Unfortunately when I checked recently with some cable companies that
offer telephone service, the accessibility that the large established
Bell companies offer, such as directory look up for the blind and
operator assisted dialing for those with dexterity impairments, were not
offered by the cable telephone providers.

Kelly


The Wall Street Journal

September 5, 2002


More Consumers Answer Call Of Cable for Phone Service

By PETER GRANT
Staff Reporter of THE WALL STREET JOURNAL

For years, telephone-industry executives chuckled as cable companies
tried to use their TV lines to break into the local phone business. But
today, no one is laughing.

The cable companies, after working out the bugs in their systems, are
beginning to chalk up impressive results in signing up telephone
subscribers. Their pitch is simple and persuasive: Buy an attractive
package of phone, cable and high-speed Internet service, pay only one
bill and, most importantly, cut local phone costs as much as 30%.

COMPETITIVE THREAT

Cable companies are luring customers from local phone
companies. Below, cable companies with the most phone subscribers.

Table with 3 columns and 6 rows

COMPANY
CABLE SUBSCRIBERS
LOCAL PHONE SUBSCRIBERS

AT&T*
13.3 million
1.2 million

Cox
6.3 million
578,000

RCN
507,000
190,000

Comcast
8.5 million
40,000

Insight
1.4 million
20,000 table end

*ATT Broadband

Source: the companies

The two leaders in this business, AT&T Corp.'s AT&T Broadband unit and
Cox Communications Inc., have signed up over 1.7 million local telephone
customers and are adding new ones at a rate of more than 60,000 a month.
Other industry leaders, including Comcast Corp. and AOL Time Warner
Inc.'s Time Warner Cable, plan to launch cable phone service next year
using a less expensive Internet-based technology that transmits sound
digitally.

To be sure, cable's beachhead is tiny when compared with the 102.2
million U.S. households with phone service. But the industry has spent an
estimated $65 billion over the past six years to upgrade its wires to
carry digital television, high-speed Internet and a wide range of other
services including telephone. Some 70 million of the 90 million U.S.
homes that cable wires now pass by are able to receive high-speed
Internet service and, within 10 years, analysts estimate that most will
be able to get cable phone service as well.

Already, cable companies have shown they can build significant market
share in targeted areas. In Omaha, Neb., and southern Orange County,
Calif., for example, Cox says it is providing phone service to more than
25% of all homes. "We had 20 presold homes in a brand-new subdivision and
everyone's asking 'Can we get Cox,' " says Omaha real-estate developer
Dan Witt. "The mentality is that people want to get all the services from
one company."

The dominant local phone companies already have begun to feel some pain.
Earlier this summer, when SBC Communications Inc. lowered its earnings
outlook for the year, executives partly blamed subscribers lost to cable.
Edward Whitacre, SBC's chief executive, describes cable phone service as
one of his company's biggest competitive threats.

Meantime, Verizon Communications Inc. has noticed it is losing
subscribers to the cable-Internet-telephone bundle that AT&T Broadband is
offering in the Boston area. That is one of the reasons Verizon chose
eastern Massachusetts to launch its "Veriations All" program, which
offers a package of long-distance, local, wireless and high-speed
Internet services. "We are prepared to battle for our customers," says
Maura Breen, Verizon's chief marketing officer.

It could be quite a fight to win back customers such as Shannon King. The
Laguna Beach, Calif., resident had heard so much about Cox's lower prices
from her friends that she switched her service from Verizon in May when
she changed apartments. Today, her local phone bill is only $12 a month,
compared with $30 when she used Verizon. "It was kind of a no-brainer,"
she says.

Fortunately for phone companies, the cable companies are hitting their
stride on the technical and marketing sides of local phone service at a
time when industry turmoil is likely to slow down their expansion of the
business. The fraud scandal that sent Adelphia Communications Corp. into
bankruptcy badly rattled the cable industry, sharply driving down shares.
Growth in basic cable subscribers is flat. And capital is scarce due to
the slow economy and investor dissatisfaction over the industry's high
debt levels and the low returns so far on its huge investments.

One wild card is how ambitious AT&T Broadband will be with its
cable-phone plans once the unit is acquired by Comcast. Before the merger
plan was announced, AT&T predicted that by the end of 2004, it would be
capable of offering phone service to almost all 25 million homes that its
cable system passes by. But Comcast hasn't embraced AT&T's time frame,
although it eventually wants to offer phone service systemwide. When its
executives talk about phone service, they stress the importance of
balancing it with other products, subscriber growth and revenue. "Phone
is going to an important new product," says Steve Burke, president of
Comcast's cable system. "But it's not necessarily going to be our No. 1
priority after the merger."

Cable companies dreamed of offering phone service ever since they began
upgrading their wires on a major scale in the early 1990s. Only a few
decided to launch it, using the phone industry's traditional technology,
called circuit switch. But those companies have now mastered the
complexities of providing phone service, which involve everything from
making sure lines don't go dead in a power outage to dealing with the
Federal Bureau of Investigation when it wants to do wiretaps. Gone are
the days of embarrassing technical glitches, like the time in San Diego
when Cox accidentally published 11,400 unlisted phone numbers in a
directory. Early cable-phone setups also suffered some billing problems,
such as customers getting charged twice for the same calls.

As it turns out, subscribers who sign up for phone service along with
cable TV and high-speed Internet are more likely to stay loyal to their
cable company and not switch to, say, satellite TV. "As a stand-alone
business, telephone is very strong," says David Pugliese, a Cox vice
president in sales and new-product marketing. "It's even greater for us
as a piece of a three-product bundle."

Cable companies also figured out quickly that discounts go a long way
toward severing any loyalty people may feel toward their local phone
company. Kawan Willis, a 48-year-old surgical technician in Chicago, says
she switched to AT&T Broadband from SBC's Ameritech unit last fall after
her goddaughter told her about the potential savings. Since then, her
monthly bill for local and long distance has fallen to about $68 to $78
from over $100. "I thought she was lying, but she was right," Ms. Willis
says.

So far, the so-called Baby Bells that control about 90% of the local
phone market have had a hard time fighting back on price because of
regulations that require them to apply special discounts to their entire
systems. So while Cox can offer a special deal in a particular market,
the more heavily regulated Bell companies need to offer the discount to
their entire region. "They can come into a market and do what they want
and we can't compete with them," says Jason Few, an SBC vice president
for business development.

But Bells have found other ways to defend their dominance of the local
phone market, which brings in about $130 billion in revenue annually.
SBC, for example, has teamed up with satellite-TV company EchoStar
Communications Corp. to offer a package of TV, telephone and high-speed
digital subscriber lines, or DSL, Internet service. Other Baby Bells,
such as Verizon, are racing to get regulatory approval to offer long
distance in more states so they can compete against cable companies and
others with package deals of their own.

The more services subscribers get from their phone companies, the more
difficult it will be for cable companies to pry them away, says Thomas
Eisenmann, an assistant professor at Harvard Business School. "When you
bundle local with long distance, that's a very compelling package," he
says. "The cable companies have got a two-to-five-year window of
opportunity."

Write to Peter Grant at
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