Hoping to Attract Callers to the Internet
By KEN BELSON and MATT RICHTEL
May 3, 2004

N EW ORLEANS, May 2 - Some of America's biggest telecommunications companies are meeting here this week to discuss how best to provide phone services to consumers. It will not be telephone companies talking, though, but cable providers.

The effort by the cable companies to make deeper inroads into telephone services by using Internet technology will be the No. 1 topic at the industry's annual trade show here that continues through Wednesday. There will be much backslapping given the success cable providers have had rolling out high-speed Internet, and they will be eager to show how their new Internet-based phone services that use those broadband connections will be just as triumphant.

But selling high-speed connections and phone services are two different things, and cable companies are certain to face an uphill climb beating the telephone industry in this latest contest. Many consumers still see high-speed Internet connections as a largely generic service, which they can buy from many different vendors.

But choosing a phone service is a more emotional decision. Telephone companies have well-established brands and have been reliable providers of voice calls for decades. Cable companies are still viewed, not as phone providers, but in terms of the television programming they offer.

Moreover, phone calling over the Internet is relatively new, and providers of all types are still working out the technological flaws as well as customer and billing services. Those gaps in service may alienate customers, analysts said, if cable companies introduce Internet calling too quickly.

"Depending on the cable provider, the quality of the telephony is all over the map and bad news travels by word of mouth faster than good news," Lisa Pierce, vice president at Forrester Research, said. But that risk has not stopped the cable companies from introducing Internet phone services. With all the promotion surrounding the technology and its potential to lower phone bills substantially, the cable providers do not want to be beaten by AT&T, Qwest and other telephone companies that have started Internet calling options and start-ups like Vonage, which entered the nascent market two years ago.

Cable companies are also eager to recoup some of the roughly $75 billion they spent in the last few years to upgrade their networks so they could offer Internet calling and other digital services.

Though the cable network has been in place for a while, selling Internet calling broadly became more possible when the telephone switches needed to best deploy the technology became commercially available. In December, Time Warner Cable, the nation's second-largest cable company after Comcast, announced plans to make Internet phone service available by the end of this year in all 31 markets it serves.

Cablevision Systems also announced an ambitious program, and signed up 29,000 customers in the last two months of 2003. The company said it was increasing subscriptions by 2,500 a week.

Cox Communications began its first Internet phone service in Roanoke, Va., last year and it expects to introduce the service in other small and midsize markets in the coming months. (Cox will, however, continue to offer phone service through an older circuit-switched technology in larger markets where denser concentrations of customers make using that technology more feasible. )

Cox added 78,959 customers to its phone services in the first quarter of this year, 37 percent more than in the period a year ago, with most new customers receiving circuit-switched calls. In any event, Cox, the industry leader, has one million phone customers, a small number compared with the big local phone companies.

"A lot of customers don't know cable companies offer telephony," said David Pugliese, the vice president for product marketing and management at Cox Communications.

Still, cable industry executives say the real growth will start in 2005, when Internet phone services are available in more markets. Encouragingly, too, they say, customers who order telephone service with their cable and Internet connections are 50 percent less likely to switch providers.

"We get more from a telephony halo effect," Mr. Pugliese said, referring to the high retention rate of cable consumers who choose cable telephone service.

Cox and other cable companies are also eager to promote their reliability. Unlike other Internet phone service providers that use the public Internet to transmit calls over phone networks, cable companies use their own cable lines. This allows them to offer better quality control of calls traveling on their networks.

"We can prioritize the voice bits so they are not interfered with, so you get excellent quality," said Tom Rutledge, the chief operating officer at Cablevision Systems.

Cable companies also note that they offer consumers convenient installation through regular cable company workers. And like the telephone companies, they charge flat fees for unlimited local and long-distance calls connected via the Internet, along with added features like caller ID.

Still, offering innovative technology is no guarantee that customers will cut their ties to their traditional telephone companies, analysts say. To get customers to switch, the cable industry will have to spend a lot of money marketing Internet telephony even as they are introducing other services like video on demand and digital video recorders.

"If you're a cable operator, there are five or six things happening," said Adi Kishore, a cable industry analyst at the Yankee Group. "With a lot of things going on, it's a matter of where you want to focus."

Matt Richtel reported for this article from San Francisco.

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