The Cable Guy revisited

“Cable guuuuyyy!!!” Does this sound familiar? Well, maybe not, unless you’ve seen Jim Carey in “The Cable Guy.” But all the same, more and more residential cable television customers are receiving visits from their local cable company’s technicians, who are converting their existing customers from an analog service to a digital one. More importantly, cable operators are selling bundled broadband cable Internet service as part of this new digital conversion, and offering their customers tiered Internet bandwidth services and one simple bill. The next step for cable operators, or multiple system operators (MSOs), as they are called in the industry, is to enable their networks for packetized voice communications that will allow them to offer voice services. Indeed, MSOs are the new CLECs of the 21st century.

MSOs have some distinct advantages over traditional telephone companies in offering data, voice and video services (also known as “triple play” services). These telephone companies mainly comprise RBOCs, IXCs, independent operating companies and CLECs. The most obvious advantage is that the MSOs’ legacy business is in providing video services, which the telephone companies are struggling to offer and understand. The MSOs also have the upper hand in providing basic broadband Internet service to residential customers, since they don’t have the same regulatory constraints that are undermining the RBOCs (the largest providers of DSL), and they don’t have the central-office-to-subscriber distance limitations that all DSL providers must contend with. However, the MSOs are not without their challenges, including customer service and the technical issues of implementing packetized voice services with quality of service (QoS).

Some MSOs, such as Cox Communications, are ahead of the curve compared to their peers, and have already voice enabled their networks with time division multiplexing Class 4 and Class 5 circuit-switched voice equipment for local and long-distance services. Cox reported 651,000 telephone customers at the end of Q3 2002, representing a 17% penetration of telephony-ready homes passed. Also at the end of 3Q 2002, nearly 1.3 million customers subscribed to Cox High-Speed Internet, representing a 13% penetration of data-ready homes passed. These Internet and telephone subscribers are all potential customers for next-generation voice services that will run over a packet-enabled network that Cox plans to start building in the near future. The ultimate destiny for Cox’s customers will be a complete bundled offering of data, voice and video services; bundling is the primary driver for subscriber growth, product success and unified billing.

Other MSOs have recently been involved in cable/dial-up M&A activity, with AOL, AT&T Broadband and Comcast coming to terms on a restructuring deal in late August 2002. The final agreement will allow AOL Time Warner to prepare an IPO of its new company Time Warner Cable, the proceeds of which could provide capital for other cable system acquisitions. In addition, AOL Time Warner will gain full control of content assets previously held by Time Warner Entertainment, and access to more than 10 million AT&T Comcast cable subscribers. It looks as though AOL Time Warner is aligning its dial-up subscriber base with its newly found content and cable assets and is positioning to migrate millions of dial-up Internet users to broadband cable modem accounts.

On the vendor front, cable equipment manufacturers have outlined a migration path for MSOs to upgrade their plants for triple-play services. CableLabs, the non-profit research and development consortium, is driving new interoperable, standards-based cable telecommunications technologies for residential and commercial delivery of data, audio, voice and video. While the DOCSIS standard addresses high-speed data distribution, PacketCable and CableHome are the initiatives aiming to provide IP telephony and multimedia delivery over MSOs’ cable plants. Heavyweight vendors, such as Cisco and Motorola, are counting on the CableLabs vision to help them sell to MSOs that are driving the existing residential broadband cable growth, and that wish to tap into a new commercial market that contains approximately 6 to 8 million businesses passed by their coaxial cable networks.

Two things are clear: Broadband Internet access is here to stay, and broadband cable subscriber numbers are consistently growing between 10% and 15% per quarter in North America. While North America DSL subscriber numbers maintain the same growth rates as broadband cable subscriber numbers, the MSOs appear to have a slight advantage over the RBOCs and IXCs in terms of rolling out triple-play services. In addition to the reasons mentioned above, MSOs do not have the same convoluted legacy voice and data networks that telcos have built over the decades, and their capital expenditure budgets have not proportionally decreased as dramatically as telco capital expenditure budgets.

In the end, residential and commercial customers want the same things: reliable, affordable, easy-to-use products and services. Buyer prepare: Here comes the cable guy!

Jon Cordova is Directing Analyst, Access Networks, for Infonetics Research. E-mail him at jon@infonetics.com.