Cablevision's Troubling Bundle

Updated from 10:07 a.m. EDT

Cablevision's (CVC Quote) decision to pack phone service into its bundle of TV and Internet offerings had a few analysts fretting about a price war Monday.

The nation's No. 6 cable company is offering a so-called triple play of video, voice and fast Internet access for $30 apiece, or $90 a month. The promotion was advertised over the weekend and is only available to people in the Cablevision service region -- primarily the suburban New York area -- who are not already subscribers.

The $90 offer represents a steep price cut below Cablevision's current charges for the three services. In fact, if each service was purchased separately, the total bill would be about $130 a month. The company says it will honor the price for one year, and after that it will "be stepped up, but still discounted," said a company representative.

Analysts and investors have long predicted that once cable companies started offering phone service, they could effectively compete for the customers of the local phone giants -- Verizon (VZ Quote), SBC (SBC Quote) and BellSouth (BLS Quote).

In anticipation of greater phone competition, some of the Bells, such as SBC and BellSouth, have partnered with satellite-TV broadcasters to sell video programming along with phone and Internet services.

Cablevision has signed on 100,000 subscribers to its phone service, according to ABI Research. The company uses voice-over-Internet-protocol, or VoIP, technology. Unlike conventional phone service, which sets up a dedicated line between callers, a VoIP conversation is sliced into data packets and sent via the Internet for a portion of the call route.

The Cablevision VoIP service requires a new phone number and does not have uninterrupted power like the Bells. That means phone service is interrupted whenever there is a power outage.

The offer seems aimed not only at the Bells, but at closely held VoIP upstart Vonage, which offers unlimited calling plans to broadband customers for $30 a month.

Each of the Bells are preparing plans to offer VoIP services in some markets. And the nation's largest long distance phone company, AT&T (T Quote), sells an unlimited VoIP service for $35 per month.

Cablevision's price cuts got analysts to debating Monday whether all the cash flow is being sucked out of the VoIP business.

"It appears that VoIP pricing is declining even faster than we expected, thanks to Cablevision," wrote Fulcrum Global Partners' Richard Greenfield.

VoIP won't be a meaningful driver of revenue and cash flow on its own, says Greenfield, though bundling it with video and data services will help cable operators lower subscriber defections, increasing total revenue and earnings before interest, taxes, depreciation and amortization.

But the biggest potential problem, says Greenfield, is telcos' competitive response. They will likely lower prices on high-speed data and resold satellite video products, he says. "It just feels like a price war will inevitably suck margins and free cash flow out of the cable industry."

Banc of America's Doug Shapiro, however, suggests the impact of Cablevision's move will be minimal. While the promotion is aggressive, he says, it's only $15 per month lower in the first few months than the operator's previous similar offer. Because of its limitations, the offer would affect only about 5% of Cablevision's subscriber based, he calculates. Because of Cablevision's limited size, the discounting is unlikely to prompt a response from telcos, he says. And other cable operators are unlikely to be as aggressive.

"The news won't help reverse the perception that cable and the Bells are running headlong down the path of mutual destruction, but we think this move will actually impact only a small proportion of Cablevision's sub base and, in any case, we don't think Cablevision is indicative of the rest of the industry," writes Shapiro.

"More generally, while it is increasingly becoming the consensus, we continue to think the idea that the two industries will systematically drive each others' returns to zero is the easy conclusion, but is overly simplistic," he adds.

Shapiro has a buy rating on Cablevision and a $34 price target; his firm has received investment banking compensation from Cablevision within the past year.