Let the dial tone competition begin.
Cable giant Comcast last Monday finally outlined its plans to roll out a digital telephone service, with a target of marketing the service to 15 million households by year-end and signing up 8 million customers by 2010.
In launching its aggressive deployment plan, Comcast, which boasts 21.5 million video subscribers, gave a significant boost to cable-based telephone service as the last of the major players to pursue telephony as a way to diversify its revenue base at a time when core video growth is slowing. It also stands to bring back to the cable sector some of the luster lost in recent years, thanks to a changing landscape that has left cable operators facing stiff competition on a number of fronts.
“We spent the last two years integrating the AT&T systems, improving margins from 20 percent to high-30 percent to 40 percent,” said Comcast Chairman and CEO Brian Roberts, who described the new service last week at a Smith Barney investors conference in Phoenix. “That was a huge priority that needed to be completed first.”
Comcast will introduce the service in 20 markets initially and hopes to have it available to the 40 million households in the Comcast footprint within 24 months.
Wall Street seemed pleased with the plans. After losing ground at the start of the year, Comcast shares all but erased those losses last week, and analysts are expecting the phone service to help Comcast continue its trend of double-digit revenue growth.
A big factor in that success rests on how Comcast went about setting up its phone service. While the technology relies on a format called Voice over Internet protocol, or VoIP, Comcast’s phone service actually doesn’t rely on the Web to move phone calls. Instead, the company said the bulk of the traveling by phone calls will take place on the vast network of Comcast, the largest cable operator in the United States.
(Specifically, calls made from one Comcast phone customer to another never leave the cable operator’s network; calls to non-Comcast customers travel as far on the company’s network as they can before being handled by networks owned by the local Regional Bell Operating Cos.)
Operating on a closed network will have two benefits for Comcast. Rian Wren, senior VP and general manager of Comcast’s phone effort, said that sending calls over a closed network helps enhance reliability of the service. Mr. Wren noted that many Internet phone services that rely on the Web to deliver calls are at the mercy of Web traffic, which can degrade the quality of calls if there’s congestion on the Internet; Comcast doesn’t suffer from that problem.
Another benefit is more financial. David Joyce, a media analyst at J.B. Hanauer & Co., noted that because Comcast is delivering its phone service over a network already in place, it will be easier for the company to achieve the 40 percent margins it’s forecasting for 2009.
Comcast’s move to offer VoIP service comes two years after it inherited a troubled telephone business as part of its purchase of cable systems owned by AT&T Broadband. Comcast is the last of the big-name cable companies in the United States to offer phone service.
Other cable operators, including Time Warner Cable and Cox Communications, have been offering a cable-based telephone service for more than a year, and Comcast’s entry is likely to step up the ongoing battle between cable operators and RBOCs, which are trying to change the game by deploying fiber technology capable of delivering video content to households.
Comcast for its part defended its last-to-market status, with Mr. Wren saying the company used the past two years to perfect the system, ensure its reliability and take advantage of next-generation gear, which is cheaper to buy and more reliable. Indeed, Comcast officials said a major selling point of the service, which will be offered for $39.95 a month, is the array of features available from day one, including enhanced 911, directory assistance and other services.
What’s more, Comcast said it is pressing ahead with plans to integrate the phone service with the video service, enabling such features as caller identification that pops up on a television screen when a call comes through and eventually video-conferencing.