Duopoly

July 25, 2005
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GRAND RAPIDS — As incumbent telephone and cable television carriers battle over new broadband Internet-based service offerings, West Michigan will have a front-row seat.

"There is a convergence factor. Both companies clearly see themselves as being in the other company's business," said Rick Gershon, professor of telecommunications at Western Michigan University.

The Telecommunications Act of 1996 gave cable companies the opportunity to become full-service communication companies through the proliferation of high-speed Internet, he said.

"Once you get into high-speed Internet access, the next step is some combination of entertainment, high-speed Internet and telephone communications," he said.

Cable took an early lead in the high-speed Internet market. According to the FCC, cable has been the nation's most popular high-speed Internet technology since 1999.

At the end of its first quarter in March, Comcast Corp. held a roughly 20-percent share of the nation's 38 million high-speed Internet subscribers. Based in Philadelphia, the nation's largest provider of cable and broadband Internet service came to West Michigan in 2002 with its acquisition of AT&T Broadband.

The consolidated company has invested more than $1 billion in its Michigan broadband networks — including $200 million in West Michigan — to facilitate simultaneous video, data and voice transmissions.

Comcast has used that platform to launch a string of new products that pushed its average revenue per cable customer to $77 in 2004 from $42 six years ago.

During 2004, Comcast attracted 1.7 million new high-speed Internet customers. That same network birthed Comcast Digital Cable, now 40 percent of its subscriber base, and high-definition television (HDTV) programming.

This year, Comcast launched its Digital Voice Recorder (DVR) service in West Michigan and intends to roll out its video-on-demand service in the fourth quarter.

Easily the most significant of the new offerings, Comcast Digital Voice — a voice over Internet protocol (VoIP) telephone service — will arrive here late next year.

"Our approach is to package as many features into it at we can," said Larry Williamson, West Michigan vice president. "This is where the convergence of three products comes in — voice, data, TV."

Like its peers, Comcast is frothing for a piece of the local phone business, worth a total $130 billion a year vs. the cable industry's $56 million. It is targeting a 20-percent market share in its 40-million home footprint by

2007.

As such, the future of the cable industry is seen not on the television screen but a computer monitor.

"(Internet) is the entry level," said Gregory Dudkin, senior vice president of Comcast Michigan. "We build from that point."

Comcast added 30 new features to its broadband Internet service last year. Last week, it increased the speed of its Internet service for the second time this year, upgrading the download speed of its two tiers to 8Mbps and 6Mbps.

"We're a high-value provider," Dudkin said. "Our Internet hasn't traditionally been a lower-speed, lower-cost provider. It's never been our philosophy with any product."

Comcast's primary competition here prides itself on just that.

"One of the biggest things happening in broadband is continued downward pressure on price," said Andy Shaw, spokesman for SBC Communications DSL. "And we're the ones applying most of the pressure."

SBC is currently offering its 1.5Mbps Yahoo! DSL for $14.95 per month — cheaper than most dial-up ISPs — and its 3Mbps package for $24.95 with telephone service. By comparison, the Comcast tiers are respectively $42.95 and $52.95 — $15 more if purchased without cable.

"It's designed to drive broadband adoption by making it more affordable," Shaw said.

The cut-throat digital subscriber line (DSL) pricing has propelled the technology into direct competition with cable. Granted, the availability of DSL is a crapshoot. While penetration is a closely guarded secret, Shaw said the service is available in 76 percent of customer locations.

Nonetheless, its recent growth has outpaced cable: DSL lines increased by 45 percent nationwide last year.

SBC added 504,000 new subscribers in the first quarter of this year. It is the largest DSL provider in the country, representing about 40 percent of lines nationwide.

So it is odd that the $40.8 billion SBC can be characterized as an underdog.

SBC's forthcoming acquisition of AT&T will make it the nation's largest communications company. The San Antonio-based outfit has 52 million switched access lines in service, a base twice as large as Comcast's cable segment. Its wireless carrier, Cingular Wireless, is the nation's largest cellular company.

But, like Comcast, SBC — which came to West Michigan following its 1999 merger with Ameritech — has built its long-term plans around the Internet.

"The more people we can get into DSL the better," Shaw said. "It's a sticky product and these low prices are strategically important for us to be able to compete against cable."

Looped into the phone lines, DSL is limited in penetration and speed, and because of this, SBC is years away from its triple play.

"Right now, the current wire isn't going to give them video. They're going to have to commit to some serious expense," WMU's Gershon said.

A year ago, SBC announced Project Lightspeed, a $4-billion effort to deploy an IP-based network to 18 million homes by 2007. It then signed on Microsoft to deliver TV programming over high-speed data lines, called IP-TV.

The launch date has since been pushed back to 2008, as IP-TV field tests have been inconsistent and SBC has been hampered by failed attempts to circumvent community cable franchise agreements.

"Cable has a distinct advantage because it already has the infrastructure in place," Gershon said.

SBC does have a backup plan in place. It formed a partnership with EchoStar in 2003 to provide Dish Network satellite TV to its customers. Earlier this year, SBC announced a joint venture with San Jose's 2Wire to offer an all-in-one package to provide satellite TV and on-demand video and music through a set-top box.    

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