Rad-Info, Inc.

Posted on Phone+ mag 5/2004

Voice Dreams, VoIP Realities
Can Private-Label Platforms Give Cablecos the Triple Play?
By Tara Seals

Resale options for voice over IP are changing the cable model and helping to turn the frothy triple play dream of better customer retention and higher average revenue per user (ARPU) into reality. This isn’t merely a windfall for multiple system operators (MSOs): It’s crucial to their competitive viability.

It’s been a while since cable operators first talked about rolling out voice services over their infrastructure. For years, we’ve heard about bundles of voice, video and data that will propel cablecos to the pinnacle of communications success.

“We’ve seen reductions in terms of churn when customers take a third product — as much as 48 [percent] to 50 percent versus a customer with only one product, so that’s a real driver,” says Mike Pacifica, director of marketing for Cox Digital Telephone, one of the few MSOs in the voice market today, “Also the revenue opportunity, another $45 to $50 ARPU opportunity on a significant amount of customers.”

In fact, analyst firm Kagan World Media says the fledgling voice-over-Internet technology will bring cable companies 4.2 million new subscribers per year, yielding $5.4 billion in business for cable operators by the end of 2008.

Determined to make the dream come true, MSOs set to work, first bringing the world high-speed cable Internet access and digital video. However, the voice component has lingered somewhere out there in the ether; a shadowy “initiative” that always seems to be a year or so away, flitting through the dreams, perhaps, of visionary CEOs.

Big, national companies like Time Warner Cable and Cox Communications Inc. have rolled out circuit-switched voice offers, but slowly and with hefty capex investment. Meanwhile, PacketCable, a CableLabs project that defines a suite of specifications to deliver multimedia service and make use of cablecos’ investments in the hybrid fiber-coaxial plant, made it possible for MSOs to replicate PSTN dial tone using VoIP, in terms of reliability, quality and features. But these rollouts too are time-consuming, complex, and above all, expensive. Aside from additional capex for VoIP equipment, cablecos must solve interoperability issues between the video and telephony plants. A Net2Phone Inc. white paper says, “The complexities of a two-way plant, enabled for voice telephony with CLASS 5 services, include but are not limited to interfaces to the PSTN, transaction- based billing and voice customers who have different expectations with regard to the availability and quality of telephony service.”

VONAGE & EARTHLINK

That’s quite a barrier to market. Meanwhile, the Bells, already doing well on the voice and data side, are signing resale deals with DirecTV for the video piece of the triple play, putting more pressure on the cable companies to roll out voice sooner rather than later. Plus, best-efforts, public Internet-based voice providers like Vonage Holdings Corp. are winning residential customers at startling rates with bring-your-own-access offers — offers that threaten to reduce cablecos to bit-pipe providers. In fact, Vonage has announced a deal with EarthLink Inc. to offer EarthLink’s cable modem and DSL customers — all 780,000 of them — “EarthLink Unlimited Voice.” For a flat fee of $39.99 per month, customers get unlimited local and long distance, with free features like voice mail, caller ID, call waiting, call forwarding, call return and repeat dialing.

WAKING UP TO PRIVATE LABEL

“To some extent [cable companies] have hamstrung themselves,” says Scott Wharton, vice president of marketing at BroadSoft Inc. “One of the main problems they have, and why they haven’t really done voice, is that they’ve made an incredibly complex and elaborate scheme to reinvent the PSTN for packet. And they made it so complicated for themselves and for vendors to become compliant. They said, we have to be absolutely perfect and have everything the PSTN built in the last 100 years before we can start selling anything.

That’s why they’re only in limited trials.” Wharton explains, MSOs really don’t have to be PacketCable-compliant in order to go to market. There are VoIP services that work today. “I think the cable companies are going to have a choice — keep going down the road of PacketCable compliancy, or start going out with some of the products that are off-the-shelf today. Or most likely, they’ll give up and wholesale the service from somewhere else because they’ll realize they’ve made it too hard on themselves.”

Reselling someone else’s service under your brand name is a turnkey approach that allows cable companies to get into the market with little or no capital or operational expense and little exposure to risk. Some private-label options mean the reseller does everything from provisioning to fulfillment to customer care; the only thing the cable partner does is market the service.

“It’s a very quick market strategy,” says Phil Giordano, vice president of MSO/cable and major accounts at Vonage. Ironically, Vonage is one of the companies making private label a viable alternative for cablecos; the service is the same as the Earthlink offer.

“Private-labeling allows them to offer VoIP or telephony services to their customers, under their brands, very rapidly, and you don’t have to worry about building infrastructure, or finding out if you build it, will they come?”

Giordano says the resale channel doesn’t cannibalize Vonage’s own retail offer. “It saves my cost of acquisition, so that’s critical.

Where Vonage does marketing like a shotgun — reaching out to everybody and hoping to hit the right person, in a cable partnership they know exactly where that high-speed customer is and can very cost-efficiently focus the right kind of message because they’ve been marketing to this person for umpteen years, and they can send the right targeted message to that customer; and that customer will, in all likelihood, subscribe to that partner instead of to Vonage.”

For example, Vonage has signed Armstrong Cable, the 17th largest cableco in the United States. Armstrong operates in rural areas of Pennsylvania, Ohio and West Virginia. “Vonage would never be able to cost-effectively market to those customers, but Armstrong has an incredible take-rate,” says Giordano. “These are customers that would never come to us otherwise.” Volo Communications Inc. also has introduced a turnkey, private-label VoIP option for cablecos, CLECs and ISPs.

Unlike Vonage’s service, which is layered on top of whatever access the customer has, Volo’s offer is provisioned on its private IP backbone. It provides for quality of service and SLAs, and is appropriate for the enterprise and business markets. Ron Harden, executive vice president of sales and marketing at Volo, says the service provider is putting together a sales force whose partial purpose is to go after cable operators. “Cable companies are very good at what they do: providing cable services and Internet services, and they’re very good generally at providing good customer service. But what they need is the triple-play capability, because they know their entire customer base is at risk if you look at it,” says Harden.

“The Bells have deep pockets. But with offers like this I believe the cable companies can add quality voice services quicker and more effectively than the Bell companies can add video services.”

In March, after the first two weeks of actively marketing the private-label offer, Harden says Volo received two dozen calls from ISPs and cable companies. “Volo has created the network, the network has been tested, so we will be adding to the customer list and targeting the cable market now,” he says.

Other options are there too. SIPRACK markets a VoIP solution specifically for cable operators that want to use existing customer relationships to sell VoIP, without having to make an initial upfront investment.

SIPRACK manages the softswitch, gateways and endpoints, and offers Web templates so cablecos can add the service with no hassle.

There also are wholesale management options available in the market to help MSOs get into VoIP. TransPacificTelecom Inc. offers VIVOware, a VoIP software application program that tracks the call detail records of all calls made through the gateways.

Essentially a back-office management tool that includes provisioning, customer service and rate plans, it’s prepaid and postpaid, and automates the departments. Wholesale long-distance termination also is available. “The cablecos don’t know how to run a company,” says TPT CEO Steve Thomas. “Here, all they do is use existing infrastructure and broadband connections, put in a VoIP edge device at the customer premises, and that’s it. No capex cost, no switches, no servers. They can be a phone company overnight.”

TPT charges a one-time licensing fee and charges per-transaction, or call-record. It also charges a wholesale rate for long distance and cablecos can mark it up.

AT&T Corp. also has a focus on creating wholesale offers for U.S. cablecos going for the consumer VoIP market. The offers, unlaunched and unnamed at press time, will use the IXC’s network infrastructures and let service providers choose from “a flexible set of options ranging from basic infrastructure management to fully outsourced arrangements,” says a spokeswoman.

She says, “The flexibility of AT&T’s wholesale offers assist service providers in launching value-added VoIP services without investing heavily in the supporting infrastructure.”

Cox’s Pacifica says that while Cox has not decided whether to resell VoIP service (the company has one facilities- based VoIP market, Roanoke, Va.), he acknowledges that resale options will kick-start the market. “This will make it more affordable for some of the late players, a lot of the cable companies who haven’t launched a circuit-switched product, to finally get into telephone at a lower cost,” he says.

LOOMING NIGHTMARES?

Some of the resale options available to MSOs have a glaring problem: No 911 or operator assistance, for instance. Also, since VoIP was off the regulatory radar, companies like Vonage haven’t bothered to comply with traditional telecom requirements, like CALEA, a regulation that helps law enforcement listen in on suspected criminals. Many of the privatelabel services are offering only best-efforts quality over the public Internet. “The Vonages of the world are offering an Internet telephony service that’s not really a primary line,” says Cox’s Pacifica. “No enhanced 911, for instance. No QoS. That’s not a LEC-replacement product.”

Peter Callowhill of consultancy NetGain Communications Inc., says these are trifling issues. “The scale of the opportunity is so immense that the cable companies have had a desire to gain telephony revenue for years, and they’re not going to let this pass them by,” he says. “Early adopters certainly are going and securing service through the Vonages of the space. I think it’s accurate to state there will be dozens of Vonage look-alikes in the marketplace this year, and they’re all going to have their opportunity to take market share.”

Following this flurry, however, will be a move to facilities-based offers. “There has been global work on standards, DOCSIS, 1.1 and 2.0, and you have the Nortels and Ciscos of the world working to create all the products necessary for cable companies to really utilize their own infrastructure and not have to have dual systems, and that’s a great long-range cost advantage that cable companies are going to have,” says Callowhill.

Going to market without facilities may be necessary to capture important mindshare in the space. “It’s a timing issue — they can strike right now when everyone’s talking about VoIP, and there’s just this huge tidal wave of acceptance and response and new players,” says Callowhill.

“The cable companies certainly can private-label and then roll in their own technology at some point in the future without the end user ever really realizing.”

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NSP Strategist