Thanks to this year's most talked-about new technology, the cable man will be ringing doorbells to pitch a new offering: telephone service. But getting a foot in the door may prove trickier than investors expect.The phenomenon that threatens to crash the gates of telephone companies is known as voice over Internet protocol, or VoIP. Proponents have proclaimed that this development will remake the landscape, giving big cable TV companies such as Comcast ( CMCSA), Cox ( COX) and Time Warner ( TWX) the final leg of a triple threat -- the ability to offer consumers television, Internet and now telephone service together, cheaply and reliably. The cable companies are racing to show investors that they're riding the VoIP wave. Comcast says it hopes to be selling phone service to 40 million customers in 2006. Time Warner says that just this month, it extended its own offering to a 10th city, Houston. And just this week, Cablevision ( CVC) rang a few bells by announcing it would offer new customers cable, Internet and phone service for $90 a month. The one-year promotional price effectively charges standard prices for TV and cable modem service and throws in phone services for free. Wall Street has been swept up in the frenzy, viewing the march of cable as another stake in the heart of the regional Bell phone companies. The cable sector's expansion plans are unmistakably aimed at a market dominated by local phone titans Verizon ( VZ), SBC ( SBC) and BellSouth ( BLS). Some observers have gone so far as to compare VoIP to the early days of cell phones, which continue to be the paramount threat to the Bells' livelihoods. But beyond the screaming headlines, some hard facts suggest that the so-called VoIP revolution is a long way from victory. The number of actual VoIP users remains minuscule, despite strong growth this year. (See charts on the next page.) Service quality falls far short of the phone industry standard, reducing its appeal. The cost advantage could be fleeting as cash-strapped states consider new tax measures. Most strikingly, even VoIP's much-ballyhooed technological advantage is a slippery subject. For now, most of the cable industry's phone offerings rely on the very same century-old copper-wire system that they are reputed to make obsolete. Nearly all Net calls at some point must hitch a ride on the phone networks to make a connection. Indeed, while the perceived threat of VoIP has cast some shadows over the Bells, it hasn't done much to lift the shares of cable operators. For the year, the Bells are down an average of 8%, but big cable outfits Comcast, Cox and Cablevision are down about twice as much. According to a recent Smith Barney report, the cable sector's stock performance this year has lagged the S&P 500 by 10%.
Waiting for a RepeatVoIP's potential -- as well as its pitfalls -- lies in how it works. Unlike ordinary phone calls, which require a dedicated circuit all the way from the caller's phone to the person on the other end, VoIP calls are sent in what's known as electronic packets. These envelopes of computer coding contain bits of conversation stamped with "from" and "to" addresses. Packets enter the stream of the public Internet where bits of email and Web images and mp3 files are coursing around the world. These small segments of VoIP conversations get routed over the Net, on to a phone network, and, if the other caller has VoIP, back over the Net, where they usually arrive in sequence. Theoretically, the system offers the prospect of great flexibility and lower costs by using the ubiquity of the Internet to bypass the phone networks and the attendant access charges. The cable operators have made strides in adapting their offerings to consumers' needs. Systems such as Cablevision's ( CVC) Optimum Voice enable users to plug standard phones into a cable modem or a service-enabled wall jack. That said, at this early stage in the medium's development, the process is far from trouble-free. VoIP is a little like sticking a letter in a mailbox and expecting flawless same-day delivery. Some packets can get mangled or lost at various network bottlenecks. Early VoIP efforts were marred by poor service quality. The advent of fast Net connections and a greater reliance on telco pathways have helped improve the service, but a gap still yawns between gold-standard regular phone service and VoIP. Even VoIP phenom Vonage, which sells unlimited broadband calling for about $30 a month, relies on several telco partners to connect its customers' calls.
|Heavy Toll |
Competition gains ground at Bells' expense
|*FCC figures as of June 2003. **Verizon, SBC, BellSouth and Qwest. ***AT&T and MCI. Source: Federal Communications Commission, Cellular Telecommunications & Internet Association|
|Ringing Endorsement? |
Upstart technologies start to catch on
|*Figures included in cable phone user count. Source: Companies, In-Stat/MDR.|
|Just a Sliver |
Cable phone use remains but a fraction of the market
|*FCC figures as of June 2003. Source: Federal Communications Commission, Cellular Telecommunications and Internet Association|