How cable can do it again: A primer for MSOs entering the telephony market

Cable companies, often branded as intransigent, monopolistic dinosaurs when it comes to delivering paid programming to homes, are considered to be fast-moving, competitive beasts in the broadband market. Why? Because MSOs, as a group, made a commitment to customer service, reliability and differentiation when they embarked on providing Internet services to the residential market.

Can the successes that allowed AOL Time Warner, AT&T Broadband and other MSOs to dominate the start-up high-speed Internet access market be replicated as these behemoths move into voice services? Or will "genetic pre-programming" dictate cable's entry into voice and keep telecom as the playground of the Bells, CLECs and wireless carriers?  Only time will tell, but here are a few rules of engagement if cable prefers the former rather than the latter.

Simplified customer service

Residential subscribers have little patience for confusing IVRs and Byzantine rules associated with signing up for new services. Making communications simple should be the driving vision behind cable's entry into telephony. A great deal of cable's success in the broadband market is due to an almost industrywide commitment to handling Internet services differently from programming. Simplification of the offer is a good start, but more importantly, cable companies must ensure that getting service is easy. Nothing is simpler than doing nothing with your local phone service and the Bell's hitherto successful foray into bundled services is a potential noose around the necks of anyone hoping to sell services to households. However, there is an opportunity for cable companies if they can provide a compelling reason to switch.

Reasons to switch

Residential customers, by their very nature, tend to be slow to tinker with changing their service providers. Only when a trusted brand name provider offers them lower prices and/or better services do they tend to make the leap. Look at the successes of SBC Communications, BellSouth and Verizon in the residential long-distance market in the wake of their successful 271 applications. The Eastern Management Group research shows that RBOCs garner 22% of the long-distance market within 12 months of entering the market. How are they doing this? By using a strong brand name and a billing relationship with the customer as a base and providing a compelling product offering based on:

1. Simplicity in billing/customer care/etc.

2. Lower prices

3. Innovative service packages.

Cable companies possess many of the same advantages as they move into new markets such as telephony. 

Provide reliability of service

Cable companies continue to hedge on the ability of VoIP to reach the levels of reliability associated with either traditional voice services or packet-switched cable telephony a la AT&T Broadband. Continuing the hard work of establishing technology standards is critical, as the cable line becomes a viable alternative to copper and fiber for residential communications services. Impeccable operations support systems (OSSs) are also vital to the success of cable telephony, and the OSS industry has begun to shift much of its focus toward MSOs, but we still aren't there yet. Cable telephony is still considered "experimental," not just by the software makers, but the industry at large. For consumers to trust phone service over their cable lines, more work needs to be done convincing the stakeholders that this is a viable technology. This, at a minimum, is going to require closer cooperation between cable and software providers.

Bundling

Creating a walled garden is an essential part of survival in this industry. The lessons of the telecom debacle show us that maintaining customer loyalty and marginalizing your competitor's offers are keys to success. Cable companies can take a page from Verizon's book. The communications giant is quickly establishing itself as a leader in bundling services to consumers. By providing converged billing to the customer and developing a world-class OSS to track customers' use of (read loyalty to) the package, the company has successfully "locked in" much of its residential base in states where it has achieved long-distance approval. Cable has some natural advantages and can "bring the heat" when it comes to online gaming, movies on demand and other entertainment products that are terra incognita for the phone companies. But the wireless component is and will remain cable's Achilles heel. However, the continuing consumer trend in wireless to switch providers on a whim may ultimately negate much this sector's strategic importance in the bundling realm. 

Parting thoughts

Intermodal competition between cable and telecom is the future of the residential sector, and both industries are gearing up for the fight. However, Big Cable continues to send mixed messages about its willingness to dive into the telecom sphere. Consumers will come around en masse when, and only when, the MSOs make a major commitment to deployment, as AT&T and WorldCom have done in the local telecom space and the Bells have in accomplished in long-distance. Until that point, early adapters will be the norm.  We haven't crossed the chasm yet, but something tells me that 2003 is going to be the year that cable telephony makes the leap.

Robert A. Saunders is a senior analyst with The Eastern Management Group Inc., a management consulting firm focused exclusively on the communications industry. He can be reached at rsaunders@easternmanagement.com.