Cable TV takes lead in whole house telecom (1 Viewer)

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ST. LOUIS - AT&T Inc., a giant telephone company, and Charter Communications Inc., a large cable TV company, share a common problem - the melding of telecommunication services now taking place in the U.S.

The two companies have come up with a common solution - going after each other's customers. Their conflict is being framed as a struggle between two large, monopolistic giants.

But there's more to it. The companies also face heavy competition from satellite TV, cell phones and other wireless innovators - the real wave of the future, according to some analysts - as well as Internet service upstarts.

In the battle for the "wire" into customers' homes, cable TV appears out front of the telephone companies, industry analysts say.

Cable companies, including Charter and larger companies Comcast and Time Warner, have a key advantage in time and investment, said Aryeh Bourkoff, a cable and satellite analyst with UBS Securities Inc. in New York.

The cable industry has spent nearly $100 billion in the last decade upgrading networks so companies could offer digital services, including video-on-demand, high-definition television and cable modem Internet access. The emergence of computer-based - or Internet protocol - telephone service allows them to add voice services for little incremental cost.

Ted Henderson, a cable analyst with Stifel Nicolaus & Co. of St. Louis, agrees that cable companies have an advantage.

"The cable guys are putting up some pretty big numbers in voice," Henderson said. The phone companies "are competing with the press release," actually offering service to only a fraction of their customers.

The telephone industry will have to spend almost as much as cable did before it can expand the service to a substantial chunk of its customer base. Telephone companies can send voice and high-speed Internet access over the copper wires going into most homes. But they need fiber optic cables fairly close to customers before they can send bandwidth-hogging video into homes.

Robin Diedrich, senior media and communications analyst for Edward Jones, said telephone companies covet the margins in the cable business, which can be up to 40 percent. "They're saying, Why not try and get some of that business?'"

To offer a competitive product, the phone companies will have to spend heavily, she said. Verizon, which needs fiber to a customer's doorstep to offer its FiOS television and Internet service, could spend $18 billion to $20 billion over the next few years.

AT&T is taking a different tack, building fiber into neighborhoods, and then using technology that gets more out of existing copper wiring to deliver video to homes. AT&T plans to spend $4.5 billion on its fiber upgrade in the next three years, not counting work in the territory covered by BellSouth, its newest merger partner.

"We'll see if they can get enough market share to make it pay off," Diedrich said.

Michelle Abraham, an analyst with InStat of Scottsdale, Ariz., believes they can. And once they have rebuilt their network, the phone companies can offer a host of new services like home monitoring, video surveillance and video phone calls through customers' televisions.

"There are a lot of things - once they have the network in place and once they have you as a TV customer - that they could add on that would generate more revenue," Abraham said. "That's not to say that the cable operators won't do the same thing."

For both industries, the key reason for invading the other's turf is to sell bundles of three or more products, including video, voice, Internet access and, in some cases, wireless phone service. Research has shown that customers are far less likely to change providers if they have to switch multiple services.

"You can't be a standalone company offering one product," said Cynthia Brinkley, president of AT&T-Missouri. "Our customers like the bundle. They like to be able to put it all together."

Ted Schremp, senior vice president and general manager of Charter's telephone service, calls phone service "an incremental product that we can drive into our customer relationships." Selling phone service cements that relationship and adds revenue.

Charter's phone customers "are sticking with us and telling their friends," Schremp said.

For cable, the entry into voice has cost relatively little for the additional revenue it generates, said Mike Paxton, a cable analyst for In-Stat. Cable modem service is even more profitable, and the cable industry already knows how to market video.

For the telephone companies, learning the video business could be a challenge, said Henderson, the Stifel analyst.

"Voice is not nearly as complex of a product as video," which has ongoing customer service challenges as well as making deals with programmers, he said.

At least one analyst thinks the phone and cable companies are missing the point in focusing on each other's business.

Victor Schnee, president of Probe Financial Associates of Ironia, N.J., said the telephone companies would be better off focusing on their wireless business than on getting into video, an entirely new business that's growing much more slowly than wireless.

The cable industry, on the other hand, has been attacked by two strong satellite companies that have done better than expected in picking off customers, Schnee said. Competition for video customers could get more intense when satellite companies start selling high-speed Internet services, probably in the next year.

Both industries will face new competitors as Internet access speeds increase. Customers will begin to use the Internet to access entertainment, including television. The competition then could come from companies like eBay, which has bought Skype, an Internet phone company.

These companies have an entirely different business model - based on bringing parties together for transactions, Schnee said. The companies make money on the transactions, not communications.

"What the risk is to communications companies is that the bottleneck isn't defensible anymore," Schnee said. "The consumers of the future aren't going to care that a show used to be on at 9 o'clock on Tuesday. They will see it when they want to."

AT&T's customer loss isn't due solely to cable companies selling telephone service. Other companies, like Internet phone provider Vonage and competitive telephone companies like XO Communications Inc., were siphoning off lines long before the cable companies got into the phone business.

Charter, on the other hand, has been losing customers mostly to satellite television companies like DirecTV and Dish Network. AT&T hasn't entered the video business in Charter's markets except as a partner with Dish.

Verizon Communications Inc., the New York-based phone company, offers its fiber-optic television service in Keller, Texas, a Charter market. Verizon says it's garnered 20 percent of the video market there. But Neil Smit, Charter's chief executive, said Charter has lost just 4 percent of its customers in Keller, so Verizon must be taking customers from satellite or adding people who haven't had multichannel video previously.

The focus of the battle lately has been the phone companies' attempts to get statewide - and possibly nationwide - franchises to offer video service. Cable companies have traditionally made individual franchise agreements with each city, town or county they serve.

Several states have passed bills allowing a statewide franchise. Legislation also has been introduced in Congress, and Federal Communications Commission Chairman Kevin Martin has come out in favor of easing franchise requirements on telephone companies.

The outcome is critical to both industries' success. "This is now going to be a race to get the customers" before the other company locks them up, said Bourkoff, the UBS Securities analyst.

http://www.chieftain.com/business/1146146408/1
 

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