Time Warner Inc.'s Phone Service Shows Cable's Growing Clout

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Time Warner Inc.'s phone service shows cable's growing clout Industries offering similar products

By Peter Grant The Wall Street Journal

Glenn Britt, chief executive officer of Time Warner Inc.'s cable TV unit, surprised investors and analysts in late 2003 when he announced that his operation planned to roll out phone service using Internet technology in all 31 of its markets by the end of 2004.

Earlier moves by cable companies into phone service using traditional "circuit-switched" technology -- the type used by most phone companies -- have taken far longer. Cox Communications Inc., for example, launched phone service in 1997 over its cable lines yet today offers it in just 17 of its 26 markets.

"There was a certain skepticism," Britt said.

But Time Warner Cable, the country's second-largest cable operator, hit its target. While the rollout has involved a fair share of growing pains, the company now offers phone service in parts of 27 states from Hawaii to Maine. Time Warner has signed up more than 220,000 phone customers and is adding more than 11,000 each week.

The speed with which Time Warner moved with the new Internet technology underscores why traditional phone companies are rushing these days to add services such as TV -- and to bulk up by merging. That's because local-phone providers such as Verizon Communications Inc., which plans to buy MCI Inc., and SBC Communications Inc., which has a deal to buy AT&T Corp., are starting to face their most serious competitors yet for local service.

"Time Warner shows the severity of the threat that cable companies can pose to incumbent telephone providers," says Kate Griffin, a senior analyst with Yankee Group, a technology consulting firm in Boston. She says cable providers were more cautious in rolling out older circuit-switched phone systems in part because of their cost. "But the margins are there for [Internet phone technology.] Once they decide to enter, they're going to come at it with full guns."

That's why other cable companies also are moving quickly. Comcast Corp., the country's largest cable operator, announced last month that it plans to roll out Internet phone service and expects to offer it to all 40 million households its system reaches by the end of next year. (Comcast has offered circuit-switched phone service in some markets for several years.) Cox has begun to use the Internet technology as well when it introduces phone service in new regions. Nationwide, more than 80 percent of households should be able to get phone service from a cable company by the end of 2007, Yankee Group predicts.

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