Time Warner Cable said Monday it will tap two long-distance carriers, MCI (Nasdaq: WCOEQ, MCWEQ) and Sprint Corp. (NYSE: FON), for help with the nationwide rollout of its Digital Phone VOIP service (see Time Warner Picks MCI, Sprint for VOIP).

If Time Warner Cable (TWC) prices its offering low enough, the news will shake up Verizon Communications Inc. (NYSE: VZ), SBC Communications Inc. (NYSE: SBC), Qwest Communications International Inc. (NYSE: Q), and BellSouth Corp. (NYSE: BLS), which are already under attack from wireless operators and standalone VOIP providers like Vonage Holdings Corp.(see Analysts Prod Verizon on Portability, Cable's Voice Getting Louder).

Digital Phone is expected to cost Time Warner Cable customers $39.95 a month for unlimited local and long-distance service, on top of the $100 a month they're paying for broadband Internet and cable TV. Those who aren't TWC customers will pay $49.95 a month.

Time Warner Cable has been conducting VOIP trials in Portland, Maine, since the beginning of the year and launched its first residential IP phone service in North Carolina in the spring. Its biggest markets include New York City; Houston; Raleigh, N.C.; and western Ohio (see Time Warner Finally Takes VOIP Plunge).

It's not hard to see why TWC wants to expand its phone service. A study released Monday by Multimedia Research Group (MRG) Inc. says the cable telephony market will reach over $3.9 billion in service revenue worldwide and $386 million in systems revenue by 2007. If outsourcing deals like Time Warner’s tie-in with Sprint and MCI take off, those figures could grow to $8.1 billion and $700 million by 2007, MRG says.

TWC's multiyear deals with MCI and Sprint will speed up its rollout throughout next year, company execs say. "Capitalizing on their local points of interconnection, our broadband cable system, and the efficiencies and flexibility of IP technology,” means Time Warner can get to market faster with phone service, says Glenn Britt, the company’s chairman and CEO.

Analysts point out that, while the deal could mean additional revenue for all parties, it isn’t quite as state-of-the-art on the technology front as it appears. Lisa Pierce, telecom analyst with Forrester Research Inc. notes that it’s only voice-over-IP on the cable access side, it’s not end-to-end VOIP.

“It’s a good start,” she says. “The call begins as VOIP, but is turned into regular TDM voice traffic as it is carried over the PSTN [public switched telephone network] to the caller at the other end… We are going to live in this hybrid world of part VOIP, part TDM, worrying about backwards integration and compatible directory and 911 services for some time.”

In fact, TWC rivals Cox Communications Inc. (NYSE: COX) and Comcast Corp. (Nasdaq: CMCSA, CMCSK) have yet to endorse VOIP for the cable market. Both these companies have been offering phone service for some time, but using traditional Class 5 telephone switches, believing that VOIP is still not ready for prime time.

MCI and Sprint will assist Time Warner in the provisioning of Digital Phone service to customers, termination of IP voice traffic to the PSTN, delivery of enhanced 911 service, local number portability, and carrying long-distance traffic.

"It makes sense as an alternative to cable operators' building their own voice infrastructure to leverage our existing networks, management experience, and technical knowledge. Our intent is to fulfill as many of their telecommunications needs as they want -- from basic transport to a fully outsourced solution that includes network design, implementation, and management and support,” says Paget Alves, president of strategic accounts, Sprint.

For the consumer it means local and long-distance voice services, high-speed Internet, and video in one package, on one bill, from a single provider. Of course, the one-bill Utopia scenario only applies to the 27 states where TWC offers cable TV and other services.

— Jo Maitland, Senior Editor, Boardwatch