wireless,
DSL or VoIP operators and indeed even larger cable MSOs have anything
approaching the RBOC’s financial capability or customer reach,” Deutsche Bank
said. “Also unlike their more specialized competitors,
the RBOCs enjoy the benefit of an extremely wide and diversified operating
base and the luxury of massive ($20 billion per annum) free cash generation.”

RBOCs are also expected to become a major player in the corporate market,
Deutsche Bank added. By late in 2004 and early 2005, the note continued, the market should have
a better understanding of “how well the RBOCs are going to cope with the
coming volatility.”

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