MSOs still have the edge

Toughest battle with telcos, overbuilders is for high-speed data business
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DBS services remain the most formidable competition to cable, with operators holding a fairly strong advantage over insurgent telcos and overbuilders.

That's the assessment of securities and cable executives appearing on a May 8 NCTA panel focusing on "the race for subscribers."

"Anyone who comes in and thinks they can take 20% of the cable companies' customers is in for a tough fight," said Comcast Vice Chairman Julian Brodsky.

The closest battle is in the high-speed data business, where cable operators and telcos are racing to deploy similar services and lock up customers.

After years of hesitating, MSOs have grown far more aggressive in the past year. But telcos and resellers are equally aggressive in deploying digital subscriber line (DSL) service, which has advantages over cable modem service. SBC Corp., in particular, is spending heavily to upgrade plant and market service in the roughly 25% of the country the telco serves.

But JP Morgan telecom analyst Todd Jacobs said cable has a clear advantage in deployment of high-speed data service. Although DSL is being heavily promoted in large markets, the physical limitations of the technology limit the audience. DSL customers still must reside within 12,000 feet of a central office, less than three miles.

Also, telcos that have "upgraded" their networks with digital loop carriers find that they interfere with DSL transmission. "The reality is that only about 50% of the access lines can take it," Jacobs said.

But that doesn't mean the local network has been upgraded to deliver service. Add that factor, and telcos can deliver service to 23% of their access lines. Cable operators have upgraded systems that pass 52% of their homes.

Jacobs added a demographic filter that favors cable even more. High-speed-ready cable systems pass 60% of homes with incomes exceeding $75,000, while DSL-ready telephone networks pass just 20% of those homes. MSOs' lead there is triple telcos' readiness.

Jacobs predicted that lead would narrow sharply. By 2002, he projected, net-ready cable would pass 76% of homes, while DSL would pass 68%.

Wireless access via old MMDS systems will ostensibly pass 30% of homes. But MMDS still suffers the same severe reception problems that thwarted wireless cable operators that sold their microwave systems to MCI WorldCom and Sprint in the past two years. Interference by trees and buildings will limit MMDS' reach to just 50% of the homes those systems pass.

Jacobs is also unexcited by telcos' chance to deliver full-blown cable and data service over phone lines or VDSL. US West has launched VDSL against Cox Communications in Phoenix, but such services reach only 3,000 feet from the central office, and nationwide deployment would require a $10 billion upgrade on top of the $10 billion that telcos are budgeting for DSL data service.

There's plenty of other competition in cable's core video business.

"I always thought that DBS companies would crest, then start to head down," said Morgan Stanley Managing Director Richard Bilotti. But DirecTV and EchoStar continue to demonstrate strong growth: 25% to 33% gains in the first quarter.

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