Opening a new battlefield against cable companies, regional phone operator US West Communications said Monday that it will take advantage of new technology to offer its Phoenix customers the first digital television and high-speed Internet service over existing phone lines.
The company backed up its commitment with another first, signing a 25-year, $300-million agreement with the Phoenix Suns professional basketball team for exclusive television rights starting in 2003.
Although cable companies have aggressively bought sports rights to drive subscriptions to their services--and have in several cases bought teams outright--this marks the first time a telephone company has invested so heavily in sought-after programming that could give it an edge against cable competitors.
The US West venture will be closely watched by cable companies and by the telephone industry, which has been slow to enter the video business despite deregulation of telecommunications by Congress in February 1996 designed to spur competition and drive down consumer cable and phone rates.
Technology experts generally agree that the software and hardware needed by US West to achieve its goals is readily available. But industry analysts question whether the proposal is economical because of the high cost.
Success by US West could set off a storm of new competition between cable and telephone companies. That could ease concerns in Washington, where legislators and regulators have been debating whether to tighten cable regulations because rate reductions have not materialized.
"This is another clear indication that competition is here and growing," said Scott Broyles, a spokesman for the National Cable Television Assn. "Regional sports programming has long been one of cable's strengths. The competition is starting to figure that out."
US West's bold push into television in Phoenix is largely a result of the brisk competition it faces there from Cox Communications Inc. Phoenix is one of US West's most lucrative local telephone markets and is home to Cox's largest cable system, with 585,000 customers. Cox has been offering high-speed access to the Internet since May and plans to launch telephone services by year's end.
Analysts have been impressed by Cox's early success in Orange County, where it has offered video, Internet and phone services selectively since September, becoming the first cable operator in the country to bundle all three products for its customers. In the areas rolled out first, nearly 20% of its cable subscribers have signed up for phone service.
After several years of debate, Wall Street and technology companies such as Microsoft seem to have concluded that cable has the edge over phone or satellite companies in the emerging competition. The primary reason is simply that cable companies own a larger wire capable of receiving and sending more information in and out of homes. Telephone data is transported into homes on a thin copper wire.
US West's ambitious plan comes at a curious time for the Denver-based Bell company. In June, the telephone company is scheduled to split off from its sister cable company, which will be called Media One and has grown since 1992 to become the nation's second-largest operator.
Analysts say the split indicates that expected synergies between the two businesses never materialized. But the two companies say they were becoming increasingly at odds in regulatory and policy debates--though both aim to offer bundled video, telephone and data services.
US West was one of the first phone companies to stick a toe into the cable waters, buying a system in Atlanta early in the decade and buying a 25% stake in Time Warner Inc.'s cable systems (as well as its Home Box Office and Warner Bros. studio). Last year, US West plunged further into cable with its $11.5-billion purchase of Continental Cablevision Systems. Now those assets are being spun off.
The biggest question facing US West in the ambitious plans announced Monday is whether the technology works and is economical. Analysts say telephone companies could be at a disadvantage because it generally costs twice as much to upgrade telephone systems to deliver video as to send the signal by cable wires.
US West plans to use its extensive fiber-optic network in Phoenix to send digital video from a central office into various neighborhoods. But the fiber-optic cables only go to within about a mile of most people's living rooms, and squeezing so much data over the twisted pair of copper wires that actually connects to a home has been a long-standing technical hurdle.
Recent breakthroughs using what is known as "digital subscriber line" (DSL) technology have made it possible to "turbo-charge" the copper wire by adding hardware on both ends, but so much equipment is required that analysts question whether the proposition is economical.
For its set-top digital boxes, US West is contracting with General Instrument, the same manufacturer that many cable companies are using.
Howard Flagg, president of Tustin-based telecommunications equipment maker PairGain Technologies, said DSL technology is "certainly up to that kind of a task," but that it will be a challenge for US West to have it deployed to 400,000 homes by the end of the year, as planned.
By making an expensive plunge into sports rights, US West is taking a page from the recent history of the entertainment business. The most popular programming, such as televised sports, is increasingly being viewed by distributors as a loss leader to help sign up customers and build a new business.
The development could signal a continued escalation in sports rights fees. Sources say US West is paying about 10 times more than Cox, whose five-year deal, expiring in 2003, is valued at less than $10 million.