Cox Voice Gambit Pays Off

Could Cox Communications' reported telephony gains portend a cable invasion of the voice market?

February 19, 2003

4 Min Read
Cox Voice Gambit Pays Off

Telecom service providers beware! After moaning for years over competitive pressures from cable operators on the high-speed Internet side of their business, traditional telecom carriers may also start feeling the pinch on the voice side.

Last week, the nation’s fourth largest cable operator, Cox Communications Inc. (NYSE: COX), announced that the 18 percent jump in its fourth-quarter revenues was in large part due to record growth in telephone subscriptions (see Cox Boosts Q4 Revenue). The company announced that it added approximately 67,190 Cox Digital Telephone subscribers, ending 2002 with 718,420 customers, or 58 percent more than the year before. A growing number of broadband and digital cable subscribers also helped swell Cox’s earnings, the company said.

The cable company’s success on the voice side is significant. For, although cable operators have been upgrading their networks for more than a decade to facilitate a broad range of new services, few have managed to crack the telephony market.

The numbers may show they're closer to capturing voice market than many traditional service providers might think. Cox claims to have more than 30 percent penetration in its two oldest markets, Orange County, Calif., and Omaha, Neb.

While most, if not all, of the large cable operators recognize that there’s a lot of money to be made on voice and have aspirations to offer telephony services, there are widely disparate opinions on how to best enter the voice arena (see Cable Networks: A Primer).

On one hand, you have the operators that argue they don’t want to replicate the TDM infrastructure underlying the incumbent local exchange carriers' (ILECs) networks, instead opting to wait for IP telephony technology to come of age before taking the plunge into the voice market. IP telephony, they argue, is also much less expensive to roll out and costs less to maintain than traditional TDM equipment. A Morgan Stanley report from February 2001 calculated that the cost per subscriber in the first year of an IP rollout would be approximately $400 to $500, compared with the $600 to $700 it would cost in a circuit-switched architecture.

The opposite approach is the one taken by Cox and a few others that have chosen to launch their voice services over traditional circuit-switched technology -- and worry about new technology advances as they come along. The rationale here is that, although major advances have been made in voice-over-IP technology, its advent may still be a ways off. And while the capital cost per subscriber is much higher for circuit-switched architecture than for an IP rollout, Cox, at least, has concluded that the price is worth it.

“There’s additional capex, but right now they seem to think that they’re getting a more immediate payback for those services,” says Barrington Research Associates Inc. analyst James C. Gross. “The immediate return is greater.”

“We’ve found that our circuit-switch offering has been hugely profitable for us,” says Cox spokeswoman Amy Cohn, pointing out that bundling voice with other services has helped the company dramatically reduce customer churn.

At the moment, at least, Cox’s approach seems to be paying off. According to a Morgan Stanley report out last summer, Cox and AT&T Broadband (now part of Comcast Corp. [Nasdaq: CMCSA, CMCSK]) were the only cable operators expected to report any real revenues from residential voice services in 2002, forecasted to report $348.6 million and $802 million, respectively.

Going forward, Cohn says, Cox will probably start migrating to IP for its voice services in markets where it makes sense. The company already has an IP trial in its Oklahoma City system.

This hybrid-IP approach is attractive, observers say, because it allows the operator to provision VOIP in the access portion of its network without stranding its invested capital in the head-end. The advances of Data Over Cable Service Interface Specifications -- DOCSIS 1.1 -- could also help simplify the push by cable operators into IP telephony, analysts say, since it adds quality-of-service and class-of-service capabilities.

Of course, many cable equipment subscribers are clued into this, and they're pushing equipment that allows them to offer a broader range of services. "The more services you offer a subscriber, the harder it is for them to move to someone else,” says Mitch Auster, the director of product marketing for Internet Photonics Inc.'s cable business.

Morgan Stanley estimates that the cable companies will have grabbed 10 to 15 percent of the telephony market by 2007, and that Cox will be making in excess of $1 billion a year on residential telephony services by then. The analysts anticipate that AOL Time Warner Inc. (NYSE: AOL) will net nearly double that, and that Comcast will pull in more than $3 billion on voice by that time.

— Eugénie Larson, Reporter, Light Reading

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