John Malone: Telecoms could take big hit in cable wars

NEW YORK – John Malone, the chairman of Liberty Media, says the coming cable-phone wars could turn out to be a bloodbath for AT&T and Verizon.

“Cable guys right now have a huge advantage,” Malone told USA Today. AT&T and Verizon are spending a bundle to recreate the wheel (cable TV), he says. If they’re lucky, he adds, they’ll wind up as the fourth provider in any given market – behind the cable incumbent and satellite carriers DirecTV and EchoStar’s Dish Network.

He also says cable TV, unlike the new video technology being adopted by AT&T, is “mature” and understood, meaning it has few technical bugs.

And forget about trying to launch a surprise attack on cable. AT&T and Verizon must dig trenches to get their broadband networks built, he notes.

“Cable guys know where they’re coming a year in advance,” Malone says, “And they are well positioned to respond.”

It’s no surprise that Malone supports cable. He helped to create and shape the industry, primarily at Tele-Communications Inc. which was the No.1 cable operator in 1999 when he sold it to AT&T.

But Malone, who began his career as an engineer, says that cable operators – unlike phone companies – “only have to make expenditures as demand shows up.”

Cable operators aren’t taking any chances. They’re racing to add voice to their service bundles. Some of the bigger cable operators also plan to offer wireless.

AT&T and Verizon are using vastly different technical solutions to get them into the video game.

AT&T, based in San Antonio, is using IPTV, short for “Internet Protocol TV.” The technology has been used successfully for years in small deployments. But nobody has ever tried to scale an IPTV system for many customers.

The problem? Nobody knows how IPTV will hold up under the strain of millions of simultaneous users.

That includes AT&T, which plans to launch its IPTV product – sold under the U-verse brand name – to 15 to 20 markets later this year.

Verizon is running fiber-optic lines straight to the home, giving it almost unlimited speed – 100 megabits per second or more – and capacity. (In the digital world, capacity is directly related to “data rates,” or speed.)

Malone says both plans have advantages and pitfalls.

AT&T, he notes, is saving money by running broadband over its copper phone lines, which are being upgraded with digital subscriber line technology to make them high-performance. The network is expected to top out at about 40 megabits per second.

Malone says DSL isn’t sufficient to handle “heavy video,” particularly high-definition television, which eats up a lot of capacity. For that reason, primarily, he thinks AT&T could find itself in a tough spot once HDTV takes off.

DSL “makes AT&T competitive against cable for high-speed data” customers, Malone says. “But it doesn’t get them into video in a meaningful way.”

He also says the DSL plan will force AT&T to hang on to its 100-year-old copper network, which is “expensive to maintain.”

Those costs are increasing as consumers continue to dump local phone service in favor of VoIP and wireless.

Chris Rice, executive vice president of network, planning and engineering for AT&T, says its DSL technology has plenty of capacity for video. He adds that AT&T can install other equipment to effectively double the speed – to 80 megabits per second – if it needs to later.

“We have all the bandwidth we need,” he says flatly.

Rice also doesn’t think AT&T’s copper network is a problem. “Maybe he just doesn’t understand how phone networks operate, or are maintained,” he says.

Verizon’s plan also has soft spots, Malone says.

On a positive note, he says Verizon’s fiber-to-the home approach “is technically superior,” in that it will leave Verizon with unlimited capacity and blinding speeds.

But he also thinks a lot of that muscle isn’t worth the cost.

“It’s like having an American car that can go 200 miles per hour when the speed limit is 65,” he says. “You can sell those cars, because people have big egos, but it really doesn’t matter.”

In a statement prepared for USA Today, Verizon said: “We firmly believe speed, capacity and rich interactive services are killer capabilities that customers will increasingly demand and will find ways to use. In the final analysis, the market will decide the outcome.”

Time is another critical issue, Malone says.

If Verizon hews to its plan, it will have to rewire every customer in its territory. That could take decades.

Malone says he hopes AT&T and Verizon stick it out.

“They haven’t made any meaningful dent” in the video business, he says. “But I hope they do. They’re great customers.”