Competitive Intelligence

Telcos vs. Cable

I found a good piece in this week’s BusinessWeek magazine “How Telcos Can Fight the Cable Invasion”, all about the expected counterattack from DSL delivering movies and other new services with only minor upgrades.

One of detractors' most common observations is that telcos can't easily add video services. Their much-trumpeted fiber-to-the-home (FTH) initiative, the plan to deliver voice, video, and broadband services by extending fiber-optic cable to every home, could prove to be prohibitively expensive - to the tune of $1 billion for every million potential subscribers. It also could take more than a decade to implement, making that strategy a very slow boat to profitability.

Telecoms don't need to exactly replicate cable's performance and services, however. Instead, with little additional investment in infrastructure, they can grab extra revenue - as much as $20 a month per customer - by providing innovative video services and content not available today, says Jonathan Hurd, a vice-president at tech consultancy Adventis in Boston. Such a move would represent a hefty addition to phone outfits' bottom lines, which typically reflect revenue per customer in the $30-to-$60 range.

Telcos have already taken their first steps in that direction. Many recently began reselling satellite-TV service - programming that's on par with cable. The largest U.S. telecom operator, Verizon, is offering its users a $6-per-month discount on the service to help get the business off the ground, says Marilyn O'Connell, vice-president for broadband. (Verizon and others won't release subscriber numbers.)

But wouldn't that necessitate costly upgrades to their networks?

Upgrading the telcos' existing copper networks to handle that bandwidth isn't a big deal. To provide DSL service today, telcos use DSLAM (digital subscriber line access multiplexer) devices, which accumulate bandwidth, then parcel it out to individual homes or neighborhoods via copper wires. Telcos can add special cards relatively easily to the DSLAM boxes for other flavors of DSL, such as VDSL (very high speed DSL), or to provide neighborhoods with more DSLAMs (at a cost of just $50 to $300 per user).

This could greatly increase the bandwidth available to each subscriber home, says Matt Davis, an analyst at tech consultancy Yankee Group. A DSLAM located within 3,000 feet of a customer's home could pump data at rates of 7 megabits per second, far in excess of standard DSL, and more than enough to broadcast TV channels, Davis says.

If they play their cards right, telcos could not only eat into cable revenues, they might also take on such outfits as DVD rental concerns like Blockbuster and Netflix. The average consumer bought 15 DVDs last year - and telcos could potentially grab part of that money by delivering the same content via their networks, says Ken Twist, an analyst with telecom consultancy RHK in San Francisco.

To do that, telcos need to learn a lot more about branding and marketing - neither a strong point, historically. They also will need to strike deals with content providers, roll out new services, and tweak their networks. The phone companies, however, have a huge and loyal customer base, one that might prove both willing and eager to buy discounted bundles of various offerings.

"I think that, at the end of the day, telcos will be able to respond to the [cable] threat," says Walt Megura, general manager of broadband networks business at gearmaker Nortel Networks, which has recently reentered the broadband-access market. Sure, the doomsayers could be right about some players - but maybe not all.

- Arik