Report urges package deals to beat phone companies

Copyright 2005 Gannett Company, Inc.

USA TODAY

January 24, 2005, Monday, FIRST EDITION

Cable has reached a turning point where it can beat the phone giants in the race to dominate home entertainment and communications, but the price could be steep, consulting firm PricewaterhouseCoopers says in a study of cable industry prospects out today.

The report urges operators to roll out packages of sophisticated video, Internet and phone services before companies such as BellSouth, SBC and Verizon complete a $10 billion investment in fiber-optic lines. Those lines will let them offer cable-like TV along with phone and Internet services that will rival bundles from cable operators, which are beginning to add phone service.

“The heat is up on the competition front,”

PricewaterhouseCoopers partner Ted Schaefer says. Operators “need to push (phone over cable services) pretty hard and do a lot more marketing.”

Phone companies will begin to take market share from cable and satellite companies in 2007, the firm forecasts. The number of basic cable subscribers, now at 73 million, will fall 3% by 2008.

More to the point, losses will be highest among prized affluent customers who buy multiple services. Last week, for example, Verizon outlined plans to upgrade its lines in well-to-do communities around New York City largely served by Cablevision Systems.

The report forecasts cable to have $5.3 billion in home-phone revenue by 2008, up from $2 billion in 2004. But it urges operators to fight on all fronts, such as by striking deals to add wireless phone offerings.

In addition, PricewaterhouseCoopers says that cable companies also need to add more high-definition and video-on-demand channels to fend off rival satellite broadcasters. DirecTV says that by 2007 it will be able to offer 150 national HD channels and 500 local ones.

To match that, cable operators need more capacity in their lines. That will take spending to upgrade the lines, or giving customers digital tuners so operators can go to bandwidth-saving all-digital service.

“Now’s the time to push the pedal to the metal,” Schaefer says. Operators spent about $80 billion during the past decade to upgrade their coaxial cable lines to handle two-way communications. As a result, “They have an advantage — a network they can leverage. All of the digging has been done.”

But the report says more spending is needed to cash in on those upgrades, though Schaefer says he doesn’t know how much. That could cut free cash flow or add debt, which could trouble investors. In 2004, as competition heated up, cable stocks fell 13%.

Companies can get some cash by raising prices about 3% a year, which is “not as much as in the past,” he says. In addition, they will have to fight price increases for channels. “Talks between operators and programmers won’t get any easier,” he says.