Comcast Challenges Telcos With Plans for Internet Phone Service

Comcast said on Wednesday that it plans to offer Internet-based telephone service to about 40 million households by 2006, heating up the competition between cable and telephone companies that are moving into each other's markets in search of new revenue.

The Philadelphia-based giant is not the first cable company to enter the market for voice over Internet protocol or VoIP, but its size is certain to speed-up the pace in which competitors roll-out services to grab market share.

Comcast, the nation's largest cable operator, expects to offer phone service to half of the households its cable operation reaches by the end of 2005, reaching the remaining half a year later.

Comcast's plans continue a trend that has seen cable and telephone companies moving into each other's markets. Cablevision Systems and Time Warner's cable division have started offering VoIP service, while phone company SBC Communications is offering satellite-TV service under an agreement with EchoStar Communications. Verizon Communications has announced plans to roll out a high-speed fiber network that is expected to eventually carry television programming.

Among the driving forces behind the trend is the potential expansion of the companies' businesses. Telephone companies, for example, have little growth potential in traditional long distance and regional phone services. For Comcast, the move is particularly important, given it's decision in April to drop its take-over bid for Walt Disney, which would have brought cable networks, film libraries and other programming.Also attractive to both industries is the ability to sell larger bundles of services to subscribers, making them less likely to jump to competitors. Cable and telephone companies today offer packages in which the services are less than if they were bought separately.

"The bundling trend is more of a forced trend than anything else," Brian Washburn, telecommunications analyst for Current Analysis, said. "You'd have to be crazy to give up the price differential that cable and telephone companies are offering with bundles."

Also helping to push Comcast and other cable operators into the telephone market is the emergence of Internet phone companies, such as Vonage, which is offering their service over cable company's high-speed networks.

"What Comcast is doing is very necessary," Washburn said. "If they don't, then the Vonages of the world are going to do it for them. They're going to ride on Comcast's networks and grab the money."

Nevertheless, it's still unclear whether consumers will be willing to move from their reliable telephone companies to a cheaper, but less dependable, VoIP service from cable operators. The latter service, for example, doesn't operate during power outages, and 911 emergency services are not always available at the same level as traditional phone services."Cable companies don't have the experience and the infrastructure of the telephone companies for providing reliable phone service," Washburn said. "The telephone world has a strong tradition of reliability that's up to the five 9's (99.999 percent)."

Cable operator Cox Communications, however, could prove to be an exception. The company is beginning to launch a VoIP service over its traditional circuit-switch system. This blend of new and older technologies could provide increased reliability, Washburn said.

On the flip side, telephone companies will find it difficult to match cable operators' bundle of television, Internet and phone services.

Whether consumers chose cable operators or phone carriers, most experts believe the gradual adoption of VoIP over traditional technologies is inevitable, given its flexibility and potential for delivering unique offerings that include video-phones and integrated phone messages and email.