Here Come Two More Bullets for Cable To Dodge
For more than a decade, cable has had only one serious competitor: direct-to-home satellite. Those days may be over. Telcos, which already have dropped prices for DSL and phone bundles, are threatening to eat into cable operators’ core video business, while utilities, small towns and municipalities intend to challenge cable with fiber-optic and broadband over power line technologies. Two new rules adopted last month by the Federal Communications Commission will ease their entry onto cable’s turf. In one set of rules, the FCC paved the way for utilities to offer high-speed Internet access via the nation’s grid of electric lines using a technology formally known as broadband over power lines (BPL). New York-based Con Edison and Ohio-based Cinergy are trialing and testing BPL; after a pilot program in Westchester, N.Y., Con Edison plans in the coming months to partner with Earthlink and Ambient to offer BPL to residents in a high-rise building on Manhattan’s Upper West Side. The FCC also ruled that regional Bell companies will not have to give rivals access to new fiber-optic communication lines through which they plan to offer an array of services, including high-definition video—a decision that has prompted telcos to speed up construction plans. Verizon, for example, will spend $800 million this year and billions more over the next couple of years to build a fiber-optic network in parts of nine states, including Texas, California, Florida, New York and New Jersey. The company said late last month it would hire as many as 5,000 workers to help with construction, and could offer a video product within a year. By the end of 2005 its new network is expected to pass some 3 million homes. Merrill Lynch now believes Verizon will far exceed that figure and has the potential to revamp 50% of its network by 2008 and 100% by 2010. SBC will accelerate its own fiber build-out to reach 18 million homes passed by the end of 2007; it previously expected to complete that construction by 2009. "Fiber is a technology whose time has come," says Michael Render, a principal at market research firm Render Vanderslice and Associates. "Fiber is superior to most other technologies in that it can send very high bandwidths for very long distances, unlike copper and coax and airwaves." Farewell to the Copper Age Out in Comcast territory, near Sacramento, Calif., SureWest Communications has made a play for cable’s customers. SureWest is bringing high-capacity fiber-optic communication lines directly to customers’ homes instead of to a neighborhood connection point (or node), which is connected to the home via copper wiring. At the end of June, SureWest’s fiber-to-the-home network passed about 57,000 homes in the Sacramento region, and the company had signed up nearly 14,000 customers, half of whom are taking SureWest’s triple-play bundle of voice, digital video and high-speed Internet access. Advocates call fiber to the home "future-proof" because of its high bandwidth; symmetric nature, meaning download and upload speeds are the same; and low maintenance costs. SureWest, which introduced long-distance service in 1997 and wireless and DSL high-speed Internet service in 1999, has been trying to get into the cable business since 1996, says Fred Arcuri, SVP and COO of SureWest, but it bumped into regulatory difficulties. SureWest saw an opportunity to expand by buying the assets of bankrupt WINFirst Networks, which was based in Sacramento. SureWest bought WINFirst’s hybrid fiber and coax network for $12 million—WINFirst had reportedly spent $200 million on it—and began migrating it to all fiber. Meanwhile, across the country from SureWest, the city of Manassas, Va., in November of last year became the first community in the country to offer broadband over power lines, a technology in far wider use in Europe. After a rocky start with Prospect Street Broadband, which originally won the franchise to run the network, Manassas turned to Communication Technologies. The Chantilly, Virginia-based company, which has been researching and testing BPL for more than 15 years, began operating a BPL network for the city on June 30. TV via Power Lines BPL technology uses the medium- and low-voltage lines outside the home as the last-mile solution for broadband. Bernstein Research analyst Tom Wolzien expects it will be at least three to five more years before regulatory issues and business models are worked out, and three to seven years for deployments of any scale to take place. While video currently is not available via BPL, Walt McAdams, VP, commercial, for Communication Technologies says the technology is capable of deploying both voice and video services. Wolzien expects limited video service to be available over BPL within a year. Intellon, a maker of chip sets that enable broadband access through a home’s electric wires, is watching developments closely. "We’re starting to see more and more interest in [BPL] technology," says Cameron MacCaskill, Intellon VP, sales and business development. Sales of the company’s PowerPlug modems are jumping, according to MacCaskill. It took the company two and a half years to sell its first million PowerPlugs, he says, and about a half a year to ship its second million. Like fiber to the home, BPL technology allows for symmetric, or synchronous, transmission speeds as opposed to cable’s asynchronous transmissions. BPL is cost efficient, as the infrastructure—public power lines—is already in place. "What we’re doing is enabling initial services over existing infrastructure," McAdams says. "We don’t have to go and dig and wire into somebody’s house. Whereas cable companies need to deploy fiber and coax into a neighborhood, we don’t—we’re putting devices on existing wires." BPL is more cost efficient to deploy in heavily populated urban and suburban areas because of the higher density of homes per electrical transformer, McAdams adds, a claim that, if true, can’t be good news for cable operators in big urban areas such as Comcast, Cablevision, Time Warner and Cox. Fighting Cable’s Competitive Fire With Fiber Broadband over power lines presents less of an immediate threat to cable than the build-outs of fiber to the home. As of May, there were 128 communities in 32 states utilizing fiber-optic networks for their communications services, according to the Fiber-To-The Home Council. The advantage of a pure fiber network that’s connected directly to a customer’s home over cable’s hybrid architecture of fiber and coaxial cable will become apparent in coming years, says analyst Render, particularly as gaming and peer-to-peer applications grow and websites become more video oriented. A service provider deploying fiber can offer Internet connection speeds many times faster than DSL and cable modems, enabling the user to download a movie in minutes, for example. As Time Warner Cable CEO Glenn Britt noted at the CTAM Summit in July, the biggest threat to cable will come from the big telcos, which don’t intend to continue losing their residential access lines to wireless services and cable without a fight. "Video is for us new business just like voice is new business for cable, so we’re each going to invade each other’s core business," says Bob Ingalls, president of Verizon’s retail markets group. "We’re going to defend the voice and attack their video, they’re going to defend their video and attack our voice. Broadband is the swing, but it happens to be the platform on which all this will ride. The competitive landscape is winning the broadband relationship with the customer, and fiber, in our view, is the technology that provides the potential for compelling applications and differentiation." The rollout of Microsoft TV’s Internet protocol television (IPTV) platform could play a large part in the telcos’ plans to offer digital TV service over broadband networks, although the platform is designed to enable cable operators to use bandwidth currently allocated to analog for digital TV services such as VOD and DVR. Microsoft TV has been working with cable operators and telecom companies in trials of the IPTV platform, and expects to see the first commercial deployments in the first half of next year, says Lynne Elander, general manager of Microsoft TV. Microsoft and SBC announced an IPTV trial in June; Microsoft has eight other customers for its Foundation IP platform worldwide, including Bell Canada, SwissCom and Reliance Infocom in India. IP technology’s open standards encourage competition and reduce the cost of deploying the platform, Elander says. Further, over the last two to three years, advances in compression technology have shrunk the amount of bandwidth required to deliver a high-quality signal. New encoding technologies can deliver the same signal quality with one-third the bandwidth required on a traditional MPEG 2 video network, she explains. Being able to push more bits through the pipe "is what has enabled the telcos to look seriously at being able to deliver video over their existing IP networks," she notes. "There is a lot of invested capital in [cable’s] existing [Hybrid Fiber Coax] architecture," Elander says, "[but] I suspect if you went back to any of the cable guys today and said if you were building your network from scratch what technology would you use, I would hazard a guess that most of them would say [they] would use IP technology in some way because it is standards-based, because there is so much investment worldwide around making that technology effective and efficient." Cable’s $85 billion investment in upgrading its own plant to bring fiber optics to neighborhood nodes should stand it well in coming years; further improvements such as splitting nodes can be made fairly easily without a large capital investment. But the number of homes connected directly by fiber-optic lines is growing. That number stood at 78,000 as of April, up from 5,500 in 2001, according to Render Vanderslice and Associates. The firm forecasted fiber would pass 1 million homes at the end of September, and almost 200,000 homes would have direct fiber connections. Competitive local telcos, or CLECs, account for about 45% of the fiber construction, the market research firm said in its 2004 North American FTTH Update, with municipalities accounting for another 20%. Before Verizon’s foray, most of the fiber networks were being built by rural telephone companies; municipalities; groups of municipalities, such as a unique project in Utah called UTOPIA; master planned developments; public utility districts; and, in some cases, companies like SureWest, which is competing with Comcast as well as with local phone companies outside its own service area. Battle of the Pipes Elander wasn’t the only attendee at the CTAM Summit to be startled by Glenn Britt’s comment that the telcos would be cable’s biggest competitors in coming years. "The focus on competition over the last 10 years has really been DirecTV," she says. "I thought it was an interesting acknowledgement that no longer is cable competing video vs. video but they are competing bundle vs. bundle. So who are the people that are best able to put together that bundle of services that competes with cable?" As advances in technology—especially in the growing use of Internet protocol to deliver high-quality video—make it more feasible for telecom companies and other types of service providers to enter the video arena, and as more data flows through broadband pipes, the question looming for cable operators is whether they, too, should bring high-capacity fiber all the way to the home. It’s no wonder Wall Street is concerned about intensifying competition in the broadband arena. "The people that have to spend money immediately are the telephone companies," Michael Render says. "The cable companies may be seven to 10 years away before they’re really having a major investment." UTOPIA in Utah? Comcast Bets Its Bundle Against It A cooperative of 14 communities along Utah’s Wasatch Front, in the Salt Lake City area, is undertaking an ambitious plan to provide voice, video and data services through a new fiber-optic network—and is taking on Comcast in the process. The Utah Telecommunications Open Infrastructure Agency, or UTOPIA, in late July raised $85 million in a bond offering and has begun wiring 50,000 homes in parts of six participating cities with a high-capacity, community-owned fiber "metronet." When this first phase of construction is completed in August of next year, UTOPIA, which will run the network and operate as a bandwidth wholesaler to third-party service providers, expects to offer a triple-play bundle. Eventually, 140,000 homes and businesses will be connected to the fiber network. A feasibility study conducted by Washington, D.C., strategy consultants Dean & Co. projected take rates would ramp up quickly through 2006, then gradually plateau above 50%. The higher capacity and symmetric nature of a full-fiber network will enable more new services such as uploading full-motion video streams, says Roger Black, UTOPIA’s deputy director and COO of the project. "We believe that real competition will demonstrate what the public’s appetite is for these services," he adds. Beyond the additional competition, Comcast executives in the region are worried about the fact that the communities involved in the UTOPIA project also regulate the cable franchises; the UTOPIA cities could pass laws that make it harder for Comcast to undertake new projects. "There’s a genuine concern where we are having to face the very real possibility of having to compete with the same people who regulate us," says Steve Proper, director of government affairs for Comcast Utah. Comcast likely will fight the new UTOPIA network the same way it fends off its satellite competition—by selling bundled services at more attractive prices, offering one bill and by providing better customer service. In Utah, the biggest loser may end up being satellite. "We think most of our customers are going to come from satellite providers," says UTOPIA’s Black. Although cable and satellite combined reach about 60% of households in the state, satellite cannot offer video on demand. As Black says, "It is a one-way proposition." —M.S.