THE BATTLE THAT COULD SPARK A VDSL REVOLUTION

The concept of sending video over copper typically has been met with lukewarm reception. But as cable companies get more aggressive in marketing to telcos' traditional customer base, incumbents may have to resort to the same tactics. Now carriers such as Qwest are turning to VDSL to challenge cable operators for their video customers. Could VDSL be poised for a turnaround?

It's just a spark right now — a tiny little glimmer in the Arizona desert — but it's enough to give very high bit rate DSL providers hope. Qwest Communications' experiment with video over copper in Phoenix is showing the first small signs of success. The carrier has taken away some of Cox Communications' video customers, and more important, it has managed to keep some of its traditional voice and data customers in the fold.

CABLE HOUSEHOLDS' DESIRE TO SWITCH PROVIDERS

The news is significant considering the opposite is happening around the rest of the country. Multiple system operators (MSOs) armed with fancy new digital networks have begun to push telephony and data through coaxial cable in earnest. Over the last three months, several MSOs have made a point of telling the investment community they are pursuing the Bell companies' traditional customer base.

And it seems to be working. Among numerous announcements, Cox reported significant increases in its digital voice subscribers since the first quarter, while AT&T Broadband stated that 70% of its cable plant was ready for digital in July.

Now VDSL advocates are counting on MSOs' new aggressiveness as well as Qwest's initial deployments to spur a VDSL revolution — a revolution they've been talking up for years but have so far failed to realize.

Next Level Communications, VDSL's primary equipment vendor, is giving the Bell companies a year to begin seriously churning out the technology. According to the vendor, the Bells simply have no choice with their lifeblood voice and data revenues threatened.

“The cable companies are making their successes known,” said Geoff Burke, director of marketing services for Next Level. “This situation only occurred in the last few months. The cable companies have not been able to offer digital services until now. They just spent $50 billion upgrading their networks. They need to pay back those debts.” And they will do that by bundling telephony and video services, he said.

Next Level estimates the MSOs are now bringing in almost $3 billion in voice and data revenues. Conversely, incumbents could tap $7 billion in video revenues if they ventured into cable's hollowed turf.

“That's a $10 billion swing there,” said Jeff Barnell, Next Level's senior vice president of marketing. “Telcos are looking for answers. Well, VDSL is the answer. They have to bundle services and beat cable at its own game.”

Qwest's Arizona spark is a bit of an enigma. The service provider-turned-RBOC is still a long way from being a major player in the video arena, but it does seem to be enjoying some initial success in its two launch markets, Denver and Phoenix.

The carrier has 50,000 customers between the two cities, most of them in the Phoenix suburbs. It's offering VDSL 5000 feet from the remote terminal at data rates of 22 Mb/s. Qwest subdivides that pipe into three 5 Mb/s video streams and leaves the remainder for voice and data service. Standard packages start at $70 to $80 per month for video, voice and high-speed Internet, prices competitive with standard cable video, voice and modem packages.

But Qwest is being mysterious about its future plans for the technology. Its initial hesitancy over VDSL was its extreme installation and equipment costs, but Next Level has cut those costs by 40% to 50%. Though Qwest enjoyed some initial success selling bundled services before Cox finished upgrading its cable plant in Phoenix, Qwest is not actively marketing its video offering, selling only through word-of-mouth.

Chris Coles, Qwest's executive vice president and chief operating officer of Internet solutions for Qwest, explained that the carrier still is trying to push costs lower and address the technical and environmental challenges of deploying a new technology. “Right now we're trying to figure out at what level it makes sense to proceed with a wider deployment,” Coles said. “We're balancing these questions with a set of engineering trade-offs.”

According to Yankee Group analyst Ryan Jones, Qwest is closer to a major rollout than it lets on. He expects an announcement in the next year. The other Bell companies will follow, but it won't be the revolution Next Level is predicting, Jones said. While a perfectly viable technology, VDSL still has a while to incubate, and its birth as a major cable alternative isn't due for another few years.

“This fight's coming later down the road,” Jones said. “From an execution standpoint, VDSL will be slow to roll out. What you're going to see is the small companies — guys with 5000 lines or less — roll out VDSL, along with Qwest. The rest will watch, and eventually the SBCs and Verizons will follow.”

The cable industry appears unfazed that VDSL is roaming its stomping grounds. The National Cable and Telecommunications Association said MSOs already have made leaps in upgrading their analog cable plants for bundled offerings, far more than carriers have done to prepare their copper networks for video.

The fact that telcos are even considering taking on the MSOs shows that the cable industry has done a good job of luring away customers, said Mark Smith, senior director of NCTA communications. “It just buttresses our point of view that this is a brave new world,” Smith said. “It's the beauty of competition. We still think we have the better architecture.”

Smith added that the Bell companies still have to prove they can sustain any widespread deployment of video over DSL — and they don't exactly have the greatest track record. Smith pointed out that DSL was a viable technology a decade before the Bell companies began deploying it.

The cable industry has faced challenges from other technologies in the past — most notably digital broadcast satellite (DBS) — and has managed to stave them off. Yankee Group figures for 2000 show 70 million cable households vs. 16 million DBS households in the U.S., and a good deal of those DBS households are in rural areas where cable isn't available, Jones pointed out. “Taking market share away from established players is very difficult,” he said.

But the telcos do have a few factors on their side, the most important being their automatic “in” to every potential customer: The vast majority of Americans have a telephone. The cable industry also suffers a bad rap from years of poor service. While the cable industry has improved its track record greatly in recent years, popular perception takes longer to change, Jones said.

Those factors are reflected in a survey by The Yankee Group that found 50% of people who want bundled voice, data and video would rather get it from the local phone company, as opposed to 25% who wanted the same services from the local cable company and 25% who preferred a different company altogether.

Telcos also have technology on their side. The Bell company networks inherently are more accepting to next-gen services because they are data-centric in their design. The cable companies spent years retrofitting their networks to get their analog plants ready to accept data and other next-generation services, Jones said.

Aside from cost, perhaps the biggest obstacle holding back the Bell companies is their lack of knowledge about the industry, Jones said.

“For the RBOCs and ILECs, data and voice revenues are eroding, and they have to find a way to recapture them,” Jones said. “They may not be ready to become cable companies, but they are going to have to be.”