Rumors of Fixed Line's Death are Somewhat Exaggerated

This was originally a comment at Andrew Schmitt's excellent Nyquist Capital blog, but it got kind of long and unwieldy.

In a post titled "Someone Tell the Cablecos Fixed Line is Dead", Andrew writes:

"Everyone agrees fixed line is a dying, low margin business. Yet Cablecos like Comcast (CMCSA), Cablevision (CVC), Shaw (SJR), and Time Warner (TWX) are feverishly trying to capture market share in this business. Why?"

I have a few reasons. Actually, about 70 billion reasons.

There are 175M fixed lines in the US. At $35/month (the going rate for voice over cable), that's over $70B of annual revenue. The number of lines is declining, but it's only down 9.1% over the peak (192.5M lines in 2000) - even at the highest reported annual rate of decrease (-3.5% 2003-2004), there would still be over 120M fixed lines ten years from now. For the MSOs to not go after this market, and instead to rely on a fixed-mobile convergence play (which is likely to be several years away) would be leaving a ton of money on the table (worse: leaving a ton of money in the hands of their primary competitors).

(By the way, the second major driver of POTS line decreases - aside from cellular substitution - is substitution of high-speed internet service for second phone lines used for dialup access.)

Sure, the PacketCable EMTA is useless when the MSO transitions to a SIP-based fixed-mobile convergence offer, but it's so cheap that Cablevision (for one) is shipping all their new Optimum Online customers cable modems with EMTAs whether or not they subscribe to Optimum Voice. So for maybe $10 per HSI sub in incremental capex (I don't know the actual cost difference between a cable modem without an EMTA and with an EMTA - $10 is a guess), you capture about $18/month in incremental revenue (over 50% of Cablevision's HSI customers purchase OV, at $35/month - the take rate is lower for other MSOs, but Cablevision shows that 50% is an achievable target) - and you deprive your main competitor of about $50/month in revenue for each customer you capture (since cable voice customers tend to be disproportionately high-paying voice customers).

When a SIP-based FMC solution is available, the MSOs will start shipping their cable modems with built-in 802.11n hubs, and the handsets for their "mobile" service will be dual-mode 11n/cellular. By that time, the cost of the embedded 11n hub will be low enough that they can throw it in just like they throw in the EMTA now; it'll give the customers the home networking capabilities and the platform for the dual-mode handset at home. In the meantime, they'll have captured a thousand dollars or so of revenue away from the ILECs per customer. And there will still be probably 150M-160M fixed lines sitting out there to be plucked...

Just as importantly, the MSOs will have established credibility as voice providers, established a base of voice customers, and built IP-based voice networks which (if they play their cards right and make smart equipment choices) will be largely re-usable in a converged fixed/mobile network.

Having a fixed component to the service - a "landline" - is important not because of the whiz-bang features like single number and integrated address book and all that - it's important because spectrum is a scarce and expensive resource. So when a customer uses their dual-mode handset at home, the traffic avoids the scarce, expensive licensed spectrum and hops on the abundant, cheap home WiFi network with its good in-home coverage and its DOCSIS connection back to the MSO servers.