Research

Publication Date: 15 February 2005 ID Number: G00126202

Canadian Cable Operator Raises the VoIP Bar

Elroy Jopling

North American cable operators are entering the voice over IP market. Quebec's
Videotron has taken an aggressive approach by offering low prices and targeting
nonbroadband subscribers and noncable customers.

© 2005 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior
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TABLE OF CONTENTS

Introduction ........................................................................................................................................ 3
Videotron's VoIP Positioning ............................................................................................................. 3
Videotron Cable Network...................................................................................................... 3
Videotron Voice Offering ...................................................................................................... 3
Videotron Voice Pricing ........................................................................................................ 4
Gartner Dataquest Perspective ......................................................................................................... 5
Gartner Dataquest Recommendations................................................................................. 6
Cable Operators ...................................................................................................... 7
Incumbent Telecommunications Carriers................................................................ 7

LIST OF TABLES

Table 1. Videotron Voice Pricing vs. Bell Canada (Canadian Dollars).............................................. 4

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ANALYSIS

Introduction
In January 2005, Videotron became the first cable operator in Canada to enter the voice over
Internet Protocol (VoIP) market. It did so with surprising pricing and customer-targeting strategies.
Videotron's VoIP introduction is initially on the south shore of Montreal, with complete coverage of
Videotron's 2.5 million homes passed in Quebec territory planned by the end of 2005. Quebec is
Canada's second largest province, with a population of 7.5 million, or 24 percent of the Canadian
population. Videotron is the third largest cable operator in Canada and a division of Quebecor,
which had holdings generating CDN$11 billion in 2003 from printing, newspaper publishing and
television broadcasting.
Videotron's offering provides a hybrid VoIP approach, with the access networking based on VoIP
and the telephony features provided by Lucent Technologies' 5ESS traditional circuit switches.
Videotron is able to enter the market with lower capital expenditure (CAPEX) than most cable
operators because it already has the 5ESS as part of its business offering. This also provides
Videotron with hands-on knowledge selling to and servicing the voice market (albeit the business
voice market, rather than the consumer voice market).
What stands out with the Videotron offer is its price aggressiveness — with prices 30 percent
lower than the competition's — combined with the company offering the service to nonbroadband
subscribers and noncable customers.

Videotron's VoIP Positioning

Triple play (the delivery of voice, video and data by the same carrier) does not yet have a
concretized competitive model. For each geographic region, different strategies apply, based on
the dynamics of the individual market (including the regulatory environment, competition and
broadband penetration).

Videotron Cable Network

Videotron's VoIP offering is based on the following network schema:

• 2.5 million homes passed

• 97 percent two-way-enabled, with 74 percent at 750MHz

• 1.4 million basic-cable subscribers

• 308,000 (or 21 percent) digital subscribers

• 501,000 (or 35 percent) broadband subscribers

Videotron Voice Offering

Videotron will use a hybrid architecture, with VoIP in the network access and telephony features
through traditional 5ESS circuit switches at the core. The pertinent details of Videotron's VoIP
offering are as follows:

• CableLabs DOCSIS 1.1-compliant

• Plans in place to later incorporate soft switches in the network for added functionality

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 • Initial VoIP offering to 300,000 subscribers in Montreal, following a 2,500-subscriber
market trial; full territory coverage planned for the end of 2005

• Cable modem with two phone lines and 10-hour battery for power outrage

• Cable modem included at no extra cost to the consumer; existing wiring and phones to
be accommodated

• Installation requires a truck roll, with initial installation time averaging two hours

• Local number portability, 911 calls, directory listing and home alarm compatibility
available

• CDN$80 million CAPEX, with a four-year averaged success-based CAPEX of CDN$250

per subscriber

• Gartner Dataquest-estimated voice average revenue per unit (ARPU) of CDN$30 to

CDN$35 per month

• Gartner Dataquest-estimated earnings before interest, taxes, depreciation and

amortization percent of revenue after the first year of 25 percent to 30 percent
Videotron has investigated entering the wireless voice market using a variant of the mobile virtual
network operator (MVNO) model. However, the company has not yet stated any definitive plans.

Videotron Voice Pricing

Videotron's pricing strategy is more aggressive than most cable operators' entering the voice
market. A comparison of Videotron and incumbent Bell Canada's public switched telephone
network pricing is shown in Table 1.
Bell Canada has a variety of bundles, but its basic charges are regulated. Videotron is not so
regulated. Videotron will see more competition from pure-play VoIP players, such as Vonage. For
instance, Vonage's Basic 500 package, at CDN$19.95 per month, offers free calling features and
500 minutes for long-distance calls throughout Canada and the United States.

Table 1. Videotron Voice Pricing vs. Bell Canada (Canadian Dollars)

Two Services One Service
(Cable TV and (Cable TV or No Services
Broadband Subscriber) Broadband (Noncustomer)
Subscriber)
Residential Line Videotron $15.95 Videotron $18.95 Videotron $21.95
Bell Canada $20 to $25 Bell Canada $20 Bell Canada $20 to
to $25 $25
Average 32 percent less Average 19 Average 9 percent
percent less less
Optional Second Videotron $9.95 Same Same
Line
Bell Canada $20 to $25 Same Same
Calling Features Videotron $4 for the first and $2 for Same Same
additional services
Bell Canada from $5 to $14 per service Same Same

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 Two Services One Service
(Cable TV and (Cable TV or No Services
Broadband Subscriber) Broadband (Noncustomer)
Subscriber)
Five-Feature Videotron $9 Same Same
Package
Bell Canada $24.95 Same Same
64 percent savings Same Same
Long-Distance Each company has a number of long- Same Same
Plans distance plans; highlights are as follows:
Videotron free calls between Videotron Same Same
telephony subscribers
Videotron $4.95 unlimited calls within Same Same
Quebec Province
Videotron $4.95 for 1,000 minutes Same Same
Canada/United States
Bell Canada Digital Bundle* $5 for 1,000 Same Same
minutes Canada/United States
Bell Canada $24.95 for 1,200 minutes Same Same
Canada/United States
Installation Videotron $0 Videotron $0 Videotron $99.95
Charges
Bell Canada $55 Bell Canada $55 Bell Canada $55
Overall Videotron's pricing is on average approximately 30 percent less than Bell Canada's
Comparison
Note: US$1 equals CDN$0.82 as of 26 January 2005.
*Bell Canada Digital Bundle provides a reduced long-distance charge for customers with two of three
services, including wireless telephony, broadband or satellite television.
Source: Gartner Dataquest (January 2005)

Gartner Dataquest Perspective

Cable operators are entering the voice market with inherent advantages in being the new
entrants. They can address the market from a new perspective, and they can design their
offerings to address the weaknesses of incumbents' offerings. With the break-even point for VoIP
ranging from 18 to 36 months, cable operators are in the enviable position of determining how
aggressive they want to be. Each cable operator will address this advantage from a different
perspective and with a varying degree of aggressiveness, based on corporate and market
conditions.
Loyal cable consumers may switch to VoIP service for a 10 percent discount, while a greater
number will switch for a 20 percent discount and even more for a 30 percent discount. The
question is: How aggressive will cable operators be? Each situation will be based on how quickly
and to what degree the cable operator expects the incumbent telephone company (telco) to
respond. To a lesser degree, cable operators' aggressiveness will be weighed against how strong
they perceive pure-play VoIP providers to be in their territories.
Additionally, cable operators have three "wild cards" they can play in grabbing market share.
They are as follows:

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 • Cable technology allows cable operators to offer VoIP service to nonbroadband
subscribers. This is an area where pure-play VoIP providers cannot compete and the
incumbent telcos are at an extremely significant disadvantage. The telcos' circuit-
switched cost structure is not able to compete with the cost advantages of VoIP, and for
the telco to provide a broadband connection (xDSL) at no cost to maintain a VoIP
customer is cost-onerous. Most cable operators will not play this wild card at the
beginning of the game, but they will eventually. It is too great of a competitive advantage
not to.

• Wireless voice for most incumbent telcos is a key advantage, especially if they are able
to initially offer a cost-attractive wireline-wireless bundle and subsequently a wireline-
wireless converged offering. Cable operators can blunt this ILEC advantage by taking on
an MVNO role or a variant of this resale model. Canadian cable operator EastLink,
which offers circuit-switched voice, has a relationship with Rogers Communications to
be able to offer wireless voice. Again, a cable operator's aggressiveness will determine
its movement with the MVNO option. Most cable operators will put this option on hold as
they learn to navigate within the voice environment. Adopting the MVNO option will
become more prevalent in 2006.

• Another wild card will be the cable operators' offering voice services to homes passed
that are not cable customers. Most cable operators will put aside this option for many
years, until consumer customer premises equipment costs and installation times decline
or the equipment can be installed by the customer. However, it does provide an option in
competing with satellite operators. Cable operators could enter the consumer home with
a voice service and then oust the satellite provider with a more comprehensive bundle.
Videotron's move represents one of the most (if not the most) aggressive market entries to date
by a cable operator. Videotron effectively played two of its wild cards by addressing
nonbroadband subscribers and noncable customers with its launch. Although the company has
seriously investigated the wireless market, it has not made a public statement as to market entry.
Videotron is reacting to a most formidable competitor: Bell Canada. Bell has conducted trials on
consumer VoIP and is reported to be effectively ready to launch, depending on the Canadian
regulator's decision on how incumbents will be addressed in the VoIP market. In the
entertainment field, Bell Canada is the largest national satellite TV provider, with more than 1.5
million subscribers. It has initiated a very-high-bit-rate digital subscriber line (VDSL) multidwelling
strategy, and plans are in place to provide a DSL-based IP TV offering. Before cable operators
entered the market, Bell Canada instituted a "scorched earth" strategy to fight them. Bell Canada
offers their consumer customers bundles with two of three digital services (broadband, wireless
telephony or satellite television) and a CDN$5-per-month long-distance package, with 1,000
anytime minutes to the United States and Canada, based on a two-year contract.
The winner of the home market will take many years to be realized and will be different by
market. However, a prime determining factor will be the competitors' aggressiveness and how
quickly they capitalize on their advantages.

Gartner Dataquest Recommendations

The strategy for cable operators and ILECs entering the VoIP market and for ILECs entering the
entertainment market is based on how quickly to address the market. When cable operators and
ILECs decide to enter a new market, they often do not pay enough attention to what their
competitors will do in response. Albert Einstein's theory that "for every action there is an equal
and opposite reaction" not only applies to physics; it also applies to marketing strategies. The

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successful competitor will be the one that best understands and details what its competitors'
reaction will be and plans its aggressiveness and competitive offering accordingly.

Cable Operators
Time is on your side: You are able to enter the incumbents' market faster than they can respond.
A conservative approach may enamor the investment community, but a well-planned and flexible
aggressive service escalation will mean success and market leadership.

Incumbent Telecommunications Carriers

Most ILECs will be late to market with a cable-equivalent data, voice and entertainment offering.
Services may be hastened, but often this will not be a viable option. The incumbent must be
prepared to use aggressive cost bundling to lock in consumers for one- or two-year contracts. In
that way, an ILEC can buy some time.
Client Issue
What are the optimum and transitional business models for network service providers?

Recommendations
• Aggressiveness in the battle for the consumer should be based not only on one's own
capabilities, but also on how the competition is expected to react.

• Cable operators are in the enviable position of being able to match and best the voice
offerings of the incumbent local-exchange carriers (ILECs). To attain success and
market leadership, cable operators should aggressively take advantage of their position.

• To buy time, ILECs should be prepared to use aggressive cost bundling to lock in
consumers for one- or two-year contracts.

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