FRONTIER, TIME WARNER PREP FOR LOCAL BATTLE IN ROCHESTER

Competitive standoff takes shape in the place that spawned competition

A new competitive battle is brewing in the birthplace of local market competition. According to Glenn Britt, CEO of Time Warner Cable, the operator is preparing to relaunch residential telephone service in Rochester, N.Y. That same system was the showcase for cable telephony in 1994, when Time Warner Cable became the first CLEC under the former Rochester Tel's Open Market Plan, which provided much of the framework for the Telecom Act of 1996. The operator has tested a voice-over-IP product there and in Portland, Maine, for the past year and plans to expand its test to Florida this summer.

“While these initial tests were designed as technology tests rather than marketing tests, we are seeing solid customer acceptance,” Britt said in a speech to the Washington Metropolitan Cable Club last week. “We plan to begin rolling this service out more extensively later this year.”

Britt might want to speed up that timetable, at least in the Rochester market. Incumbent carrier Frontier Communications — the former Rochester Tel, which is now a subsidiary of Citizens Communications — plans to roll out a voice-over-DSL service by the end of this month using equipment from Jetstream Communications. That will be followed by the unveiling of Frontier's own VoIP offering in about a year. Depending on the results of its VoDSL service, Frontier could introduce its VoIP offering as soon as the end of 2002.

Though Time Warner and Frontier will walk parallel paths in 2002 — with Time Warner targeting residential customers and Frontier marketing to small and medium-sized businesses — it's just a matter of time before they butt heads, said Erik Keith, analyst with Current Analysis. “At present they're really two different markets, but they will be competing against each other gradually, especially in limited geographic markets like this.”

That's something Frontier will worry about down the road, if at all. For the moment, the company is excited about the prospect of filling a void with an integrated package that ultimately will save consumers money, according to Chris Muller, Frontier's commercial DSL products manager.

“If we can [deliver service] more efficiently, we can pass those savings on to our customers,” Muller said.

Despite Muller's enthusiasm, carriers traditionally have not bundled services well, and it remains to be seen how well Frontier executes its plan. On the other hand, bundling is a big part of the cable industry's heritage, said Gerry Campbell, senior vice president of Time Warner Cable.

“Telephone has always been what's been handed to us, and you just kind of accept it,” Campbell said. “But packages and bundles are what cable has always been about. Now we're going to do that with phone service.”

Frontier initially will market its VoDSL service to small businesses that use between four and 12 lines. However, as costs start to fall, “we are going to eventually be able to have a second-line offering that would work well for our residential customers,” Muller said. Frontier plans to add VoIP capability for its largest corporate customers. “Customers that have a large LAN want to have an inexpensive way to transmit their voice and data within their LANs and across their entire network, coast to coast,” Muller said.

Frontier isn't afraid of re-engaging Time Warner Cable for residential customers because it believes the DSL platform is superior for provisioning packet voice services. Cable telephony has quality of service, power and 911 connectivity issues, said Muller. “We believe that we can compete with them toe-to-toe.”

Keith agreed: “You've probably been on calls where people are using voice-over-IP systems, and it sounds like they're on a cell phone,” he said. “The maximum delay allowable by the public network is [about] 50 milliseconds. Anything beyond that is detectable by listeners. In the case of voice over IP, that's something that still has to be solved.”

Also, while telephone networks generally are powered from the central office, cable operators must install a battery at the customer premises. “It's not something that gets talked about much, but it is something that could become an issue for some customers who are used to plugging their phone into the phone jack and not worrying about power,” Keith said.

Carriers also can reduce “copper exhaust” by providing voice over the DSL, which can use a single copper line for both voice and data services, said Keith. “You're gaining essentially a 50% cost savings in copper line usage, which means you can deploy more services to the same premises.”

Despite the apparent advantages, many telcos have shied away from VoDSL because of the risk of cannibalizing their traditional wireline business. While the ability to run traffic more efficiently is an advantage, VoDSL takes revenue “out of one pocket and puts it in the other,” said Dana Tardelli, analyst with Aberdeen Group, adding that Frontier's existing voice margins are high. “If there's no competition to reduce that price, why would you do it yourself by going to a voice-over-DSL solution? That's where it just loses me.”

Frontier, however, would be making a critical mistake if it ignored VoIP. While the technology has failed thus far to live up to some outsized expectations, quality of service is no longer an issue. “IP PBXs work. They work very well,” said Tardelli.

On a more practical level, the hefty investments that carriers and enterprises made in circuit-switched equipment have prevented deeper penetration of VoIP. Much of that equipment is reaching the end of its lifespan or has become fully amortized, paving the way for an IP platform transition.

The transition, in fact, began in 2001, which Tardelli called a watershed year. A study by The Yankee Group points to rapid growth over the next two to three years.

“So many people have said that VoIP is a couple of years away or that it's a pipe dream,” said Tardelli. “These are people who probably should know better. It's here, and you're going to have to take note of it.”