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How Telcos Can Fight the Cable Invasion

By Olga Kharif You know those sign-waving doomsayers who stand on street corners and warn that the end is near? Well, many seem to have moved recently to new spots outside the headquarters of telecom outfits. Listen to their dire warnings and you'll hear a skeptic chorus predicting that telcos will shrivel and die as cable operators ramp up their phone services. After all, cable already offers pay TV and high-speed Internet, so phone service is a natural extension.

The telecom industry may be in less trouble than the doomsayers think, however. Sure, many telcos' core sales for voice calls are declining, and they need new sources of revenue -- such as video -- to prop up financial performance. Also, they are clearly the underdogs: Some 70% of U.S. homes already get pay-TV service from satellite TV or cable providers. But as technology evolves, the phone companies may have more tricks up their sleeves than the skeptics think.

BOTTOM-LINE BOOSTERS. 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 (VZ), 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.)

ANYONE FOR CRICKET? Phone companies figure they can also outdo cable operators in customer service (though many telcos don't excel at that, either). Baby Bell SBC (SBC) is offering customer care to its pay-TV subscribers through joint call centers it has set up with EcoStar (DISH), whose satellite service it resells. And Steve Starliper, Qwest's (Q) vice-president for product management, says "telcos can differentiate through great customer support" -- for instance, by keeping their call centers open for extended hours.

In the future, telcos could go beyond pay-TV service. Their advantage would be that they could gain incremental revenues and profits through new services that cable operators could offer only at a loss. The reason: Telcos have the potential to market many new products via existing DSL (digital subscriber line) lines, and to do so without spending a lot of money on network upgrades.

For instance, phone companies might offer interested customers access to all cricket matches around the globe, Adventis' Hurd says. For cable outfits, it doesn't make sense to devote channel space to such a small market, but telcos have nothing to lose, the capacity to provide such coverage, and much incremental revenue to gain.

MORE WITH LESS. On-demand access to libraries of classic movies and old TV shows is another possibility. Nowadays, such programming doesn't get a lot of play on cable, where the emphasis of pay-per-view and video-on-demand services focuses on current blockbusters. By contrast, telcos could follow in the footsteps of Until the online bookseller came along, readers could only view a limited selection of books at bookstores. With Amazon, they suddenly have access to a huge library of content. Similarly, Telecoms could grant consumers the same wealth of choices, such as access to silent movies or old cartoons, Hurd says.

Telecoms also have the option of integrating innovative communications services with pay TV. Already, Qwest offers users of its pay-TV offerings -- delivered over high-speed DSL -- a TV caller ID. When the phone rings, a DSL line connected to a TV set-top box allows the caller's number to be displayed on the screen. Another message pops up to say whether the caller left a voice mail. In the future, some experts believe, telcos could even enable users to send a call directly to voice mail with a push of a button on their TV remote controls. The good news: Telcos only have to make relatively minor changes to their networks to allow for these services.

A slew of new technologies could also create new openings for telcos. Digital video compression is getting better by the day -- and that means less and less bandwidth is required to show video. Today, high definition TV (HDTV) often demands a broadband pipe of more than 10 megabits per second, but Hurd believes that requirement may well drop 40%, to just 6 megabits per second, within 18 to 36 months.

FASTER, BETTER, CHEAPER. 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 (BBI) and Netflix (NFLX). 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.

MISPLACED PESSIMISM. 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 (NT), which has recently reentered the broadband-access market. Sure, the doomsayers could be right about some players -- but maybe not all. Kharif covers telecommunications for BusinessWeek Online from Portland, Ore.

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