THE PENDING TELCO MEGAMERGERS PRESENT A WHOLE NEW WRINKLE IN THE GAME PLAYING OUT BETWEEN THE RBOCS AND THE CABLE COMPANIES IN THE RESIDENTIAL MARKET.
Some believe these mergers will give companies like SBC Communications Inc. and Verizon Communications Inc. (if Qwest Communications International Inc. doesn’t ultimately capture MCI Inc.) the added muscle to drive down voice margins even further, pinching the cablecos and anyone else offering voice services. The argument goes that cablecos as a result will have to address extremely low voice prices at the same time direct broadcast satellite companies are eating their lunch on the video end.
Others, however, think it’s the cablecos that have the upper hand. After all, the major MSOs long since have completed their broadband access network upgrades and, in many cases, already have gone to market with a triple play of video, data and now new VoIP services. Meanwhile, the RBOCs still are shoveling big bucks into new fiber access infrastructure — and, in some cases, into large acquisitions.
Allan Tumolillo, COO of Probe Financial Associates and a long-time telecom industry analyst, says the RBOCs were successful at “destroying” the long-distance operators on the TDM front, and now are setting their sights on voice competitors like the cablecos and Vonage Holdings Corp. “Look at what [the RBOCs] did to AT&T and MCI,” he says. “That message should not be lost on the cable industry.”
As a result of the Telecommunications Act of 1996, the RBOCs were able to get into the long-distance market. Within two years, they drove down prices and captured 40 percent of that market, says Tumolillo. With the unbundling of services from transport that VoIP enables, telcos now are concerned about losing customers to competitors offering VoIP services, “so the telcos are trying to eliminate the number of independent competitors,” Tumolillo says.
As of June 2004, local phone service was provided over 3.3 million coaxial cable connections, representing about 2 percent of all switched access lines in the United States, according to FCC data. In-Stat predicts worldwide cable telephony subscribers will pass 14 million by late 2005, and grow to more than 22 million by the end of 2008.
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cable phone snapshot |
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| Subscribers | Technology | |
| CableVision | 273,000 | VoIP |
| Comcast | 1.2 million | Circuit-switched |
| Cox | 1.2 million | VoIP and circuit-switched |
| Time Warner Cable | 220,000 | VoIP |
Robert Rosenberg, president of The Insight Research Corp., says the U.S. cable companies’ move into the consumer phone market is a driving force behind the planned mergers bringing together phone giants like AT&T Corp. and SBC. He expects the phone companies to lose 20 percent to 30 percent of their residential base to cable operators in the coming years.
In a Feb. 14 research note placing the ratings of Verizon on review for possible downgrade following Verizon’s announced plans to acquire MCI, credit rating agency Moody’s Investors Service stated: “Moody’s believes that [Verizon] views the threat to its core wireline cash flow stream from cable competition as significant. Furthermore, Moody’s believes the company’s decisions to upgrade its networks, enhance and diversify its consumer revenue streams ... and accelerate the development of its enterprise service business is strategically appropriate in light of this threat to the core residential wireline business.”
But Tumolillo believes it’s the cable companies that should be on the offensive.
The expected acquisitions of AT&T by SBC and of MCI by Verizon will enable these companies to cut staff and add revenue on the business side so they can offer bigger price cuts on services like residential VoIP, according to Tumolillo, and “force Vonage into the ropes.” At the same time, he adds, “they’ll turn the ship then directly into the path of the cable companies.”
So cablecos like Comcast Corp., which has more than 1.2 million cable phone customers but has so far been tentative on VoIP, need to decide how to respond, he says. Tumolillo suggests a good strategy would be for Comcast to focus on media/video services and simply offer VoIP for free as part of its bundles. The No. 1 MSO, he says, might take a cue from the many Asian service providers that are co-marketing Skype Technologies S.A.’s VoIP services and offering them to customers gratis. “Skype has something like 70 million downloads,” says Tumolillo. “Verizon doesn’t have anything even approaching that. Skype is the biggest VoIP provider — bigger than the next 20 — and they are undermining the proposition of voice. It’s free.”
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the hands of two giants |
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2004 Revenue |
Free Cash Flow |
Debt |
Market Value |
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| Comcast | $20.3 billion | $1.94 billion | $21.9 billion | $27.6 billion |
| Verizon | $71.3 billion | $4.3 billion |
$39.3 billion | $98.1 billion |
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*Excluding Feb. 23 market values, all figures are year-end numbers. |
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Comcast Chairman and CEO Brian L. Roberts, speaking at a recent financial event, said his company will add VoIP in 20 “markets” this year, but did not specify locations. Those 20 additional market launches will pass about 15 million homes, says a Comcast spokesperson, who adds that Comcast will have its “digital voice” service “available to all its customers by the middle of 2006, passing 40 million homes.”
Roberts has told Wall Street that the No.1 MSO plans to deliver VoIP services for $40 per month, according to Tumolillo. But given that Vonage sells its services for $25, Skype has a free offer and the major telcos are readying for a price war, Tumolillo suggests Comcast rethink that strategy. “Brian Roberts is smoking dope if he thinks he can sell it at $40 a line,” Tumolillo says.
But Roberts already may be formulating a better plan, Tumolillo adds, one focused on media rather than telecommunications. Of course, Comcast’s two major moves in the past year or so have been to try to buy Disney, and to join forces with Sony and others to buy movie giant Metro-Goldwyn-Mayer (MGM). “Those are media deals, they are not telco deals,” Tumolillo says. “They’re putting their money into media.”
Meanwhile, the phone companies are spending billions of dollars to bring hundreds of television programs into homes.
Donna Jaegers, an analyst with Janco Partners Inc., a Colorado-based investment banking firm, says it is costing the phone companies about $1,300 to $1,500 per home to retrofit the networks to support video. “I think it’s more economic to offer phone service over their [cable] infrastructure than it is for the phone companies to upgrade their plants and offer video services,” she says.
Infonetics Research reported that cable operators doubled their spending on VoIP equipment from $63 million in 2003 to $123 million last year. Meanwhile, in 2004 alone, Verizon earmarked $800 million to build a fiber network to 1 million homes and businesses.
cablecos may have winning hand in smb market
THE PLANNED MERGERS AMONG THE BIGGEST U.S. PHONE
companies position them to support global corporations and big government agencies. At the same time, these phone giants are spending billions to deliver video services in competition with cable TV operators.That creates an opportunity for the cable companies to target small and medium businesses, according to Michael Smith, managing director of the telecom strategy practice with Stratecast Partners.
“The fact is that’s going to be a segment that is going to be underserved by the likes of Verizon and SBC over the next few years,” he says.
Smith expects the cable companies will turn their attentions to the business market in the next 12 months to two years following their expansion into the residential phone market.
Robert Rosenberg, president of The Insight Research Corp., says U.S. cable companies own networks that pass approximately 6 million small and medium businesses. These businesses account for an estimated 53 million business telephone lines, according to Insight Research.
There appears to be plenty of incentive for the likes of Comcast to court businesses. Cable companies selling a package of services to small and medium businesses can triple or quadruple their revenue versus serving consumers who buy a package of voice, data and basic cable television, according to a May 2004 report from Insight Research.
“We do good business in terms of high-speed data to small and medium-sized businesses but ... are we going after the commercial market for phone and high-speed data in a very aggressive way? The answer is no, not yet,” Comcast Cable President Stephen Burke said during a fourth-quarter earnings call. But, he added, “that may be the next big initiative after IP phone.”
Of course, some of the cablecos already have staked a claim in the business market. Rosenberg says Cox Communications Inc. and CableVision Systems Corp. are among the most aggressive cable operators supporting businesses.
Cox entered the business market 12 years ago. For the nine months ending Sept. 30, the company reported $4.75 billion in revenue, with commercial revenue comprising about $260 million. Cox serves more than 100,000 business locations and already competes aggressively in the small, medium and large business market with SBC in several areas, including Cleveland, San Diego and Tulsa, Okla., says Cox spokeswoman Jill Ullman. Cox also offers voice service to businesses in 16 markets, including Omaha, Neb.; Orange County, Calif.; Phoenix; and San Diego.
CableVision’s Lightpath Business Services division reported $54.5 million in fourth-quarter revenue, a 20 percent increase compared to the previous period. Lightpath had 36,138 business cable-modem customers at the end of 2004, up from 25,699 a year earlier. The company markets voice service to homes, but has not announced plans to offer business voice.
Meanwhile, Time Warner Cable, which owns a stake in Time Warner Telecom, ended 2004 with 173,000 commercial high-speed Internet customers and is exploring whether to offer VoIP to businesses following its foray into the residential phone market. And Sprint Corp. has confirmed it is in talks with Time Warner Cable to help the No. 2 cable operator deliver wireless service.
— josh long
| Links |
| AT&T Corp. www.att.com Comcast Corp. www.comcast.com Infonetics Research www.infoneticsresearch.com In-Stat www.instat.com The Insight Research Corp. www.insight-corp.com MCI Inc. www.mci.com Metro-Goldwyn-Mayer (MGM) www.mgm.com Moody's Investors Service www.moodys.com Probe Financial Associates www.probefin.com Qwest Communications International Inc. www.qwest.com SBC Communications Inc. www.sbc.com Skype Technologies S.A. www.skype.com Sony www.sony.com The Walt Disney Co. www.disney.go.com Verizon Communications Inc. www.verizon.com Vonage Holdings Corp. www.vonage.com |
