Cable's crown jewel

European cable operators are providing a road map to telephony service, though data service lags behind voice.

Names such as NTL, A2000, Telewest and UPC may not be familiar to many U.S. cable operators. But if AT&T Broadband and Internet Services, Cox Communications and Comcast want to peer into the near future, they probably should take a closer look at these European cable operators, all of which have been deploying cable telephony for several years.

Although the European operators' experience certainly is far from a runaway success, the knowledge they offer could serve as a valuable road map to their stateside counterparts that are about to launch voice services. At the same time, European operators have trailed far behind their U.S. brethren in deploying Internet access and other data services.

Kings of cable telephony

Nowhere is the difference between the U.S. and Europe more marked than in the U.K., where cable telephony got its first big push in the mid-1990s and where cable operators have met their biggest successes. "The Future of the Local Loop," a recent report from research firm Ovum Communications, says that many U.K. cable operators now generate more revenue from voice services than from video. Indeed, according to that report, U.K. operators will continue to spend more capital on - and generate more revenue from - cable telephony than video services in the foreseeable future.

"It happened in the U.K. because the law was set up to encourage it, and the regulators deliberately gave the cable companies good opportunities," says Tim Johnson, an analyst with Ovum. For example, NTL, one of the U.K.'s largest cable operators, has a residential telephony penetration level of 43%, according to its latest reported numbers. Moreover, the company recently used a cash infusion from France Telecom to acquire Cable & Wireless' consumer operations and expand its own footprint. The deal gives NTL access to about 2.8 million homes - more than half of the U.K.'s total cable homes, including most of metropolitan London.

However, other analysts and manufacturers point to factors besides regulation for the U.K. operator's success. One is technology.

"The U.K. is slightly different from the rest of Europe, and in fact, the rest of the world, in terms of [cable] telephony. The U.K. has some of the newest cable plant and, as a result, has benefited from the better technology," says Howard Seddon, director of operations for Africa, Europe and the Middle East for Motorola's multimedia group. Motorola claims Telenet in Brussels, Belgium, as its biggest cable telephony customer.

Key to the technology is "Siamese" cable, which allows operators to install coax and copper twisted pair cables side by side. And because most cable operators did not begin installing much of their base coax networks until well into the '90s, they were able to hit the street with a bundled package of voice, video and, in some cases, data services. The result: a platform with significantly lower costs and lower prices than incumbents.

"In the U.K., you can pay 20 Pounds per month to get your voice services from BT. From Telewest or NTL, you would pay 15 Pounds but would get the bundle," says Ham Matthews, director of marketing for ADC Telecommunications' broadband network division, which has announced cable telephony contracts with operators in Germany, Spain, Sweden and the U.K. "They've collapsed the operational core of these three services," he says. More important to competitors entering new markets as the underdog, "they've seen the churn start to drop through the floor."

Indeed, because BT had operated as a monopoly for so long, many cable operators have been able to base their pitch solely on price, says Johnson of Ovum. "A lot of people are taking just telephony because it's so cheap."

Of course, like any new market, the U.K. cable telephony space has encountered several bumps, particularly with customer service. In his own internal survey of cable telephony users, Johnson found several examples of operators simply miscommunicating with customers or mishandling operations, including one instance in which it took three months to change the name on a bill.

In addition, as BT has begun responding to its rapid ascent, the cable telephony business case has become harder to sell to investors.

Whether the same early success and strategy can be exported to other countries also remains an open-ended question. Across the rest of Europe, cable telephony deployments vary much more, depending on regulation, overall teledensity and the condition of PTT networks. In general, northern European countries have environments that are more friendly to competitive voice service than southern Europe, with the notable exception of Spain, Johnson says. But that won't stop cable operators from pouring money into voice services, where they see opportunity to undercut incumbents (Figure 1).

IP enters the game

Perhaps the biggest factor in determining the success of European cable telephony is the arrival of technology that lets operators deploy both cable modems and IP voice on the same platform. Cable operators, regardless of location, have a much easier time justifying investment in a technology if it can deliver more than a single revenue stream.

"Most everyone is waiting for voice over IP [with regard] to telephony," says Hans VanderBoon, vice president of Philips Broadband Networks' European operations. "Right now, the priority is Internet access. This would seem to be a completely different service, though in the future, operators will begin to market packages."

Analysts seem to agree. A report published last month by IDC pegged the European IP voice market at $2.3 billion by 2003.

The European market can be divided along several lines of influence, including British, French and German, says ADC's Matthews. Of the three, the British-influenced markets are furthest along with circuit-switched voice, while the French-influenced markets show the greatest interest in IP voice. "The ones that are pushing toward IP telephony are France, Belgium and Switzerland," he says.

In German-influenced markets, the results have been mixed. Dutch cable operator A2000, for instance, has pushed ahead into circuit-switched voice service, capturing anywhere from 10% to 50% of the markets with an average of about 25%, says Ellis Reid, group manager of international marketing with Tellabs, which is providing A2000 with equipment. "I assumed we'd have more trouble in the Netherlands than we did, but they've done well tuning their marketing campaigns and setting their pricing," he says. Sending sales crews door to door has helped, as has positioning the plant, Reid adds. "They're not putting in cable telephony, they're putting in a broadband infrastructure."

That same mindset also is driving operators in the U.K. to diversify their service menus.

"Telephony stalled out in the U.K. over the last two years," says Paul Budgen, technical pre-sales manager for Motorola MMG. "At the same time, [cable operators] find they can't make a profit with video alone. The content just isn't there. When you start to bundle services, though, it gets to be quite interesting."

However, pushing beyond voice and into data is turning out to be a struggle in many markets. According to several vendors, almost universally, European cable operators are far behind their U.S. counterparts in deployment of cable modem-based data services. The reasoning behind it may have more to do with culture than technology or marketing. In much of Europe, Internet usage rates are significantly below those in the U.S. and look to remain that way for some time.

"The market is just not taking off as quickly as in the U.S.," Budgen says. "Just looking at Internet usage at the start of the year, about 65% of it was from North America, and only 20% was European."

Ironically, one of the biggest factors holding down general Internet use in Europe is the cost of local calls, he adds. And if users are unfamiliar with dial-up usage, it's more difficult to sell them on dedicated high-speed service. Usage also varies widely based on the wealth of the country. "If you don't have a PC, you don't care about Internet access," Budgen says. "In the more wealthy countries in Europe, PCs are much more common."

Another gating factor is the lack of a standard. "The market has been waiting to explode, and one of the things the market has been waiting for is a standard," says Motorola's Seddon. Currently, the data over cable service interface specification (DOCSIS) that all U.S. cable operators have adopted has not been fully embraced by Europe. However, a different version of DOCSIS that supports the unique technical requirements of European operators' plants is expected to win wide backing.

One unique aspect of "EuroDOCSIS" that could come into play is the European operators' use of 8 MHz channels, as opposed to the 6 MHz channels that are widely accepted in the U.S. Those extra 2 MHz theoretically should allow for greater speeds. However, most vendors say they likely won't develop products specifically for such networks because of cost constraints and the desire to keep cable modems affordable. In addition, unlike their U.S. counterparts, European cable operators have virtually no thoughts of putting cable modems on retail shelves, says Philips' VanderBoon.

Not unlike cable telephony, there are some notable exceptions to the early gloomy reports. The biggest is a 20,000-modem France Telecom installation near Paris. In fact, the service has been so successful that the company has stopped marketing, Johnson says.

Enter DSL

That scenario appears to be the exception and not the rule. And perhaps one of the biggest impediments to cable modem deployment is the progression of DSL - and in particular asymmetrical DSL (ADSL) - which focuses on the high-end residential market.

In most markets, ADSL is proving extremely popular, Johnson says. That, in turn, is putting pressure on the cable modem's window of opportunity. "It seems to me that [cable modem deployment] is so far behind that it might never get going," he says. "The business case for cable modems, now that all the European telcos are committed to ADSL, is fading fast."

In Germany, Europe's largest single market, the situation is even more difficult, given Deutsche Telekom's major deployment of ISDN during the last decade.

Still, the experience of companies such as NTL, Telewest and A2000 not only are providing a possible roadmap to U.S. operators, but they're lending fortitude to their European cohorts that are laying plans to offer bundled service. Companies such as NTL have been able to take away significant subscribers from incumbents, therefore, blazing a path for future competitors regardless of country.

"It makes it easier to make that decision because you're no longer a pioneer," says Tellabs' Reid. "It comes down to a fairly simple equation: What services can you offer for what revenues and at what quality?"