Telcos in Battle to Regain Share

Apr 12, 2004  •  Post A Comment

After spending much of 2003 in the shadow of cable operators, old-line telephone companies have started to fight back.
Spurred by a loss of market share brought on by cable’s so-called triple play of bundled video, voice and data services, Regional Bell Operating Companies have stepped up their efforts to staunch cable’s growth, offering their own version of the triple play, and in some cases a quadruple play, which throws wireless into the mix.
By forming alliances with satellite operators, such as Verizon Communication’s pact with DirecTV Group and SBC Communications’ partnership with EchoStar Communications, the telcos are attempting to beat cable at its own game while at the same time acknowledging that the only way to retain customers is to broaden the kinds of services offered to them.
Another strategy being explored is the wiring of new homes and offices with fiber-optic lines that could eventually carry voice, data and video. Though keen on the prospect of not having to share the fiber that they would install, analysts said fiber as a dominant tool to deliver video is probably years away, given the expense involved and most telcos’ heavy debt load, and thus will be deployed in selected markets in the near term.
At the heart of either strategy is the belief that the more ties to a customer a company has, the more difficult it is for the customer to leave.
Adi Kishore, a media analyst at The Yankee Group in Boston, attributed the interest in bundling and triple plays to the success that cable operator Cox Communications has had in packaging its video, data and voice services.
“This is the beginning of the dawning of perhaps not a multichannel video game, but a triple-play game,” he said. “The reason you are seeing a lot more interest and attention in it is that Cox has proven the value of bundling.”
He added that the package offered by the RBOCs could be particularly compelling since its bundled services can be consolidated into a single monthly bill-something the cable companies have yet to achieve, he said.
To be sure, the telcos have tried before to play in the video space, striking similar alliances with satellite operators as well as developing their own proprietary video services (including high-profile failures such as Tele-TV and Americast in the 1990s), but analysts pointed out that the circumstances this time around are different-and the stakes are higher.
Among the challenges facing telcos: A rising number of households dropping their wireline service in favor of cellular phones; long-distance carriers MCI and AT&T beginning to offer local telephone service; and a growing number of customers switching to broadband and dropping the second phone lines used for dial-up service.
Though the telcos were the first to offer broadband service in the form of digital subscriber lines, their tepid commitment to it early on gave cable an opportunity to dominate the space. Now cable modems account for nearly two-thirds of all homes with broadband access, though the telcos’ recent price drops have helped fuel DSL growth in recent months.
Most recently, cable operators have begun rolling out telephony services, offering unlimited local and long distance for less than $40 a month, which, if successful, could accelerate wireline customer losses.
If the telcos can make these partnerships work, it could blunt cable’s growth trajectory, said Credit Suisse First Boston analyst Lara Warner, who predicted the telco-satellite alliances already in place could put pressure on basic cable subscriber growth starting in the second quarter.
The SBC-EchoStar alliance has drawn the most interest among analysts, mainly because of $500 million investment SBC made in EchoStar made last fall, at the time the two companies announced their joint venture. Under the terms of the SBC-EchoStar pact, the two companies agreed to create a seamless customer experience so that one call to SBC could handle issues related to the video, voice or data services.
Mr. Kishore called it “the best model for a satellite-telco relationship,” and said its success will determine how deep other telco-satellite relationships go. Among the steps being explored, he said, is a set-top box that features a DSL modem inside, enabling the joint venture to offer video-on-demand.
“The others [telcos] are more serious, but SBC is really the one that is there,” he said.
While pricing varies, the satellite-telco ventures are generally undercutting similar packages offered by cable. For example, Verizon’s bundled service in Rhode Island goes for around $118 a month, $10 less than a comparable plan offered by Cox.
Verizon has since expanded the triple-play package to seven more states. SBC, meanwhile, is heavily promoting its service in its markets and is even including a 20 percent discount when cellular service from any provider is included in the bundle.