Cable companies are well positioned to race to the head of the pack for triple-play services with the widespread introduction of VOIP services, according to a report released earlier this week by equity research firm Standard & Poor’s.

The report, “Cable TV Operators Call on Internet Phones for Growth” by S&P analyst Eric Geil, notes that cable operators have a “clear technical and economic advantage over phone company competitors” in their ability to offer voice, video, and data to their subscribers. Geil attributes cable’s advantages to the modest incremental capital costs and low operating expenses that offer a hefty profit potential to operators introducing VOIP offerings over their cable infrastructures.

Cable operators already have a “fat pipe” into users' homes, and VOIP traffic shares the same network as high-speed data (Internet) traffic, so Geil reckons the cost of adding a VOIP subscriber is significantly lower for cable companies than adding a circuit-switched customer is for traditional carriers.

In one example, the report notes that Cox Communications Inc. (NYSE: COX) has shown that its upfront cost for adding a VOIP customer is $267, compared to $527 for adding a circuit-switched customer.

Cable companies also have an inherent advantage because they control all aspects of their triple-play offerings, while telcos must cobble together systems to offer video services to their lineups (see SBC Launches Joint Venture With 2Wire). While major telephone operators are making progress with plans to extend fiber optic networks to homes, they currently depend on partnering deals with satellite television providers to provide video services. And when they are eventually able to offer video services, a lack of video experience may hurt them (see Telco Video & VOIP Stakes Rising and Video Profits on Pause?).

VOIP is also a riskier proposition for incumbent telecom carriers, Geil says, because “with VOIP, incumbent phone companies are not competing for a new service, but are at risk of losing their core business.”

Incumbent carriers are stepping up the battle by beginning to offer [ed. note: ready for it?] quadruple play (data, video, wired, and wireless) offerings at discount prices. SBC Communications Inc. (NYSE: SBC) is offering a quadruple-play package, including video from EchoStar Communications Corp. and wireless service from Cingular Wireless for $135 a month in some areas.

Cable operators are also looking into adding wireless services to their menus, negating any advantage the wireline operators may have had (see Time Warner Confirms Sprint Talks).

There are potential roadblocks for cable MSOs. Some regulatory hurdles may pop up regarding VOIP service, but recent rulings make that unlikely (see FCC Shields VOIP From States). In fact, wireline carriers might be under regulatory scrutiny when they introduce video services (see SBC Sees IPTV Interference).

The number of cable VOIP subscribers will grow to 4.5 million customers by the end of the year, a 49 percent growth rate over 2004 numbers, according to UBS Investment Research's 2004 Performance Review report, released on January 4. By 2006 there will be approximately 6 million cable VOIP customers, according to the report.

The UBS analysts estimate that cable operators will offer VOIP to roughly 50 million homes by the end of this year and 75 million homes by the end of 2006. This is substantially higher than the estimated 3.3 million FTTN and FTTP marketable homes by year-end 2005 and 11.1 million homes by year-end 2006 estimated to be ready for telco video through Verizon Communications Inc. (NYSE: VZ) and SBC.

“Thus, we estimate that cable operators will maintain a significant advantage over both satellite and telco competition in offering bundled services over the next several years,” UBS analyst Aryeh B. Bourkoff writes.

The S&P report gives a nod to pure-play VOIP companies like Vonage Holdings Corp.; and Internet-based options like those provided by Skype Technologies SA offer similar services at a lower cost. But, in S&P's opinion, the quality of service may not be as good, since “heavy data traffic could degrade voice quality for the non-cable competitors because they do not control the network between homes and their respective network access points.”— Chris Somerville, Senior Editor, Next-Generation Services