Cable Prepares an Answer to FiOS

Posted on February 22, 2008 - 1:09pm.

from: Wall Street Journal

Cable Prepares an Answer to FiOS

From Wall Street Journal, February 14, 2008
By Vishesh Kumar

Stung by the success of phone companies in selling packages of TV and high-speed Internet services, the cable industry is getting close to launching a counteroffensive — an inexpensive new technology that dramatically boosts Internet connection speeds.

Called Docsis 3.0, the technology will allow the cable industry to compete on a more even footing with telecom giant Verizon Communications Inc., which is aggressively marketing a high-performance fiber-optic network called FiOS that offers much faster Internet connection speeds than cable modems can currently deliver. Whether the cable industry can roll out the new technology fast enough to minimize the damage from FiOS remains to be seen.

Comcast Corp., the largest cable operator with 24 million subscribers, is expected to be the first to deploy the new technology. It hopes to begin upgrading its networks by midyear, reaching about 20% of the homes along its routes by the end of the year, says Mitch Bowling, senior vice president and general manager, online services, at Comcast.

Other cable operators, including No. 2 operator Time Warner Cable Inc., Cox Communications Inc. and Charter Communications Inc., say they’re experimenting with Docsis 3.0 technology and plan on putting it into play in one form or another over the coming years. Just how aggressively they roll it out will partly depend on Comcast’s success, predicts Soleil Securities analyst Laura Martin.

Comcast has high hopes for the technology. “It’s cable’s next big thing,” said Brian Roberts, the CEO of Comcast, at the Consumer Electronics Show last month. “It takes us to a whole new level of speed and bandwidth.”

Offering Internet service remains a vital area of growth for beleaguered cable companies, which have seen their traditional business of offering basic video service stagnate. Both Comcast and Time Warner saw their share prices plunge by more than a third in 2007 amid concerns about competition from telecom companies and increasing spending on equipment, among other things.

But the strategic importance of Docsis 3.0 to cable companies extends well beyond Internet connections alone. Both cable companies and phone companies like to sell customers bundles of services that can include television and telephone service. Hooking customers with one compelling offering can allow a company to get a foot in the door to sell other services.

For many years cable companies had an advantage on Internet speeds because phone companies were limited to DSL offerings, which had a maximum speed of seven megabits per second. Both Verizon’s FiOS and a more limited fiber-optic service being rolled out by AT&T Inc. called U-verse are allowing the phone companies to offer more-competitive services. FiOS currently offers download speeds of up to 50 megabits a second — nearly two and a half times faster than what Comcast or Time Warner offers. AT&T’s U-verse can offer up to only 10 megabits a second, a 40% improvement over its fastest DSL offering and more comparable to cable offerings.

Verizon had signed up 1.54 million FiOS customers by the end of December, while AT&T had signed up about 50,000 for U-verse by the middle of the year — the last time the company reported the figures, according to Leichtman Research Group President Bruce Leichtman.

Both Verizon and AT&T are spending billions of dollars on their new networks — money cable operators can ill afford, given the tens of billions the industry has spent building its network over many years. The big advantage of Docsis 3.0 is that it allows cable operators to offer faster speeds without making costly overhauls to their existing networks — a key promise of the technology, given the close scrutiny Wall Street pays to the money cable companies spend on their networks.

“Docsis 3.0 will be a major defensive weapon for the cable industry, which had previously always considered faster Internet connections a competitive advantage against telecom players,” says Standard and Poor’s analyst Tuna Amobi.

Comcast, for example, which currently offers maximum speeds of about 16 megabits per second, expects to boost speeds to 50 megabits per second to some homes served by Docsis 3.0 by the end of 2008. Over the next two years, the company plans on offering speeds of over 100 megabits per second to homes served by Docsis 3.0.

The importance of speed is growing amid surging popularity of Internet applications like video downloading that work better on faster Internet connections. Researcher comScore recently reported that a record 10 billion videos were viewed online in December.

The new bandwidth speeds could help launch a new generation of Internet applications — which in turn could further fuel demand for Comcast’s own services. “Docsis 3.0 has the potential to influence an entirely new phase of Internet innovation in the same way that broadband spurred the development of many of the video-rich applications that have become mainstream today,” says Comcast’s Mr. Bowling.

Despite the big promise, challenges remain for cable to be able to deliver. For starters, while the Docsis 3.0 overhaul is relatively cheap, it’s still labor-intensive and time consuming. That’s because a technique called “channel bonding” — made possible for the first time by Docsis 3.0 — will play the key role in allowing cable companies to offer dramatically faster bandwidth speeds. Channel bonding lets cable companies electronically tie together several of the pipes they use to transmit data to customers to create one larger and faster pipe, thereby boosting connection speeds.

But the process of making the changes at plants takes time, says Mr. Bowling. “It’s a lot of physical work since you have to physically go to a market to do that.”

What’s more, consumers who want to use the new technology will have to get a new cable modem, complicating life for cable operators who will have to arrange to ship out new modems to millions of customers.

In the meantime, S&P’s Ms. Amobi expects the telecom players to grow even more aggressive in their push to offer faster Internet connections. “As Verizon sees the new competition from cable coming, I expect to see even more marketing announcements and promotions come out,” he says. “Verizon won’t just wait around as this new service gets launched.”

( categories: Telcos | Comcast | Time Warner | Verizon )