Telcos Seeing Green in Cable Convergence

The cable companies' push into phone service is creating a boon for telecom equipment manufacturers

In war, only the arms merchants never lose.

And in the looming technological border wars between phone companies offering video services and cable companies offering telephone service, telephone equipment manufacturers can only win.

All-out hostilities between local exchange carriers and cable television operators were postponed by the death of telecom reform, but not averted. The inexorable convergence of these two industries cannot be checked by legislative fiat, so for now, the battles will merely be fought in smaller theaters - and battles cannot be fought without weapons.

The Baby Bells and other local exchange carriers have long been a lucrative source of revenues to the major network equipment suppliers.

But the gauntlet thrown down by cable companies heralds a new source of income for these fiber-optic swordsmiths. Cable networks enjoy plenty of bandwidth, but they lack the intricate and powerful switches at the core of local exchange carrier operations. Some companies, like Time Warner, have already ventured into the alternative-access business, hooking large customers directly into long-distance networks and bypassing the local Bells altogether. And as these cable concerns muscle into the local loop, they will need more equipment.

The scenario is already being played out in the United Kingdom, where a more open regulatory regime allows television and telephone service from a single provider. AT&T, for instance, supplies switching equipment to TeleWest, a joint venture between US West and TCI, and Great Britain's largest provider of combined cable/telephone services.

The most visible source of potential cable revenue for telecom manufacturers is the $2 billion request for proposal for telephonic hardware and software issued Cable Television Laboratories Inc., the research and development consortium of cable system operators.

The RFP, whose deadline was October 7, generated responses from approximately 100 telecom manufacturers, as well as computer firms, software developers and others, said Mike Schwartz, spokesman for CableLabs.

"It's a chunk of business that we certainly don't want to ignore," said Rick Cavanaugh, applications engineer with AT&T Network Systems, one of the respondents.

AT&T, he said, enjoys existing relationships with many of the larger cable companies like Time Warner, supporting their alternative access business.

"AT&T network systems has a whole host of capabilities," said Cavanaugh, including access technologies, switch interfaces, plant installation, billing systems and even financing. "We can bring all of these things to the table, so when a customer is involved in an extensive revamping of the network, AT&T is the natural choice."

Ray Keneipp, vice president of sales & marketing for Netrix, a Herndon, Va. manufacturer of voice, data and fax networking equipment, said cable/telco convergence opportunities lie out of the company's normal realm of business, at least for now. However, he added, cable firms may well be a future source of income for Netrix as their needs grow.

William Flanagan, vice president of technology with FastComm Communications, a Sterling, Va. telecom equipment maker, said none of the company's products lend themselves to cable

But if cable carriers turn to ATM transmission technology, he said FastComm's products might fit the bill. "It's certainly an interesting market and we are watching it for opportunities," he said.

Newbridge Networks, a Canadian network equipment manufacturer whose American operations are headquartered in Herndon, is in an excellent position to profit from the telecom wars, said Jim Michaels, assistant vice president of strategic marketing. "All of these churns in the communications environment is one of the more exciting periods that we have gone through in the past two years," he said. "The opportunities right now are absolutely wild." Tom Hill, a spokesman for Northern Telecom, another large Canadian supplier of networking equipment with operations in the U.S. and elsewhere, said the convergence of cable and television will be a free-for-all.

Northern Telecom, he said, is already one of the leading equipment vendors to alternative networks operators offering combined services in the U.K.

The company, he said, stands to will benefit from its ability to design, supply, install and manage entire networks. "Everybody in the market should be very excited," said Hill.

But how will the death of the telecom reform bill in Congress affect the plans of the cable industry and profits of the equipment suppliers?

Schwartz said the RFP was based upon the assumption Congress would pry open the local exchange this year. Their failure to do so, he added, will force the cable operators to move on a state-by-state basis, rather than nationally.

Meanwhile, Schwartz said, there has already been a local loosening of regulatory restrictions, and Congress is likely to pass some form of legislation next year. In the meantime, he said, CableLabs will put the extra time to test and evaluate equipment.

"I don't think it will really slow anybody," he said.

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