Cable Telephony Business Case and North American Forecast – 2004 to 2007

New business opportunities for cable companies, systems
integrators, system manufacturers, and OSS software developers
providing cable telephony services to the residential markets

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Executive Summary
Figure 1-1: Cable Telephony Subscriber Forecast for North America
Figure 1-2: Forecast for Cable Telephony Service Revenue in North America
Figure 1-3: Forecast for System Revenue for Cable Telephony in North America

Executive Summary

The Cable Companies in the U.S. are poised to start an aggressive rollout of Cable Telephony services in 2004. Cox and Comcast already have been offering Cable Telephony services since 1998 with 1.3 million and 980 thousand subscribers expected by the end of 2003 respectively. MRG, Inc. forecasts that the rest of the U.S. Cable Companies will have another 94 thousand Cable Telephony subscribers giving 2.4 million Cable Telephony subscribers in the U.S. at the end of 2003.

Comcast, Cox, and most of the other U.S. Cable Companies deployed Cable Telephony networks through 2003 based on the traditional circuit switched technologies that the Telephone Companies use to provide telephone services.

The U.S. Cable Companies have been waiting for the availability of the voice over IP (VoIP) technology that their research organization, CableLabs, has been developing in its PacketCable project. PacketCable 1.0, which defines basic calling capabilities, is largely complete. CableLabs started testing equipment against this specification in 2002 and there is now has a range of network and subscriber equipment that has passed these tests. This tested equipment provides a strong basis for the Cable Companies to deploy PacketCable VoIP Cable Telephony networks.

There are three major advantages that PacketCable technologies have over the traditional circuit switched technologies used by the Telephone Companies:

• The cost of PacketCable technology is significantly less than circuit switched technology. MRG estimates that a PacketCable network is approximately half the cost of an equivalent circuit switched network.
• PacketCable technology can be deployed more flexibly and efficiently than traditional circuit switched technology. The circuit switch approach requires a switching system to be installed in every locale where telephone service is to be deployed. A circuit switch must be located within four to six miles of the subscriber, in most cases. With PacketCable technology the softswitch that controls the calling can be centralized and may be located a 1,000 or more miles from the subscriber. This makes the business case for supporting smaller areas feasible with PacketCable Technology that are too expensive to support using traditional circuit switched technology.
• PacketCable technology makes it easier to provide custom features for each service provider compared to traditional circuit switched technology. This will make it possible for the Cable Companies to create new services that will differentiate their Cable Voice services from the voice services from the Telephone Companies.

The Cable Companies started to deploy PacketCable technical and marketing trials in 2003. A technical trial typically has a small number of users, often employees of the Cable Company that do not pay for the service. A marketing trial typically follows a technical trial and involves offering the service for sale in a specific area and may eventually include a few thousand subscribers who pay for the service. The objectives of a technical trial are typically to prove that the technology works in the field. The objectives of a marketing trial are to prove that people will buy the service and that the Cable Company can take orders and provide the service on an economical basis.

MRG, Inc. expects that the leading Cable Companies will move from marketing trials to commercial deployment in 2005 and will start rolling out service in new areas. The rollout of Cable Telephony services is a complex task that involves:

• Regulatory approvals
• Establishing connections with local telephone services
• Deployment of network equipment

In general, it takes eight to twelve months to accomplish all of this and establish Cable Telephony service in a new area.

The process of rolling out Cable Telephony service is a major limitation in the rate at which the service can be offered and new subscribers can be added. There is another approach to deploying Cable Telephony services that addresses this problem.

A group of companies that include Vonage, Net2Phone, and Gemini Voice Services that are offering turnkey network services to the Cable Companies. Vonage and Gemini Voice Services provide these services on their own networks. Net2Phone will deploy a network for the Cable Company. These companies provide and approach to implementing Cable Telephony networks that can significantly accelerate the deployment of the service and increase the number of subscribers.

There is a strong business case for Cable Telephony services. The breakeven point is 32 months when the Cable Company deploys its own network and 35 months when the Cable Company out sources the network. Beyond the revenue streams that they can generate, a major reason for offering Cable Telephony services is to reduce the number of subscribers that cancel their service and move to a satellite or other video service. A subscriber to telephone, high-speed data, and video services from the Cable Company will be less likely to change to another supplier for any of these services, especially if they are part of a pricing bundle. The breakeven point improves to 19 months for a Cable Company that deploys its own Cable Telephony network and 17 months for an outsourced Cable Telephony network when the telephone service prevents the subscriber from canceling their video service.
The leading companies in offering Cable Telephony services include:

• Cablevision Systems is the most aggressive company deploying PacketCable based Cable Telephony services and will offer this service across its entire served area before the end of 2003.
• Charter Communications has two PacketCable market trials underway with 23,700 subscribers. MRG expects that Charter will expand these trials and move to commercial deployment in 2004 and 2005.
• Comcast has the largest base of Cable Telephony subscribers, most of which it acquired in the merger with AT&T Broadband. The company has a technical trial underway in the Philadelphia area and will start two marketing trials in 2004.
• Cox Communications has the highest penetration of Cable Telephony subscribers of the U.S. Cable Companies. Cox is implementing a VoIP long distance network to interconnect its regions that provide Cable Telephony services. It is also adding PacketCable support to its circuit switched network in Northern Virginia. MRG expects that Cox will implement a fully PacketCable based Cable Telephony network in 2004 and will deploy PacketCable to serve its smaller markets that cannot be economically served using its current circuit switched technology.
• Insight Communications out sources Cable Telephony service to Comcast. MRG expects that it will continue to do this and will offer PacketCable based services as Comcast makes them available to Insight.
• Mediacom Communications has been testing both packet and circuit switched technologies for delivering Cable Telephony services. The company has stated that it is positioning to launch a Cable Telephony service in 2004.
• Time Warner Cable started offering a Cable Telephony service in Maine in 2003. It appears that the company will offer a similar service in Kansas in 2004. MRG expects that Time Warner will start a commercial rollout of Cable Telephony services in 2005.


Figure 1-1: Cable Telephony Subscriber Forecast for North America


Source: MRG, Inc.

Figure 1-1 shows the forecast for Cable Telephony in North America. It shows that there will be 11.3 million Cable Telephony subscribers at the end of 2007 with 10.8 million in the U.S. and .5 million in Canada.

Figure 1-2: Forecast for Cable Telephony Service Revenue in North America


Source: MRG, Inc.

Figure 1-2 shows the service revenue for Cable Telephony in North America. It shows the total revenue in North America as $4.06 billion in 2007 with $3.89 billion in the U.S. and $.17 billion in Canada.

Figure 1-3: Forecast for System Revenue for Cable Telephony in North America


Source: MRG, Inc.

Figure 1-3 shows the forecast for system revenue in North America. It forecasts a total in 2007 of $412 million in North America with $387 million in the U.S. and $26 million in Canada.

System revenue includes what the service providers pay for:
• Circuit switched network and subscriber equipment
• PacketCable Softswitches
• PacketCable Media Gateways
• PacketCable subscriber equipment
• OSS for provisioning and billing Cable Telephony services

If the Cable Companies aggressively adopt outsourcing network deployment strategies in order to maximize their footprints, they will significantly improve their Cable Telephony business. MRG has forecasted that this strategy will double the number of Cable Telephony subscribers and service revenues to 21.2 million subscribers producing $8.1 billion in 2007. System revenue will grow to $699 million in the same year. MRG recommends that the Cable Companies use outsourced services in order to take full advantage of the opportunity.

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Table of Contents

1 Executive Summary

2 The Opportunity for Cable Telephony
2.1 Incumbent Telephone Companies
2.2 Early Success with Circuit Switched Cable Telephony
2.3 Packet Voice Technology Overview
2.4 Voice Service Requirements
2.5 Market Drivers
2.6 Market Strategies

3 Packet-based Cable Telephony Technologies
3.1 CableLabs PacketCable Specifications
3.1.1 DOCSIS 1.1 Specification
3.1.2 DOCSIS 2.0 Specifications
3.1.3 PacketCable 1.0 Specifications
3.1.4 PacketCable 1.1 Specifications
3.1.5 PacketCable 1.2 Specifications
3.1.6 PacketCable 1.3 Specifications
3.2 PacketCable Architecture
3.3 PacketCable Functional Components
3.3.1 Hybrid Fiber Coax (HFC) Access Network
3.3.2 Cable Modem Termination System (CMTS)
3.3.3 Call Management Server (CMS)
3.3.4 Media Gateway Controller (MGC)
3.3.5 Signaling Gateway (SG)
3.3.6 Media Gateway (MG)
3.3.7 OSS Back Office Components
3.3.8 Announcement Servers (ANS)
3.3.9 Embedded Multimedia Terminal Adapter (eMTA)
3.4 Home Gateway Architecture
3.5 Hybrid Packet/Circuit Switched Architectures
3.6 Non-PacketCable Voice over IP Architectures

4 The Business Case for Cable Telephony
4.1 The Business Case for Building a Cable Telephony Network
4.2 The Business Case for Outsourcing a Cable Telephony Network

5 The Outlook for Cable Telephony in North American
5.1 Legacy Circuit Switched Services
5.2 The PacketCable Rollout
5.3 Outlook for the Major Cable Companies
5.3.1 Cablevision Systems Corporation
5.3.2 Charter Communications
5.3.3 Comcast Corporation
5.3.4 Cox Communications
5.3.5 Insight Communications
5.3.6 Mediacom Communications
5.3.7 Time Warner Cable
5.4 Network and Service Deployment Strategies
5.4.1 Deploying PacketCable Networks
5.4.2 Outsourcing Cable Telephony Networks

6 North American Cable Telephony Market Forecast
6.1 Forecast Assumptions
6.2 Consolidated North American Forecast
6.3 U.S. Forecast
6.4 Canadian Forecast
6.5 Alternate U.S. Forecast

7 Future Trends and Drivers
7.1 Technology Trends and Drivers
7.2 Service Deployment
7.3 Market Trends and Drivers

8 Opportunities, Risks, and Recommendations
8.1 Opportunities
8.2 Risks
8.3 Recommendations
8.3.1 Service Provider
8.3.2 System Integrators
8.3.3 System Suppliers

9 Appendices

Appendix I: Cable Company Profiles

Adams Cable Service
Advanced Cable Communications
Armstrong
Cablevision Systems Corporation
Charter Communications
Comcast Corporation
Cox Communications
Insight Communications
Mediacom Communications
Time Warner Cable
Appendix II: System Integrators
8x8, Inc.
Gemini Voice Solutions
Net2Phone
Volo Communications
Vonage
Appendix III: Systems Manufacturers
AudioCodes Ltd.
Cedar Point Communications
Cisco Systems, Inc.
Gallery IP Telephony, Inc.
General Bandwidth
IP Unity
Nortel Networks
Nuera
Siemens
Syndeo Corporation
Appendix IV: Customer Equipment
Arris Group, Inc.
Motorola
Terayon Communications Systems
Toshiba Corporation
Appendix V: Operational Support Systems (OSS) Providers
Alopa Networks
Convergys
CSG Systems
Interactive Enterprises
Lemur Networks
Liberate Technologies
Primal Solutions

List of Figures
Figure 1-1: Cable Telephony Subscriber Forecast for North America
Figure 1-2: Forecast for Cable Telephony Service Revenue in North America
Figure 1-3: Forecast for System Revenue for Cable Telephony in North America
Figure 2-1: Circuit Switched Cable Telephony Network Architecture
Figure 3-1: PacketCable Network Architecture
Figure 3-2: Typical PacketCable Network
Figure 3-3: PacketCable Functional Component Reference Model
Figure 3-4: Hybrid Circuit Switched/PacketCable Network Architecture
Figure 3-5: Alternative to the PacketCable Architecture
Figure 6-1: North American Cable Telephony Subscribers
Figure 6-2: North American Cable Telephony Service Provider Revenue
Figure 6-3: North American System Revenue
Figure 6-4: U.S. Cable Data Homes Passed
Figure 6-5: U.S. Cable Data Subscribers
Figure 6-6: U.S. Cable Telephony Homes Passed
Figure 6-7: U.S. Cable Telephony Subscriber Forecast
Figure 6-8: U.S. Cable Telephony Service Revenue
Figure 6-9: U.S. Cable Telephony System Revenue
Figure 6-10: Cable Forecast for Canada
Figure 6-11: Canadian Cable Telephony Subscribers
Figure 6-12: Canadian Service Revenue
Figure 6-13: Canadian System Revenue
Figure 6-14: U.S. Telephony Homes Passed in the Alternate U.S. Forecast
Figure 6-15: U. S. Cable Telephony Subscribers in Alternate U.S. Forecast
Figure 6-16: Cable Telephony Service Revenue Alternate U.S. Forecast
Figure 6-17: Cable Telephony System Alternate U.S. Forecast
Figure 9-1: Cablevisions’ Service Area
Figure 9-2: Volo Communications Interconnection Points
Figure 9-3: Cisco’s Packet Cable Product Architecture
Figure 9-4: General Bandwidth Circuit/Packet Architectures
Figure 9-5: Alopa Cable Telephony OSS Provisioning Architecture
Figure 9-6: Convergys Infinys System Architecture
Figure 9-7: Primal Solutions’ Access IM Mediation System Architecture

List of Tables
Table 2-1: Relative North American Market Positions and the End of 2002
Table 2-2: Major U.S. Telephone Company Unlimited Long Distance Packages
Table 2-3: Calling Features included in Unlimited Long Distance Packages
Table 2-4: Alliances between U.S. Telephone Companies and DBS Companies
Table 4-1: Business Case for Building a Cable Telephony Network
Table 4-2: Business Case for Outsourcing a Cable Telephony Network
Table 5-1: North American Cable Telephony Services
Table 5-2: Cablevision Network
Table 5-3: Charter Communications Network
Table 5-4: Comcast Consolidated Network.
Table 5-5: Original Comcast Network (without AT&T Broadband)
Table 5-6: AT&T Broadband Network
Table 5-7: Comcast’s Cable Telephony Subscription Packages
Table 5-8: Cox Communications Network
Table 5-9: Cox Communication’s Cable Telephony Subscription Packages
Table 5-10: Insight Communications Network
Table 5-11: Insight Communication's Bundling Pricing
Table 5-12: Mediacom Communications Network
Table 5-13: Time Warner Cable Network
Table 9-1: Adam Cable Service’s Cable Network
Table 9-2: Adam Cable Service’s Telephony Offerings
Table 9-3: Advanced Cable Communications Cable Telephony Subscription Packages
Table 9-4: Armstrong’s Cable Network
Table 9-5: Armstrong’s Cable Telephony Offerings
Table 9-6: Size of Cablevisions’ Network
Table 9-7: Cablevision’s Cable Telephony Subscription Package
Table 9-8: Cox Communications Voice Features
Table 9-9: Charter Communications Top Ten Markets
Table 9-10: Operating Statistics for Charter Communications’ Network
Table 9-11: Actual and Pro Forma Operating Statistics for Comcast Cable
Table 9-12: Operating Statistics for Comcast without AT&T Broadband
Table 9-13: AT&T Broadband Operating Statistics
Table 9-14: Comcast Cable Telephony Subscription Packages
Table 9-15: Comcast Voice Features
Table 9-16: Operating Statistics for Cox Communications’ Network
Table 9-17: Cox Communications Cable Telephony Subscription Packages
Table 9-18: Cox Communications Voice Features
Table 9-19: Operating Statistics for Insight Communications’ Network
Table 9-20: Insight Communications’ Bundling Pricing
Table 9-21: Insight Communications’ Financial Analysis of Bundling
Table 9-22: Operating Statistics for Mediacom Communications’ Network
Table 9-23: Time Warner Cable’s Top Ten Markets
Table 9-24: Operating Statistics for Time Warner Cable’s Network
Table 9-25: States Where 8x8 Does Not Provide Local Numbers
Table 9-26: Packet8 Calling Features
Table 9-27: Net2Phone’s Voice Features
Table 9-28: U.S. Markets Served by Vonage
Table 9-29: Vonage Regional Datacenters
Table 9-30: Vonage Voice Features
Table 9-31: AudioCodes Cable Telephony Products
Table 9-32: Components in Cisco’s Packet Cable Product Architecture
Table 9-33: Services and Features Support by the Gallery IP Cassiopeia
Table 9-34: Nortel Networks’ Cable Telephony Products
Table 9-35: Nortel Networks Communications Server 2000 Specifications
Table 9-36: Nortel Networks Passport 15000 PVG Specifications
Table 9-37: Nortel Networks Universal Signaling Point Specifications
Table 9-38: Nortel Networks Interactive Multimedia Server Specifications
Table 9-39: Specifications of the Nuera ORCA BTX Products
Table 9-40: Syndeo Syion 426 Features
Table 9-41: Motorola’s Cable Telephony Products
Table 9-42: Alopa’s Cable Customers

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