January 28, 2004 1:54 PM PST

Time Warner Cable leans more heavily on voice

Time Warner Cable is accelerating the rollout of a Net-based telephone service to fend off competitive pressure from satellite companies and act on a hunch that broadband phone offerings will be a big success, Time Warner CEO Richard Parsons said Wednesday.

Time Warner Cable's Digital Phone service is now in Raleigh, N.C.;

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What's new:
Time Warner Cable is accelerating its VoIP investments, expecting to offer Net-based phone service to most of its subscribers by the end of 2004.

Bottom line:
Thanks to their rapid deployment of new broadband phone services, cable companies are poised to reap new revenues--and potentially take market share from phone companies and satellite competitors.

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Kansas City, Mo.; and Portland, Maine. The $40-a-month telephone plan, which offers unlimited local, in-state and domestic long-distance calling, will be available in three more cities in the next few weeks and in "almost the entire cable footprint by the end of the year," Parsons said during a conference call, following Time Warner's quarterly financial results announcement. It's an accelerated timetable, according to a Time Warner representative.

Parsons said Time Warner is making a "bigger investment" in Digital Phone this year because of the service's potential as a revenue generator. Digital Phone will also help defend Time Warner Cable against satellite companies that are making headway selling cable TV and broadband services, Parsons said. Most satellite cable providers do not sell a telephone service.

"We think the addition of the voice leg of the stool gives us an offensive weapon to go back and win back some of our customers," Parsons said. "The rollout will be a major focus for us all this year."

Time Warner Cable's shortened VoIP (voice over Internet Protocol) timetable highlights cable's increasingly powerful position as a conduit for all things digital--a trend that poses a dangerous challenge to local phone companies and satellite providers in the race to provide much coveted "triple play" services, which combine voice calls, high-speed Net access and video programming.

All of the major U.S. cable companies have announced plans to sell phone services over a broadband connection, heralding the collapse of the last barriers to local phone competition. By contrast, planned video services over telephone wires--the missing triple play link for the regional Bell operating companies (RBOCs)--are much further away from widespread commercial deployment.

In addition, cable's entry into phone service represents a major threat to a raft of upstart services that piggyback VoIP products on third-party broadband connections. Companies such as Vonage, VoicePulse and Packet8 have been selling broadband phone packages for between $20 a month and $35 a month, but they have signed up relatively few customers to date.

"We think the addition of the voice leg
of the stool gives us an offensive weapon to go back and win back some of our customers."
--Time Warner CEO
Richard Parsons

Local and long-distance phone companies have also joined the game. In October, regional phone company BellSouth announced plans to sell VoIP to small and midsize businesses. Qwest Communications International rolled out a VoIP service in Minnesota in December. Verizon Communications said it plans to begin selling Internet telephony services to broadband customers early this year. In addition, SBC Communications last year began testing VoIP services.

AT&T is also laying the groundwork for a national VoIP plan that will be available to anyone with a broadband connection. AT&T has not yet disclosed its pricing plans.

One of the biggest appeals of broadband phone plans for consumers is their cost, usually about 30 percent less a month than similar offerings from traditional phone companies. Broadband dialing services also offer features like caller ID and call waiting for free; regional Bell operating companies or long-distance providers usually charge extra.

Cable is in a strong position to capitalize on a predicted consumer shift to VoIP service over the next five to 10 years.

"This is one of the big fears among the RBOCs--that cable companies will make a major push in local telephone markets," said Mark May, an analyst at Kaufman Bros.

Although Cox Communications and Comcast already offer digital phone service over cable to some 2.2 million subscribers, most their products use a different underlying technology, known as TDM (time division multiplexing). Cox has also begun testing a VoIP phone service in Roanoke, Va., the 12th market in which the company has begun selling cable TV, broadband and its Cox Digital Telephone service.


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Meanwhile, Cablevision Systems last year rolled out VoIP service to its approximately 4.4 million cable customers in the New York tristate region. Dubbed Optimum Voice, the service is offered exclusively to subscribers of Cablevision's Optimum Online high-speed Internet access service, for a flat rate of $34.95 per month. The package offers customers unlimited local and long-distance calling, along with a list of other features, such as call waiting, caller ID, call return (*69), three-way calling and call forwarding, according to Cablevision.

Parsons' comments about the Net phone business underscore a new direction for Time Warner. After suffering major setbacks from its merger with America Online, the company has largely stabilized its finances by reducing debt and selling off underperforming businesses such as the Warner Music Group. In 2004, Parsons' message to investors focuses on growth, much of it stemming from its Time Warner Cable division.

Executives have also publicly discussed their ambitions to grow Time Warner Cable through acquisitions. Time Warner has listed companies such as Cablevision, Adelphia Communications and Charter Communications as possible takeover targets. However, these efforts could be hamstrung by an ongoing investigation by the U.S. Securities and Exchange Commission and the Department of Justice over Time Warner's accounting practices. Executives did not offer an update to the investigations, nor did they offer a time frame for any resolution.

 

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