Voice-Over-Net Calling Out to Cable Sector

But some analysts doubt returns are as easy or as quick as fans would like to claim.
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Cable TV operators may wring some money from telephone service this year, but don't overestimate how easy it's going to be.

That's what one analyst advises, saying that investors' expectations may be getting out of hand for new telephony-over-cable offerings based on technology known as "voice-over-Internet protocol."

"People are assuming a bit too much from the cable operators in the voice-over-IP rollout," says Alan Bezoza, cable and broadband analyst for Friedman Billings Ramsey. "I think the jury is still out."

Cable operators have been offering phone service over their networks for years -- notably

Cox

(COX)

and the

AT&T Broadband

systems acquired in late 2002 by

Comcast

(CMCSA) - Get Report

.

Increasingly, however, these and other cable operators are talking about using a new technology behind the telephony -- making the transition from what's called "circuit-switched" technology to VoIP, which piggybacks onto the broadband data infrastructure of cable operators' upgraded networks.

VoIP enables cable companies to offer telephone service over their networks with minimal expense. That translates, they say, into additional advanced services revenue. In addition, they say, telephone service alongside video and data service fosters increasing loyalty among customers, since the more products a household signs up for the less likely it is to drop service, or churn.

In recent months, both large and small publicly traded cable operators have talked about rollouts of VoIP. Citing poor economics, Comcast -- the nation's largest operator of cable TV systems -- is making no effort to expand the circuit-switched service it inherited from AT&T. But the company says it will test VoIP in four states this year, and is hopeful it will expand it in 2005.

Mediacom

(MCCC)

, saying VoIP has "huge potential," plans to launch it in the second half of the year.

Cablevision

(CVC)

has already launched its VoIP.

And

Time Warner

(TWX)

says it plans to roll out VoIP beyond its test market of Portland, Maine, to nearly all of its systems in 2004. The company said last month that 7% of Portland cable subscribers had signed up for the service in a matter of months.

While cable stocks have been rising steadily over the past year, Bezoza attributes the most recent run-up to Time Warner's encouraging commentary about how VoIP has fared in Portland.

But Bezoza says that much of the outlook for cable telephony these days ignores the difficulties that a telephony rollout entails.

While Cox has had success with telephony, "it wasn't fun at the beginning" for them, he says. "They had a lot of issues."

The reasons Cox succeeded, he says, relate to "their customer service, their brand name, and their continued focus on maintaining the utmost quality and reputation. ... I'm still skeptical that other operators who approach VoIP as a tertiary business can be successful." Cablevision, for example, doesn't have as strong a reputation as Cox, says Bezoza. (He has an outperform rating on Cox and a market perform rating on Cablevision; his firm hasn't done banking for either company.)

Also important to consider, he says, is that -- in contrast to multichannel video and high-speed data -- telephony is the first service that cable is deploying that is not a "greenfield" business. "They're going after somebody else's business." The regional bell operating companies, says Bezoza, "aren't going to sit there and watch their lunch get eaten."

Among the issues that cable operators will have to contend with, he says, are billing systems and the cost of provisioning service. "I think the product has merit, but you can't cut corners when talking about land-line voice services," he says.

It's key for operators that telephony cuts down churn the way it has for Cox, Bezoza says. "At the end of the day, voice needs to be a defensive as well as an offensive deployment," he says. "If it's not lowering the churn rates, then it's not doing what it's supposed to do."

As for what Bezoza is waiting to hear operators say about VoIP during the coming weeks' earnings announcement and conference calls, he responds that he'd like to hear more about actual deployment and results, rather than plans. "I'd love to see more walk and less talk," he says.