By Tara Seals

After years of hype, 2005 will see the cableco triple play - bundled voice, video and data offers - come to fruition on a widespread level as the major MSOs roll out VoIP on their PacketCable infrastructure. That’s good news for the big cablecos sweating competitive pressure from RBOCs and CLECs alike. But what about the other guys - the small, geographically constrained cablecos that make up a good chunk of the competitive options for Tier 2 and Tier 3 towns?

According to Infonetics Research, North American cable companies spent $64 million on VoIP equipment last year, but most of the smaller companies only have two-way HFC networks suitable for delivering Internet access and haven’t invested in CableLabs’ PacketCable specification for delivering IP voice. They don’t have the resources or the customer volume to justify the capital outlay, and that could prove a death knell.

“In most cases, the smaller cablecos are the only game in town,” explains William Stofega, senior analyst at IDC, which projects MSOs to have almost 10 million VoIP customers by 2009. “They’ve already sold what they have to everyone they can in their area. There’s no room to grow and stay viable. So this gives them something else to sell.”

They also face being run out of the market by the incumbents. “Small cable companies need to be able to provide their customers with access to the new broadband applications, but they obviously will not be able to throw resources at this in the way that the Bell companies are able to,” says Steve Braasch, vice president of marketing for PointOne Inc., which offers a turnkey solution that runs on a private IP network with national coverage. “But the beauty of the IP universe is that it is a virtual universe; they do not need to build vast new infrastructures in order to bring new services to their customers. They already have the connection, so they are able to partner with best-of-breed service providers at relatively low cost.”

And so, rather than let the segment die on the vine, some wholesale VoIP providers have made smaller, voice-needy cablecos a priority in the last few months, giving these providers a way to get in the voice game with minimal investment and risk by taking advantage of outsourced services. PointOne for instance can install servers at the MSO’s head-end to ensure QoS, certify Internet access devices, and provide billing and around-the-clock network operations services. The service is delivered on a co-branded basis as “StarPoint IP digital phone service brought to you by XYZ Cable.”

Meanwhile, VoIP Inc. announced in October a contract with J & N Cable Systems Inc., a small operator in Washington and Oregon. The company hopes the deal will lure others to consider the outsourced route. “[Subsidiary] VoIP Solutions is one of the first to give smaller cable companies the ability to be a viable competitor to local phone [companies],” says Clive Raines, president of international operations at VoIP Inc. He adds the carrier is hoping for a ‘string of deals’ with the nation’s 1,100 small cable companies with VoIP Inc.’s outsourced offer, which costs a mere $10,000 for setup.

Another option is simply to rebrand someone else’s best-efforts service. Regional cablecos Advanced Cable Communications and Armstrong Cable, for instance, have signed deals with Vonage Holdings Corp. to private-label the bring-your-own-access offer.

Despite the fact that cablecos may be financially challenged in building their own VoIP services, they ironically may be in one of the best positions to offer the service.

The fact that cablecos own the last mile and already have proven video success is a huge advantage in a market that already has 400- plus VoIP service providers in North America alone, according to industry group VoIPAction. “It boils down to the question of who’s going to win the service game,” says Sarah Hoffstetter, senior vice president of corporate communications at Net2Phone Inc. “You have to have the bundle, the last-mile access and/or the brand. Two out of three will get you to the finish line; one will get you nowhere.”

With regional cablecos well-known in their areas as last-mile access owners, bundling the voice with existing video and data will help them weather the coming storm of consolidation and shakeout of IP telephony service providers, she notes.

Net2Phone has targeted small MSOs with hosted, wholesale VoIP that includes provisioning, switching and enhanced feature sets as well as billing, network monitoring and other back-office chores. Last year, Net2Phone announced the first commercial launch of its hosted cable VoIP service with Liberty Cablevision of Puerto Rico and has since added more customers, most recently teaming with Millennium Digital Media to offer cable telephony service to customers in Maryland, Michigan, Oregon and Washington - covering a footprint of 255,000 homes passed.

Net2Phone isn’t the only one to recognize second-tier cablecos as a prime opportunity. “The [Tier 2] cable market was an ideal candidate for our service because of its method of connectivity to its customer base, the ability to efficiently target customers, the ease of implementation of services and the market’s receptiveness to this product,” says Braasch.

i2Telecom International Inc. has launched the VoIP Virtual Network Operator (VVNO) program and is specifically targeting smaller cable MSOs, according to Jerry Lumpkin, senior vice president of Americas sales at the carrier. “We see a real opportunity here,” he says. i2Telecom uses its own network as well as the Internet to carry traffic. Participants in the VVNO program use their own back-office functionalities and can customize their product offerings and rate plans under their own brands, while earning recurring revenue on every customer minute. This allows partners with strong brand recognition and existing infrastructure to gain higher margins, Lumpkin says. “We have substantially lowered the barrier to entry for companies who want to capitalize on the growing VoIP market,” he says. “i2Telecom [can] build strategic partnerships with companies that have strong, leverageable brands, and/or large distribution channels.”

As for whether smaller MSOs will bite in large numbers, most are bullish.

“They will take the least cost-prohibitive route,” says the IDC’s Stofega. “Everyone learned their lesson in the ’90s. This is quick and easy to do. Sometimes people want to characterize these companies as slow movers, but there are pockets where they are really cutting-edge.”

And, bottom line, VoIP represents a way to leverage existing assets and brand recognition for an extra $30 to $40 per month average revenue per user.

“Up ’til now, a big obstacle in the cable market was the lack of a Tier 1 provider testing the waters,” says Hoffstetter. “Now it’s a green light from the big boys, and the stampede is coming from everyone else and not just clustered in large markets. I think 12 months is conservative for it to be ubiquitous.”

The Water is Fine

VoIP provides cablecos with a significant opportunity to take business from the copper wire players. JupiterResearch forecasts that VoIP telephony services will jump from about 400,000 U.S. households at the end of 2004, to 12.1 million by 2009, representing about 10 percent of all U.S. households. Seventeen percent of all U.S. broadband households will use a VoIP telephony service in 2009, up from only 1 percent this year.