Time Warner to Use Cable Lines to Add Phone to Internet Service

ime Warner Cable said yesterday that it had signed a deal with Sprint and MCI to help it send telephone calls over lines once used only to deliver television programming. The move escalates the clash between the cable and the traditional telephone industries, and shows how quickly cable companies are transforming themselves into all-purpose telecommunications providers.

Internet technology has made it possible for the cable companies to use their lines — which reach nearly every American home — to deliver telephone service, as well as high-speed Internet connections. Time Warner said it intended to offer telephone service by the end of next year in major markets in most, if not all, of the 27 states it serves.

	Advertisement

Several cable companies already offer phone service using an older technology, though worldwide the number is fewer than eight million subscribers combined.

The newer technology, known as voice over Internet protocol, sends phone calls as digital data over the Internet. Customers using the service would plug regular phones into modems connected to the cable wire in their homes. They would be able to keep their existing phone numbers, and the Internet-based calls could be received on regular phones. Refinements of this technology over the last year allow cable companies to offer phone service in more markets more quickly.

In addition to Time Warner Cable, the cable giants Comcast, Cox Communications and Cablevision have started deployment of Internet phone services, with plans to expand those services in 2004.

Time Warner Cable, the second-largest cable company in the country, with 11 million subscribers, entered the phone market last May with service in Portland, Me., signing up 8,000 subscribers, who pay $39.95 to $49.95 for unlimited local and domestic long-distance calling.

"Our plan, by the end of next year, is to be in most, if not all, of our markets," said Glenn Britt, chief executive of Time Warner Cable, a division of Time Warner.

The move comes as Time Warner has sought to shed huge amounts of debt and mine new sources of revenue. The development of a telephone service could be particularly significant because the cable division already is Time Warner's "biggest profit center," said Dennis Leibowitz, a general partner at Act II Partners, a media and telecommunications hedge fund based in New York. "It's the growth element" of Time Warner, he said.

Mr. Britt said the Internet technology made possible the rapid roll-out of the service and was less expensive than the more conventional cable-phone technology, called circuit switch technology. Industry analysts said those cost savings could be passed on to consumers in the form of lower phone bills.

Under the deal announced yesterday, Time Warner Cable will pay Sprint and MCI to carry the telephone traffic from its cable network across a larger telephone network, and deliver the calls to the receiving numbers. The companies did not disclose terms of the deal.

Earlier efforts by cable companies to deploy telephone service over cable lines had mixed results. AT&T Cable Systems, for example, generated interest in cable phone service in the late 1990's, but the company was acquired last year by Comcast, the nation's largest cable company. At that time, Comcast said it would not expand that business but would focus on making sure it was profitable.

Comcast has said it is taking a cautious approach to the new technology, noting that despite its promise, Internet telephony is in its early stages. "We want to work the kinks out, then take it larger," said Sam Chernak, a vice president at Comcast.

Cablevision, the sixth-largest cable company, began offering Internet telephone services in late September, and by mid-November, it was available to more than four million homes in Connecticut, New York and parts of New Jersey.

Cablevision offers its service only to its high-speed Internet customers, charging them an additional $34.95 a month for unlimited calling in the United States and Canada. Analysts said they were impressed with the company's first marketing push.

Mr. Leibowitz said the cable industry's move into phone service had long been anticipated. "The idea of rebuilding the cable world was to offer voice, data and telephony — and telephony has been the missing piece," he said. "For economic and competitive reasons, they are now ready" to offer it.

But only recently has Internet technology become refined enough that the cable companies felt they could offer reception quality comparable to that offered by traditional telephone companies. The cable companies say they have turned the corner, and they intend to prove it in the coming months.

Cox Digital Telephone, a division of Cox Communications, plans to begin its first test of Internet-based phone service in Roanoke, Va., in the next few weeks. That rollout is viewed as significant because the Atlanta-based cable company is considered a leader in pushing the boundaries of the cable business. Cox already sells phone services to around a million customers using the older circuit switch technology. What Cox's experience shows is that a cable provider can successfully take on traditional telephone companies. In Omaha, 45 percent of Cox's cable customers now subscribe to its telephone service, and in Orange County, Calif., that figure is 55 percent.

This summer, the Yankee Group, a market research group, projected that the number of customers using voice-over-Internet-protocol telephone service would be around 220,000 by the end of 2004. But Lindsay Schroth, an analyst with the group, said that the number could well double, in light of the aggressive moves by the cable companies.

"Every year they told us, `next year is the year.' It was all a pipe dream for a while," she said. "But it has really shocked me the developments we've had in the last four months."

The development also comes amid an increasingly chaotic and competitive landscape for traditional phone companies. Mobile phone providers are offering consumers an alternative to land-line phones. Wireless operators and start-up technology companies are also developing new ways to transmit data and voice traffic, cutting phone lines out of the picture.

But phone companies are not sitting idly by as their turf comes under attack. In fact, they have been more aggressive in defending their share of the high-speed Internet market, where the cable companies took an early lead.

And the phone companies say they are prepared to offer Internet-based phone service, if that is what customers demand. Eric Rabe, a spokesman for Verizon, said that cable companies were entering a highly competitive voice market.

"If they want to jump in, they'll be the 840th and 841st competitors," he said, adding that the cable companies will be focusing on their existing customer base, "which means, at this point, it is very small for them."

Mr. Britt of Time Warner also expressed caution about how quickly the cable companies could challenge phone companies that have the overwhelming share of the local telephone market. "They are very large and they are good competitors," he said. "They're going to be around for a long time."

But as Mr. Leibowitz of Act II Partners noted, the cable companies really have no choice but to get into the voice market, because phone companies are pushing into the data and video markets.

"They realize they need to do it now, and they need to do it quickly," he said, and to compete, major telecommunications competitors "are ultimately going to have to be in every business, everywhere — including mobile."

Get home delivery of The Times from $2.90/week