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The 2005 Canadian Telecom Summit
Toronto Congress Centre, Toronto
Monday, May 30th - Wednesday, June 1st, 2005
Conference Program: Monday , Tuesday , Wednesday

Press Room

National Post Kick-off

Monday, May 30th, 2005

Battle of the bandwidth

Mark Evans
Financial Post

Monday, May 30, 2005

A Financial Post team led by Mark Evans will provide extensive coverage of the Canadian Telecom Summit in Toronto over the next three days. Among the issues being discussed by leading Canadian and U.S. telecom executives such as Nortel Networks Corp. CEO Bill Owens, Telus Corp. CEO Darren Entwistle and Vonage Holdings Corp. CEO Jeffrey Citron are the emergence of Internet telephony, the growth of the wireless market and the hot new consumer and small-business trends.

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Imagine two hostile armies poised for battle with exactly the same number of soldiers and weapons. In many respects, this is how the war between telephone carriers and cable companies is unfolding.

With carriers starting to offer digital television, and cable companies getting into the telephone business, the competitive lines are quickly evaporating. For consumers looking for phone, TV or high-speed Internet access service, it is becoming difficult to tell the two providers apart.

In Ontario and Quebec, the battle lines are even more blurred as Bell Canada and Rogers Communications Inc. also throw wireless service into the mix to create a quadruple-play bundle.

"Both sides are competing for the same dollars, and moving quickly because it's a huge cash cow for both sides in terms of video for [cable firms] and voice for telephone carriers," said Kevin Rankin, president and chief executive of Ottawa-based Tropic Networks Inc., a maker of telecom equipment that moves traffic more efficiently across high-speed Internet networks.

Given carriers and cable companies have the same arrows in their quivers, the challenge will be creating competitive differentiators. If you scratch beneath the surface, the biggest difference could be the size of the "pipe" going into homes to deliver Internet-based content and services. Cable firms are seen holding a slight edge -- at least in the short term -- because their networks were designed to carry TV signals and, as a result, have more capacity.

A big advocate of this thesis is Greg MacDonald, an analyst with National Bank Financial.

"As a result of significant network upgrades, cable companies now have a competitive advantage in bandwidth and interactive features," he said. "Further, planned telecom broadband upgrades will still fall short of the cable network potential. We conclude that cable will maintain a product advantage in Internet bandwidth and digital television features for at least the next two to three years."

Mr. MacDonald's position is somewhat contentious but he has brought attention to a key competitive issue.

Without getting into the nuts and bolts of the technology, here's a layman's take on why Mr. MacDonald believes cable pipe is currently superior to telco pipe:

During the past decade, cable firms have been aggressively investing in their networks, expanding the use of high-bandwidth fibre and converting their networks to digital technology. This has let them offer high-speed Internet and telephone service in addition to digital television.

Mr. MacDonald said the real differentiator is the last mile of a cable network. Contrary to copper, which makes up the last mile of the telecom network, cable companies string coaxial cable to the home. Mr. MacDonald said this provides cable companies with 1,000 times the bandwidth of copper -- giving cable firms a much fatter pipe that may become a key differentiator in the near term.

Telecom carriers argue there is more than adequate capacity in their networks to deliver the services consumers want. This argument is based on being pragmatic about spending and not building the network before there is demand from consumers to justify the investment.

But there is little doubt carriers such as Bell realize they need more bandwidth to compete with cable. Last year, Bell unveiled plans to spend $1.2-billion over the next three years to upgrade its high-speed network in Ontario and Quebec.

Brian O'Shaughnessy, vice-president of video and access networks technology development with Bell, said Bell will have all the bandwidth it needs to compete with cable through a "smart pipe" strategy that will take full advantage of new technology.

In a short period of time, he said, Bell will be able to offer consumers five to seven times faster Internet access than what is now available, and be able to easily triple it again by the end of next year. "Absolutely by the end of next year, we will have a vast amount of bandwidth," he said.

For consumers, a bigger pipe will be important if they want to use ultra-high-speed Internet access service to use products such as high-definition TV, video telephony and conferencing and interactive games. Perhaps the "killer app" in the big pipe world is high-definition TV, which consumes large amounts of bandwidth. While HDTV has low penetration, it has huge growth potential as consumers buy new HDTVs and look for digital programming such as movies and sports.

Mr. MacDonald said cable firms will be able to easily deliver HDTV signals to all TVs in the home, while carriers will struggle to compete unless they upgrade their networks. "Today, HDTV is a very small part of the market but if it increases significantly, it becomes table steaks," he said. "Carriers will be in the business of TV but it won't be in HD."

Michael Lee, vice-president, strategy and development at Rogers Cable Inc., said carriers will need a "great engineering feat" to expand their networks to deliver TV, telephone and high-speed Internet service. Even if they pull off this feat during the next three years, he said, they will still be a "couple bullets short of a full revolver" because high-speed Internet service will likely have to be compromised given how much bandwidth television requires.

To reduce or eliminate the bandwidth gap, carriers are counting on new technology that will hit the market during the next two years. Among them are very high rate Digital Subscriber Line, or VDSL, which, theoretically, will let carriers deliver HDTV, high-speed Internet and telephone service. Another technology is MPEG-4, a compression algorithm that sends video and images using less bandwidth.

Hilary Mine, senior vice-president of North American marketing with Alcatel SA, said it is important to remember carriers will be able to adopt a variety of technologies to go after different market segments. For new housing developments, it makes complete sense to install high-capacity fibre-optics, while housing in existing neighbourhoods can be upgraded over time.

"There is never one perfect answer," she said. "It depends on market issues and timing issues."

Alcatel is playing a key role in the launch of television services by carriers. Through a partnership with Microsoft Corp., Alcatel is offering IP-TV. Among the carriers to embrace IP-TV is SBC Communications Inc., which signed a 10-year, US$400-million deal with Microsoft last November.

Mr. MacDonald, however, has doubts new technology will get carriers to where they need to be. As a result, he believes carriers will have to invest more money in their networks to increase the capacity. But carriers, he said, are reluctant to admit this possibility because they do not want to tell investors they need to boost capital spending.

Bell may eventually have to concede its current strategy of running high-speed fibre to a central office, located as far as 4,000 feet from a consumer's house, will have to be replaced by a plan to run high-capacity fibre into each household -- an approach New York-based Verizon Communications Inc. has already adopted.

While cable companies crow about their pipe advantage, they concede that over time it will shrink to the point where it will no longer be an issue. When that day comes, the battle between cable and telecommunications will come down to basics such as marketing and customer service. In the end, the winners in the carrier-cable war will be consumers, who will have better choice and a wide variety of new services at reasonable prices.

"That is great from a customer perspective, especially if there isn't a lot of differentiation it means the customer will win all the way around," said telecom consultant Mark Goldberg. "They will win on price while carriers and cablecos continue to experiment with new technologies to try to differentiate themselves."

© National Post 2005

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