Broadband Cable Association of Pennsylvania

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January 30, 2014

Federal regulators are set to take a step Thursday toward retiring the existing landline telephone system in favor of a new, digital-based network.

The Federal Communications Commission was scheduled to vote to allow regional trials in which phone companies would switch networks in a particular area to newer digital technology and gauge the impact on consumers and small businesses. The trials would be voluntary for both the companies and consumers, and each proposal would require approval from the commission, said an FCC official in an interview. Once approved, the trials could take three to six months. Carriers like AT&T Inc., Verizon Communications Inc. and CenturyLink Inc. want to retire their existing, circuit-switched systems and move to systems based on Internet protocol-essentially treating phone calls like other data moving over the Internet.

Voice over Internet Protocol or VoIP is already offered by a number of phone and cable companies as well as new companies such as Vonage Holdings Corp. and Microsoft Corp.'s Skype. But those providers are subject to far fewer rules than traditional "common carriers," which must meet federal standards of reliability and ensure that their networks work together seamlessly. The FCC must approve any moves by common carriers to Internet protocol.

The transition could draw ire from consumers if it causes problems with phone service. Some consumers have complained that they have trouble completing calls in rural areas on VoIP networks, an issue that has attracted scrutiny in Congress. Officials at the FCC and big phone companies said the regional trials to be approved Thursday would help iron out any kinks. "These will be end user impact trials. Let's not talk theoretically; let's look at what actually happens. Let's learn," said the FCC official in the interview.

Phone carriers say the growing popularity of VoIP shows consumers are ready to abandon the old common-carrier system. They say Internet-based networks will enable newer technologies like video calling. AT&T in particular has expressed its desire to retire older network technology. One of the top issues for FCC Chairman Tom Wheeler is deciding which of the older common-carrier regulations should be applied to the new phone system. He has spoken often of the need to preserve regulatory principles in place for decades, such as universal service and accessibility for people with disabilities.

Harold Feld of the nonprofit group Public Knowledge, which advocates universal access to affordable networks, said testing is crucial to ensure the transition doesn't affect the reliability of the phone system. He said some 95 million subscribers to familiar phone service may be moving to the Internet protocol service. "We do not have any organized data on whether call quality goes down, what breaks and what doesn't when you switch over to IP," Mr. Feld said. The FCC official said existing customers could opt to stay out of any regional trial, but carriers would be free to offer only Internet protocol service to new customers in the trial area.

Small businesses are a particular focus of the trials because they use phone lines for everything from ATMs to fire alarms and credit card processing. Carriers will be expected to document issues that arise as they move users off the legacy network. "This isn't just about voice. The phone system is a platform. It's been an open platform for 40 years, which is why everything hooks into it," Mr. Feld said. Wall Street Journal

The Newhouse family's cable operator Bright House Networks, which has close ties with Time Warner Cable Inc., has hired UBS Securities as an adviser amid mounting deal speculation around TWC, people familiar with the matter said. Bright House serves about 2.4 million subscribers, making it the sixth-biggest cable operator, with cable systems in Florida, California, Alabama, Indiana and Michigan. The cable systems are part of the Newhouse family's media empire, which also includes publisher Advance Publications Inc. as well as an interest in Discovery Communications Inc.

While Bright House is run by the Newhouse family, Time Warner Cable handles programming deals and engineering functions for the company, a legacy of a 1990s partnership between the two companies. A possible change in control of Time Warner Cable, which looms amid Charter Communications Inc.'s pursuit of TWC, could have implications for Bright House. In light of that, the company has hired UBS to advise on programming issues and debt as well as the implications of a change in control of TWC, the people said. There is no sign that the Newhouse family is considering selling its systems, some of the people said. Time Warner Cable has a right of first offer on the Bright House systems under certain circumstances, according to a regulatory filing by Time Warner Cable.

Earlier this month Charter, which is backed by Liberty Media Corp. , disclosed what was its third takeover offer for Time Warner Cable. Like the previous two offers, the latest bid was rejected as too low by Time Warner Cable. But Charter's chances of succeeding have increased amid signs that Comcast Corp. , the biggest cable operator, is leaning away from making a competing bid for TWC. Charter and Comcast are in discussions about an arrangement in which Comcast would buy some of TWC's East Coast cable systems, including those in New York, if Charter succeeds in a TWC acquisition, people familiar with the situation have said. Comcast wouldn't put money into Charter's bid up front, however, the people have said.

Charter has also been trying to get Time Warner Cable shareholders to put pressure on TWC's board and management to engage in deal talks. Charter or Liberty could also mount a proxy battle for control of Time Warner Cable's board at this spring's annual meeting. The deadline for nominations to TWC's board is mid-February. Time Warner Cable reports earnings on Thursday and has said it plans to present a comprehensive turnaround plan during its investor conference call. Wall Street Journal

Like other pay-TV operators, Time Warner Cable has been challenged by increased programming fees demanded by media companies that own TV channels, as well as more budget-conscious residential customers dropping video services. In response, Time Warner Cable has focused more on its broadband cable and business-services units, where profit margins remain higher. Meanwhile, Time Warner Cable has been rebuffing acquisition offers from smaller rival Charter Communications Inc., calling the bids too low. Charter, the fourth-biggest cable operator, has been pursuing TWC since June. Time Warner Cable lost 217,000 residential video subscribers during the fourth quarter. The company gained 39,000 residential high-speed data subscriptions and 1,000 residential voice subscribers in the latest period.

Revenue from residential customers edged down 0.1% to $4.58 billion, as a 14% rise in high-speed data revenue made up for drops in video and voice. Business services revenue jumped 20% to $616 million. The company posted a profit of $540 million, or $1.89 a share, up from $513 million, or $1.68 a share, a year earlier. Excluding restructuring costs and other items, per-share earnings rose to $1.82 from $1.57. Revenue rose 1.7% to $5.58 billion. Analysts polled by Thomson Reuters expected a per-share profit of $1.73 on revenue of $5.56 billion. Shares closed Wednesday at $132.10 and have risen 13% over the past three months. Wall Street Journal; more from Reuters

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