CABLE OPERATORS DRAFT PLANS FOR VoIP TELEPHONY PUSH

Voice-over-IP is slowly winning cable's telephony holy war — even as the industry churns out profits using constant bit rate (CBR) switched technologies. Both vendor and operator executives made that clear last week as they outlined their plans for 2003 at two investor conferences.

“The fundamental [telephone] business is a great business and we love it. I hope some of my other colleagues will see their way to get there,” said Jim Robbins, president and CEO of Cox Communications, speaking at Salomon Smith Barney's 13th Annual Global Entertainment, Media and Telecommunications Conference in La Quinta, Calif. “It's not an easy business.”

That's why Robbins' colleague Brian Roberts, president and CEO of mega-operator Comcast, remains on the sidelines. Comcast became the biggest cable telephone provider in the world when it acquired AT&T Broadband's 1 million subscriber installed base of CBR users, but it immediately slammed the brakes on future subscriber growth.

“We're big believers that telephony will be a great opportunity, but we have decided to put our emphasis on the video side,” Roberts told investors at the same conference.

Comcast historically focuses on a single technology each year. This year it's video-on-demand (VOD), which gives the multiple systems operator the chance to perfect its next focus technology — probably VoIP — in 2004.

“We're very much learning about that business,” Roberts said, noting that VoIP will be part of what may become a video-driven IP movement. He also promised to revisit the subject in a year or two when Comcast reaches IP technology and the economics for it shape up.

Comcast, like all cable operators, must tweak its cable infrastructure before offering VoIP. DOCSIS 2.0 specifications that promise symmetrical speeds of up to 30 Mb/s — with products that comply with previous DOCSIS versions and that cost about the same — will play a large role in that this year. In fact, with the development of 2.0, cable vendors are decidedly optimistic heading into 2003.

So while Roberts speaks cautiously, he's pushing ahead with telephony plans, said Zaki Rakib, CEO of vendor Terayon Communication Systems, at the Fifth Annual Needham Growth Conference in New York City. “Don't misread him or misinterpret him,” Rakib said. “Telephony is an important initiative.”

Comcast, which buys equipment from Terayon, will purchase DOCSIS 2.0 cable modem termination systems (CMTS) and take a close look at cable modems that offer telephony via sidecar-like devices, Rakib said. “They are looking at what needs to be done when the trigger is pulled to offer telephony services,” Rakib said.

While Terayon claims catbird seat status with end-to-end DOCSIS 2.0 equipment, DOCSIS 1.1 also delivers VoIP, said Robert Stanzione, president and CEO of Arris.

Arris is the first provider of a complete DOCSIS 1.1 qualified VoIP solution for both the headend and the home, Stanzione told investors at the Needham conference.

Like Terayon, Arris can boast having Comcast as a customer. But unlike Terayon, it isn't something that gives Stanzione goose bumps. “The revenue opportunity for us in voice-over-IP is lower,” he said, noting CBR equipment costs $300 to $400 per subscriber and voice-over-IP would likely be two-thirds of that cost.

Arris also signed a five-year contract extension with Cox Communications, the industry's biggest CBR booster. Cox has more than 600,000 phone customers and the business will continue to grow, said Chris Bowick, chief technology officer of Cox, at the La Quinta conference. Bowick estimated the price of phone service at about $70 per line for a fully tapped-out switch. With the average customer taking 1.3 lines, that brings cost to about $90 per user.

“Ninety bucks to provide telephone service by the switch is not a lot of cost,” he said.

System power is the big differentiator, Bowick said, because today's VoIP relies on the end user for its power and is not a service for which the provider has to insure reliability.

Powering presents a dilemma for VoIP providers, agreed Tony Werner, senior vice president and chief technology officer of Liberty Media. While improved battery technology is proving no obstacle to VoIP rollouts in Europe, Werner winces when he thinks of his days as CTO of AT&T Broadband.

“I literally had calls from a lady in Fremont (Calif.) who said she was so nervous, that she would go out to the garage every hour to see if the light was still on in the battery,” Werner said. “It was a bit of a problem.”

“We're very bullish on voice-over-IP… but it's not ready for prime time,” Bowick added.

Cox's voice services are so popular that the company will face decisions this year to either add switches or decide if now is the time to go to soft switch technology, Bowick said. “To date, as I've made those decisions, I've said, ‘Nope, it's just simply not ready yet.’”

Vendors claim the groundwork is being laid to change that.

At that point, Roberts said, Comcast will build the service. “There are not many businesses where you can get $40 to $50 more per month without having to really rebuild your network at all. This is one of them.”

And when Comcast moves in that direction, the rest of the industry will follow.