In recent years, Comcast has become both the nation's largest operator of cable TV systems and its biggest provider of high-speed Internet service. Now it's looking to fully tap into the potential of a related but rival industry.
In a presentation to the news media last week, Philadelphia-based Comcast unveiled some of its still-fluid strategy for winning the phone business from the regional Bell operating companies. And, addressing some of the investor concerns that have driven down cable stocks in recent months, a Comcast executive insisted that the threat of telcos stealing cable operators' video business was overblown.
The attention Comcast and other cable operators are paying to the telephone business illustrates one of the great unanswered questions for investors trying to value the cable business. Like high-speed Internet service and digital video services, Internet-style telephony represents a huge potential revenue stream for Comcast. Yet with Comcast now providing the next-generation service to only a few hundred homes, the success of such a rollout -- and its impact on Comcast's cash flow -- remains unknown.
On Friday, the stock rose 4 cents to $27.87.
Comcast, which has 21.5 million subscribers to its basic video service nationwide, was testing its next-generation telephone service in 650 households as of last week, said Rian Wren, Comcast Cable's general manager of telephony.
The company, which expects to roll out this telephone service in earnest next year, plans to have 50% of its plant ready to go by the end of 2004, and 95% by the end of 2005.
Comcast is already in the telephone business, delivering phone service to 1.2 million households in systems that Comcast acquired from
in late 2002. The cable operator
, which launched its phone service in 1997, offers telephone service to more than one million home and business customers.
But unlike Cox's service, and unlike the AT&T-initiated service (which Comcast has ceased marketing), Comcast's new service relies on Internet technology to communicate over Comcast's cable network. Like other new services, Comcast's system is referred to as VoIP, for "voice over Internet protocol," though in Comcast's case, calls don't actually travel over the Internet.
Using VoIP, says Comcast, will enable the company to offer something better than the service now available through the Regional Bell Operating Companies, or RBOCs. That, they say, is preferable to simply duplicating RBOC service, or offering nearly-as-good service at a lower price.
As of last week, Comcast had 450 users of VoIP telephony in the western suburbs of Philadelphia and an added 200 in a Comcast system in Indianapolis, according to Wren. A third test area in Springfield, Mass., went live one week earlier. Virtually all the users are Comcast employees; the areas in the trials, he said, cover areas with over a million potential subscribing households.
The service the company is testing, Wren said, is the equivalent of basic telephone service. The customers in Pennsylvania and Indianapolis receive their telephone, data and video charges in a single bill. A backup battery preserves service for eight hours after a power failure. Customers can keep their previous phone number when they sign up for service with Comcast.
Sky's the Limit
But that's just for starters. In a hint of future services Comcast would offer, Wren showed a rough prototype of a message center that customers could access through their Comcast.net online portal. A variation on a Web-based email account, the message center would log not only incoming email, but also information about phone calls and faxes. If a phone caller, for example, left a message in voice mail, the Comcast customer could listen to the message at the computer by clicking on the entry in the call log.
Other elements of the message center would make it easy to instant-message a caller who had phoned earlier, or call back that person by clicking on his or her name onscreen. Users might also be able to selectively put their home phone in a "Do Not Disturb" mode, letting only certain callers through while shunting the rest to voice mail.
"We may be taking our time, but we are doing it deliberately," Wren said.
While Comcast plans to have half of its footprint ready for VoIP by the end of the year, the company hasn't decided exactly what half it will be. But it will probably include areas where Comcast offers the telephone service inherited from AT&T. To provide that service, Wren said, Comcast still leases equipment from AT&T. "We think we could do better by controlling our own technology," he said.
The nature of any VoIP rollout, Wren said -- such as to what extent the company enters new phone territories rather than old ones, and exactly how it markets the service -- is also not set. That will depend on such elements as the lessons learned from the current trials, and the 2005 budgeting process, which starts this summer. "The plans are not developed just yet," he said.
Ah, the Check
Although Comcast isn't saying how much it will be spending on a telephone rollout, the company keeps saying that, as it finishes upgrading its plant, the bulk of its capital expenditures are behind it. The capex spending forecast for 2004 is in the range of $3.3 billion to $3.4 billion, down about $800 million from last year.
Also at the media presentation, Comcast Cable President Steve Burke indicated that the risk of retribution to Comcast of going into the phone business was overblown.
"It's very easy for people to say, cable companies go into phone, phone companies have to go into cable," Burke said. "Whereas a phone company has to go out and spend tens of billions of dollars to put in place an infrastructure that can deliver video in addition to voice and data, we've already made the investment. So for us to sell a
customer phone service costs us under $300. For Verizon to offer a customer fiber to the home costs in the thousands.
"I think it's very simplistic to say, 'Cable is coming into phone, phone companies are coming into cable, and they're going to kill each other,'" Burke added. "I would be very surprised if that happens."