Cable Providers Grab VoIP Advantage

As competition intensifies between cable companies, telcos, and other service providers, VoIP is becoming a key differentiator in the marketplace. While independent hosted service providers like Vonage are currently dominating the VoIP market, many analysts see the advantage soon shifting to cable companies.

Mike Arden, Principal Analyst at ABI Research, says the shift in the market is likely to come early in 2006. “In 2005, the hosted providers are slightly ahead of the cable guys—but starting in 2006, we see cable dominating,” he says.

At the same time, Arden sees the hosted service providers continuing to lead in terms of innovation. “They’re trying to expand how their services work with other programs, working with calendars and Outlook and things like that,” he says. “For the cable guys, when they’re rolling out VoIP service, it’s just basic voice service that looks like what you would be used to on your POTS line.”

What the cable providers lack in innovation, Arden says, they make up in quality of service. “The voice service is running over their own network, so they can give a higher priority to the voice packets to ensure that the voice quality is good,” he says. “The hosted guys won’t be able to do that, because they’re using someone else’s network—and their voice traffic is being treated as if it were just Internet data.”

A focus on broadband
While telcos also have control of a network, Arden sees them lagging far behind cable providers in offering VoIP. “They’re going to be slower to adopt it because they will not want to cannibalize their current POTS service,” he says. “It’s going to require them putting in new equipment and switching networks over—and there’s a lot of operational costs involved with that, so they’re going to be slower to do the take-up.”

That lack of interest from telcos in competing with their own POTS services, Arden says, is compounded by the lack of innovation on the part of the cable providers. “As long as cable lags behind the hosted guys on innovation, the telephone guys can still offer their POTS services and essentially meet the services that the cable operators are offering,” he says. “So they won’t have to innovate as quickly.”

Still, Arden says it’s eventually going to become essential to package services together for a triple or quadruple play. The recent announcement that cable companies are joining with Sprint Nextel to offer bundled services, he says, proves that they see how important it is to be able to offer their customers all aspects of voice, video, and data in one package.

One example of the future of such offerings, Arden says, is Japan’s SoftBank, which has had a broadband-focused business model from the beginning. “SoftBank really built everything on leveraging that broadband customer base, and that’s why they’ve been really successful with VoIP,” he says. “I think that’s the business model that a lot of the cable guys have looked at.”

Keeping customers happy
Keith Nissen, Senior Analyst at In-Stat, says it’s important to note that while cable companies are moving ahead with deploying VoIP services, those services are rarely marketed using the term VoIP. “For the most part, they’re marketing it as ‘digital telephone service,'” he says. “What they’re purposely not doing is saying that this service is something different.”

Nissen says the companies want both to reassure potential customers that the service will be reliable, and to avoid competing on cost with services like Skype or Vonage. “They’re not getting in the business of voice because they want to be a voice carrier,” he says. “What they’re doing is using it as a means to keep customers.”

The next step, Nissen says, will be to bring VoIP over Wi-Fi into the mix. In-Stat predicts that there will be 66 million dual-mode cellular/Wi-Fi phones in the world by 2009, which will lead customers to expect that they’ll be able to switch freely between cellular and Wi-Fi VoIP service. “VoIP is going to be thought of as much more of a mobile service,” Nissen says.

In order to be able to offer such services, Nissen notes, cable companies will have to follow through on setting up agreements with cellular providers like Sprint Nextel. “The challenge for the cable companies is that they don’t have wireless,” he says. “They recognize that that’s a big hole, and they have to fill it one way or another.”

Investing in quality
Matt Di Filippo, CFA, Vice President and Senior Portfolio Manager for S&T Wealth Management, looks at these same issues from an investor’s perspective—and says while these developments will give customers access to a wide range of new services, very few of the companies involved are likely to increase their profits in the process. “The end winner is the consumer,” he says.

The cable providers, Di Filippo says, are getting into VoIP just to hold onto their customer base by making their bundled offerings more attractive. “Cable companies are trying to give buyers another reason to buy their data lines—’If you buy voice through us, your data’s going to cost less,'” he says.

Di Filippo says the cable providers’ early entry into the VoIP market will give them an advantage over the telcos—and at the same time, their financial strength should help them keep innovative pace with the independent providers like Vonage. “If innovation is about spending money, the cable companies have deeper pockets,” he says.

That same financial strength, Di Filippo says, will help cable companies ensure quality of service, while the independent providers may have trouble maintaining quality as they grow. “The question is, when the independents scale their business, can they maintain quality?” he says. “And when scale comes into play, big companies have the advantage.”

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