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Cox Declares VOIP 'Ready for Prime Time'

Cox Communications Inc. (NYSE: COX) last week quietly released a white paper on voice-over-IP (VOIP), declaring the technology “ready for prime time” -- a reversal of its opinion expressed in a white paper 15 months ago. The cable company says it can save 40 percent in capital expenditures per customer by deploying VOIP instead of circuit-switched telephony.

Much of the savings comes from deploying relatively inexpensive multimedia terminal adapters (indoor devices that connect subscribers’ phones to their cable modems) instead of costlier network interface units (outdoor devices that connect telephone wires to homes). Further savings come from using Cox’s cable modem termination system (which provides data communications to subscribers’ cable modems) instead of a headend interface terminal (which connects a circuit switch to a network).

In a white paper released last year, Cox threw cold water on bullish predictions of 50 percent savings from VOIP, saying it expected “about an 8-to-10 percent cost improvement when VOIP services are compared apples-to-apples with primary-line, circuit-switched, network-powered phone services.” In the apples-to-apples comparison, the cost of providing VOIP included a network interface unit mounted on the side of a home and powered by Cox. If subscribers instead bought and powered their own multimedia terminal adapters, VOIP could cost as much as 75 percent less than circuit-switched phone service, Cox said.

So, what has changed in the past 15 months? “Over that span of time, we’ve tested several different vendors and pieces of equipment in the network and had time to actually put it in the hands of our employees and some market-test customers,” says Mike Pacifico, director of marketing for Cox’s digital telephone business. “At the end of the trial, we felt it was on par with circuit-switched quality.”

Cox’s beliefs about the savings from VOIP haven’t changed much since last year. Instead, the equipment market has changed. “For the components of the network, those costs have gone down as more companies are now in the market for that type of equipment and more vendors are out there trying to vie for that business,” Pacifico says.

Cox has learned about the savings from VOIP by routing some of its circuit-switched, long-distance calls over its national OC48 (2.5 Gbit/s) IP backbone, which it has outfitted with softswitches from Nortel Networks Ltd. (NYSE/Toronto: NT). (See Cox Chooses Nortel and Nuera.) Cox’s long-term plans call for it to deploy softswitches in three locations to provide telephony to all of its markets. This will allow the company to offer phone service in small markets where the cost of installing circuit switches would outweigh the potential revenues.

Cox is one of only two major cable companies that provide local and long-distance circuit-switched telephone service. (The other is Comcast Corp., which acquired a circuit-switched phone business when it bought AT&T Broadband.) Last year, telephony accounted for 8 percent of Cox’s total revenues, up from 7 percent in 2002. The company currently offers circuit-switched phone service in half of its markets and has 1 million residential customers.

Cox launched its first residential VOIP service in Roanoke, Va., late last year (see Cox Launches VOIP Service). The company hasn’t announced where or when it will introduce the service next, but more launches are sure to come. “Our strategy is to use VOIP to bring phone service to the 50 percent of our footprint that we don’t currently offer phone service to,” Pacifico says. The company will not offer VOIP and circuit-switched service in the same markets.

Gaining telephony revenue is a key part of every major cable operator’s strategy as the companies increasingly vie against the Baby Bells for data and video business. “For cable companies, VOIP is an incremental business that utilizes their investment in their digital plant,” says Eric Geill, an analyst at Standard & Poor’s. “This is something cable companies now have to gain, whereas for the telephone companies, it’s a situation where they have to try to hold onto the customers.” (See S&P Cautions Bells on VOIP.)

— Justin Hibbard, Senior Editor, Light Reading

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