LOS ANGELES -- Ma Bell, take note: The cable industry is gunning for your phone business.
Long an insignificant source of revenue for cable operators, cable telephones -- phones hooked up to cable lines -- are becoming big business for cable companies.
Comcast Communications and Cox Communications have quietly climbed to the top rungs of telephone providers, helping the cable industry capture about $900 million in telephone revenue in the United States in 2003, or about 2.5 million residential customers, according to MRG, a digital media research firm. It projects cable operators could capture $8.1 billion in U.S. revenue, or 22 million subscribers, by 2007 -- or roughly 10 percent of the U.S. residential telephone market.
"If the cable guys act fast enough, they have an opportunity to eat the telcos' lunch," said Gary Schultz, MRG president and principal analyst.
Monday afternoon, hundreds of cable executives crammed into a conference room to hear Comcast, Cox and Time Warner executives talk about their plans for telephone domination.
"As we're draining lines out of (the telephone companies') business, they're getting nervous," said Scott Hightower, Cox's vice president for voice and data product development, speaking at the Cable & Telecommunications Association for Marketing's annual digital and broadband marketing conference in Los Angeles.
From humble beginnings in 1998, Cox's telephone service now reaches 1 million U.S. residential customers -- and 30 percent to 40 percent of its subscriber base in core markets like California's Orange County and Omaha, Nebraska.
To attract customers, cable companies are "bundling" services, giving consumers a price break when they buy cable TV, cable modem and phone service.
Time Warner, for example, charges $40 for combined local and long-distance phone service when consumers buy it as part of a bundle, and $10 more a month if they don't. That compares favorably with similar phone service packages offered by Verizon Communications and SBC Communications, costing about $60 and $49 respectively, said Gerry Campbell, senior vice president of operations for Time Warner Cable Voice Services.
Convenience is as important as cost.
"Most of our customers want a single bill: Internet, TV and video," Campbell said.
Cable companies are beginning to deploy new telephone services based on voice-over-IP technology, or VOIP, that could make their products even more competitive. Like the low-cost phone calls hundreds of thousands of consumers already make over the Internet, cable VOIP technology translates voice into a digital data stream. But cable's dedicated pipes -- upgraded to broadband at a cost of more than $80 billion over the last decade -- make for much higher quality and more reliable voice transmissions than often-sketchy Internet connections.
Those pipes give cable companies a potential advantage in the voice market over telephone companies because telcos have been slow to upgrade their traditional circuit-switched telephone systems, which rely on huge switches to route phone calls over dedicated copper wires to consumers. High-speed cable lines can carry voice, video and data in one pipe.
Cable companies are used to pounding Ma Bell. Consumers have flocked to high-speed cable modems in recent years, shrinking phone companies' customer base for dialup and DSL connections.
Of course, the telcos aren't just going to go quietly. They're upgrading their own communications pipes. And they're launching their own bundling campaigns, combining residential service, DSL and, in many cases, mobile service.
SBC upped the ante further last week when it announced a deal to bundle EchoStar Communications' Dish Network satellite TV service with SBC's voice, wireless and broadband offerings. The two companies also plan to create set-top boxes they claim will combine features of satellite TV, digital video recording, broadband, home networking and telecommunications services.
As Tom Nagel, Comcast's vice president for business development, acknowledged, "These competitors have very deep pockets and are increasingly getting more agitated."
