Comcast to Use VOIP to Offer Phone Service

Cable TV giant Comcast Corp. said Monday that it would offer telephone service to 15 million households nationwide this year, giving a big boost to a technology that challenges the core business of local phone companies.

The country’s largest cable company said it would use voice over Internet protocol technology to make phone service available to all 40 million homes in its territory -- including parts of Los Angeles, Sacramento and San Francisco -- by the middle of next year.

Comcast Chairman Brian Roberts told analysts at a meeting in Phoenix that he expected to take 8 million customers away from regional phone companies within five years.

He called cable telephony “the next engine for growth” for the Philadelphia-based company.

“I don’t believe there’s yet really been a viable competitor in the local phone business,” he said.

The announcement Monday was “a public shot across the bow of the regional Bell operating companies signaling that Comcast intends to aggressively pursue the voice business,” said Alan Bezoza, an analyst at equity research firm Friedman Billings Ramsey in Arlington, Va., “and it has the opportunity to be very profitable at it.”

But some industry experts suggested the price Comcast set for its telephone service -- $39.95 a month for customers who order at least one other Comcast service and $54.95 for the telephone service alone -- was too high. The rate includes unlimited domestic calls and a wide array of features.

“The company will have to lower its prices to be competitive,” said Ben Silverman, contributing editor of investment newsletter FindProfit.com, though he added that the price showed Comcast was confident in the future of its phone service.

Comcast had signaled its plans to enter the phone business, testing the service in three markets last year. It joins a growing number of companies to challenge local phone companies with service over cable, satellite or even conventional telephone lines.

Cox Communications Inc., the first cable firm to offer phone service, now controls 40% of the local phone business in its San Diego County, south Orange County and Omaha service areas.

But Comcast, with 21.5 million TV customers in 41 states, will become the local phone companies’ biggest rival. It operates in 22 of the nation’s top 25 markets.

SBC Communications Inc., California’s dominant local phone company, said it welcomed the competition.

“We’re convinced we have the best, most convenient and best value-oriented package,” spokesman John Britton said. SBC will start offering TV service this year, he said, and already has a few things Comcast doesn’t: cellular phone service and unified messaging for cell and land-line phones.

Voice over Internet protocol, or VOIP, treats voice much like other data, breaking it into packets and sending it over high-speed lines to the destination, where it is reassembled. Customers typically need a high-speed connection, but can use regular phones.

Free phone services like Skype and Free World Dialup, both of which also require home computers, have helped to push the popularity of VOIP.

The number of households using the technology grew to 980,000 by the end of December from 131,000 a year earlier, according to a study by research firm Yankee Group in Boston.

The number is expected to grow to 2.8 million by the end of this year and 17.5 million by the end of 2008, the Yankee study predicted.

There are important differences, however, among the providers -- such as what kind of networks are used to deliver the calls.

Skype and Free World Dialup, for instance, use the Internet, which sends traffic over whatever networks are available. Others use private or partly private networks, giving them more control over reliability, voice quality and transmission delays.

AT&T; Corp.’s CallVantage flows generally over cable networks to AT&T;’s worldwide network. Vonage Holdings Corp. relies on contracts with various network owners to handle its voice traffic.

Comcast will use its own cable network, which it has spent $39 billion to overhaul since 1996, to deliver calls to long-distance carriers with which it has contracts.

The network would give phone calls priority over other data to help ensure quality and reliability, Comcast spokesman Bob Smith said.

Unified messaging, which combines all messages from e-mail and various phones, is one of several features that will be offered down the road, he said.

Comcast’s ability to offer phone service, along with high-speed Internet service and beefed-up television and movie offerings, to 40 million homes by mid-2006 dwarfs what the Bell companies can do, said analyst Aryeh Bourkoff of UBS in New York.

The cable industry will be able to offer the so-called triple play of services to 50 million homes by the end of the year, he noted.

The local phone industry, rushing to lay fiber-optic networks to get into the television market, will be able to offer the same package to only 3 million to 5 million homes this year and 12 million homes by 2006, Bourkoff said.

Cable companies should be able to make huge profits on phone service, analysts said. Comcast expects to generate $40 a month on average from each VOIP customer.

“Cable companies can offer telephone service at a very low incremental cost, and that will be to their advantage,” said Craig Moffett, a cable analyst at Sanford C. Bernstein & Co. “The phone companies can’t even start a war in video until they’ve got the service and that will take years and tens of billions of dollars.”

Comcast’s Roberts declined to provide many more details, such as which markets would get VOIP service this year, and warned analysts not to expect too much too soon.

Comcast, though, has some experience in the phone business. It acquired about 1.3 million phone customers when it bought AT&T;’s broadband division in late 2002. Those customers were on conventional circuit-switched technology, not VOIP.

Smith said the company upgraded that network and turned around an operation that was losing $250 million a year to one earning $200 million annually.

Last year Comcast started VOIP trials in parts of Philadelphia, Indianapolis and Springfield, Mass. The company was far behind rollouts by other cable companies, such as Cox and Time Warner Cable, which serves some Los Angeles and Orange County beach communities.

“We wanted to do it right the first time and have all the features people expect and then some to differentiate ourselves,” Smith said.

Comcast shares rose 66 cents to $33.23 on Nasdaq.

SBC shares fell 18 cents to $24.90 and shares of Verizon Communications Inc., the nation’s largest phone company, dropped 38 cents to $39.03, both on the New York Stock Exchange.

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Times staff writer Sallie Hofmeister contributed to this report.

* (BEGIN TEXT OF INFOBOX) A new calling Comcast, the nationÕs largest cable TV provider, will roll out voice over Internet protocol, a fast-growing digital phone service, throughout its territory. ** Estimated residential VOIP subscribers (In millions) 2003: 0.1 2004: 1.0 2005: 2.8 2006: 7.0 2007: 12.9 2008: 17.5 ** Largest cable companies based on subscribers (In millions) Comcast: 21.5 Time Warner: 10.9 Cox Communications: 6.3 Charter Communications: 6.1 Adelphia Communications: 5.3 * Sources: Yankee Group, Kagan Research