To suggest that all-out competition between the Bells and cable is shaping up as the telecom battle of the decade is to invite skepticism if not downright derision from anyone who was around for the hype-ridden cable/telco non-happening of the '90s.
But make no mistake, a showdown is brewing on the broadband frontier, where the speculative cable threat of the '90s has materialized into a big market lead in the high-speed data business and the launch of voice-enabled networks now passing in excess of 8 million households. People closest to the action say the telcos' abandonment of the huge cable TV projects of the last decade (see timeline) merely marked a turning of the page to a new chapter where changing market, technology and regulatory conditions call for new strategies.
"I think each carrier has an evolving point of view, but everybody has an appreciation that having a triple-play strategy is of paramount importance," says Christopher B. Coles, executive vice president of Qwest Communications International Inc. and president of Qwest Video Services. "This is going to be a heavily disputed and competitive space involving at least the telephone and cable incumbents."
Qwest's move into triple-play services rests on plans to expand its base of very high speed DSL operations beyond the starting points in Phoenix and a Denver suburb, where the company has amassed a subscriber base of approximately 50,000 homes. Coles declines to provide subscriber penetration rate of homes passed by its VDSL networks. But he says that in sections of Phoenix where Qwest and cable incumbent Cox Communications have been going head to head for some time, Qwest and Cox are neck and neck as far as video penetration. Having a video component and a fourth service piece as well, in the form of wireless, has proven to be a significant factor in helping Qwest retain customers, he says. "There's a measurable ROI justification for what we're doing."
The success of Qwest's triple-play package has prompted the company to rethink its marketing strategy, which has been to under price the competitor while offering customers more video options and feature enhancements. "Price discounting doesn't serve the provider's interests very well," Coles says. "Focusing on customer care and more innovative ways to manage services is a more interesting way to maximize return on our capital spending."
AT&T Broadband CEO William Schleyer put voice expansion at the top of the company's capital spending agenda. "We think telephony is a better business than high-speed data," he told analysts at the end of last year, because the revenue is higher per household with similar cash flow margins but with much greater penetration rates.
Comcast officials, discussing their reasons for outbidding rivals with a $72-billion offer for the AT&T cable unit last year, told analysts the company's head start in telephony over Comcast and most other cable MSOs (multiple system operators) was a major factor in the decision. They say Comcast will be able to leverage AT&T's installed switches, now in reach of about 80 percent of Comcast's subscriber base, to make a much faster move into voice than originally planned. For starters, the company hopes to have 1 million voice-capable households ready for service by year's end in Philadelphia and Detroit.
Cox Communications, the other MSO that has invested heavily in voice services, recently reached the 100,000 subscriber mark in San Diego, which put its penetration there at 25 percent of total homes passed by its voice-enabled network. The company has about 350,000 voice subscribers in eight metro markets. Cox officials note voice is a direct source of new revenue and drives revenue growth in other service categories. The company reports 40 percent of its voice customers take the entire bundle of enhanced services, including digital TV and high-speed data, while overall digital service penetration is 22 percent and high-speed data is in the low teens.
With total cable voice subscriber numbers barely past the 1.5 million mark nationwide, telcos clearly have time to gear up to confront the cable threat.
In fact, says Probe Research analyst Tim Keefe, it only will be when that threat has materialized on a scale of many millions of cable voice subscribers that the Bells will really react with a move into true broadband triple-play services. That's because telcos would be opening their treasured high-margin voice features business to competitors that would be able to use hosted IP-based techniques to offer such features along with voice over telcos' broadband packet networks as a result, says Keefe. "Voice mail, caller ID, call waiting and other features only make up about 10 percent of RBOC revenue, but they account for a disproportionate share of operating profits," Keefe says. "If they open up a packet network to providers of softswitch [based] services, they'll be hurting themselves."
So rather than taking a panicked slap shot, telcos are following an evolutionary path to meet the cable triple threat, moving incrementally by making better use of the existing infrastructure and developing their own services rather than simply mimicking what cable offers.
"We're not looking at competing point to point with cable," says Paul Symczak, director of business development for Verizon Online, the RBOC's ISP and marketing arm for retail sales of DSL and dial-up access. "We're saying we have this high-speed network we've built based on DSL, so now we want to determine what services we can deliver that will be revenue drivers beyond the revenue we get from pure access."
With some tweaking of the DSL platform at the edges, Verizon will be in a position to deliver a wide range of value-added services, Symczak says. These include everything from entertainment services like video on demand and gaming to productivity-enhancing and home security applications. "We're seeing applications developers getting the bandwidth requirements reduced for various types of service," he says. "For example, we're seeing video encoding rates falling into the 500 to 700kbps range for video that delivers a good viewing experience."
"Today we're not differentiating one type of packet from another, whether it's video, HTML, voice or whatever," Symczak says. "We're looking at how to differentiate and prioritize those packets so that the speed is matched to the application and the customer is paying for the application." Under this scenario the bandwidth becomes transparent to the end user, who receives only what is needed to deliver the desired application.
On the service side, Verizon has taken the first step toward this type of differentiation by offering "DSL Live," which gives subscribers access to value-added services through its DSL service portal. The first DSL Live offering was launched in December in affiliation with MP3.com's music service, providing DSL customers higher streaming levels and music management features that they can't get over dial-up lines. The company is about to add a PC gaming feature to the portal, which eventually will evolve to multiplayer capabilities in the online environment, Symczak says.
SBC Communications and BellSouth are moving along similar paths. In SBC's case, the strategy involves a partnership with Yahoo! Inc. through which the two entities plan to begin offering DSL and dial-up premium services by midyear. On the DSL side this could mean a video component to the instant messaging service the two companies plan to offer as well as pay-per-view access to movies, games and other media-rich content, says SBC spokesman Fletcher Cook. BellSouth, in a deal with Disney, already is offering some pay-per-view content through a "Disney Blast" portal for kids, and it makes available streamed film videos at up to 500kbps from an online supplier of short films, notes BellSouth spokesman David Blumenthal.
Both Bell companies pride themselves on deep deployments of fiber, which allows them to deliver DSL to a broad percentage of customers at line distances that support transmission at 1mbps and above. A large share of SBC's 25 million DSL customers can receive service at 1.5mbps, Cook notes, adding that even at the 12,000- to 14,000-foot range the line rates are 700kbps or better, which is good enough to support delivery of VHS quality video. As for BellSouth, 90 percent of its DSL customers are within 12,000 feet of fiber termination points, says spokesman Jeff Batcher.
This ever-broadening array of service capabilities at relatively low data rates dovetails with the changing scenario in consumer entertainment patterns, where shared bandwidth in the home permits people to take advantage of online music and gaming services and other applications that go beyond traditional PC usage. "There's a whole collection of things we can offer over our existing DSL platform that represent compelling service enhancements which the consumer can't readily get elsewhere," Symczak says, echoing a point made by other executives.
Nothing better reflects RBOC thinking along these lines than their recent moves to support home networking using the Home PNA (Home Phoneline Network Alliance) technology supplied by 2Wire Inc. (See April xchange, page 22) The latest Bell to get on board the home networking bandwagon is BellSouth. The carrier's FastAccess HomeNetworking Service, like similar services put in play by Verizon and SBC, targets DSL customers who want to connect more than one PC to their high-speed data service in a straightforward plug-and-play manner that uses in-home telephone wiring. The 2Wire system supports distribution of signals at data rates of up to 10mbps, although BellSouth is touting 8.5mbps as the top operating speed along with adding professional firewall capability and 24-hour help service as part of the $10 per month service.
RBOC executives make it clear that the HPNA offerings mark the beginning of a move to use gateways to enable network services to connect not only to multiple PCs and computer-linked appliances but also to TV sets and other entertainment devices in the home. "We're looking very seriously at an enhanced router gateway at the home to distribute signals to the TV, PDAs and other appliances," Symczak says. "There are a lot of piece parts being worked on to create enhanced service value for our customers."
One such piece, of course, is the next-generation network platform that will carry Verizon and the other Bells beyond the limitations of today's ADSL links. In Verizon's case that involves work on VDSL and all-fiber networks, with the latter efforts being targeted to new real estate developments.
BellSouth has gone further with fiber in the loop than anyone. The company now passes close to 300,000 households with upgraded broadband fiber-to-the-curb networks. The company, which abandoned other platforms for delivery of cable services two years ago, now has more than 50,000 customers taking video services on these networks, according to company officials.
But whether this is the direction BellSouth will continue to go as it expands its base for delivery of triple-play services and just how quickly that expansion will proceed is something the company refuses to discuss.
The industry appears to have reached a watershed in its analysis of VDSL now that, as Qwest officials repeatedly have noted lately, the system costs are where they need to be to justify deployment. "We're quite pleased with the dramatic drop in costs, which have gone down by as much as 50 percent over the past 18 months, and we expect them to continue to fall as other entities come into the market and purchase product," Coles says.
"There are different levels of interest and belief around VDSL," he adds. "A lot depends on the traditional architecture that any one carrier has deployed as to whether they're more interested in VDSL or FTTH. There's a lot of activity going on around that analysis right now."
TELCOS SIDELINE LARGE ROLLOUTS
The company says that's due to the regulatory environment and the capital-funding squeeze. But here, too, things are looking up, says Chris Coles, executive vice president of Qwest Communications International and president of Qwest video services.
The FCC's recent move to change rules surrounding provision of high-speed broadband could help Bells avoid having to share their DSL facilities at what it believes are unduly low costs with competitors, Coles says.
Additionally, Qwest hopes to win a ruling from the FCC that the commission will apply its parallel action on cable broadband to VDSL in instances where, as is the case with Qwest, VDSL services are being deployed under local cable franchises in accord with the provisions of Title VI of the Telecom Act. "We've prompted the consideration of that possibility and have filed comments with the commission on the matter," he says, adding that the carrier has no problem with expanding VDSL under local franchise authority so long as localities demonstrate a real interest in fostering competition.
The capital funding situation has improved as well in the wake of an agreement by Qwest's lenders to relax debt restrictions in its credit agreement, which freed the company from an immediate threat of being in violation of its debt-to-earnings ratio limits. "We're not prepared to go public with our plans, but (the banks' action) is having a positive impact on our thinking about capital spending projects and on our perspective on VDSL," Coles says.
Clearly, the RBOC move into the full range of consumer broadband services is not going to happen overnight, nor is it likely to be accompanied by splashy press announcements linked to billions of dollars in new capital spending commitments, as was the case in the '90s. But it's equally clear that the Bells have taken cable's measure and realize they must begin now to prepare for a battle royal where they are on the offensive as much as they are on the defensive. As one telco executive put it, "We don't have to learn the lessons we've been taught in the high-speed data business twice."
| Goals and Misses in the Game of Broadband |
FEBRUARY 1988 AUGUST 1990 DECEMBER 1990 SEPTEMBER 1991 OCTOBER 1991 JANUARY 1992 FEBRUARY 1992 OCTOBER 1992 NOVEMBER 1992 DECEMBER 1992 JANUARY 1993 JANUARY 1993 FEBRUARY 1993 MAY 1993 JULY 1993 OCTOBER 1993 OCTOBER 1993 FEBRUARY 1994 APRIL 1994 APRIL 1995 MAY 1995 JULY 1995 OCTOBER 1995 NOVEMBER 1995 JANUARY 1996 SEPTEMBER 1996 NOVEMBER 1996 DECEMBER 1996 DECEMBER 1996 JANUARY 1997 APRIL 1997 JUNE 1997 DECEMBER 1997 JANUARY 1998 APRIL 1998 MAY 1998 MAY1998 JUNE 1998 SEPTEMBER 1998 APRIL 1999 OCTOBER 1999 DECEMBER 1999 JANUARY 2000 JANUARY 2000 NOVEMBER 2001 DECEMBER 2001 MARCH 2002 |
| Keeping Score | ||
| Cable and RBOC Broadband Service Penetration | ||
| TOTAL CUSTOMERS | ||
| 12/31/00 | 12/31/01 | |
| ADSL | 3,300,000 | 4,000,000 |
| Telco TV | 520,000 | 120,000 |
| Cable Data | 4,000,000 | 7,200,000 |
| Cable Voice | 850,000 | 1,500,000
Source: Industry reports |
