There's a ton of money to be made in phone service--about $60 billion of yearly revenue just on voice plans for U.S. consumers. And don't cable companies know it. For years they have been laying miles of new fiber-optic cable and doing everything they can to steal chunks of that business from the phone giants. So far they've managed to pull away about $4.6 billion in phone revenues, according to Sanford C. Bernstein & Co.
In the scramble for every customer, one cable outfit seems to have hit upon a formula that works: beating the phone companies at customer service. In recent surveys conducted by J.D. Power & Associates Inc., owned by BusinessWeek parent The McGraw-Hill Companies (MHP), Atlanta-based Cox Communications outscores traditional phone providers such as AT&T (T), Verizon Communications (VZ), and Sprint Nextel (S). On a variety of metrics, from network performance and reliability to billing and cost, customers in several regions describe Cox as their preferred provider.
Having a cable company lead the charge on phone service is doubly surprising given the poor reputation that many have among their own customers. According to Power, cable outfits rank 18th out of 19 industries for service. "Cox customers don't actually hate them, and that is saying something for a cable company," says Craig E. Moffett, a senior cable analyst at Bernstein.
But developing crossover appeal will become increasingly important as the broadband lines blur. Even while cable companies are offering new phone plans, AT&T and Verizon are launching TV and other advanced video services. In the latest twist, Cox, Comcast, Time Warner, and Advanced Newhouse Communications are beginning to sell a wireless phone service, Pivot, in select markets. Without it, they would be at a huge disadvantage to telcos such as AT&T, which plan to pitch wireless along with basic phone service, Internet, and TV, known as a quadruple play.
For many cable companies, phone is the fastest-growing portion of their business. Bernstein's Moffett estimates that Cox is generating about $1 billion a year from its 2.1 million phone customers, with profit margins of 50% to 60%. Nearly 20% of the homes in neighborhoods where it offers phone service have signed up, according to researcher IDC (IDC). By comparison, a tad less than 7% of customers in cable giant Comcast Corp.'s (CMCSA) neighborhoods take its phone service, which it started pushing two years ago. (Cablevision Systems Corp. has the industry's best phone- penetration rate, 29%.) Phone companies capture 5% or less of their potential TV customers.
What is Cox's advantage? It uses one customer-care provider, with U.S.-based centers. Rather than pushing agents to hurry customers off the phone and causing multiple call-backs, Cox strives to handle issues in a single call and grades reps on how well they eliminate problems. To avoid confusion, field technicians tap into the same system used by call-center reps. Cox has even started a "geek squad" to help customers with tech issues, whether they involve its gear or not.
Performing at the same high level in wireless could be challenging. Cox hasn't built its own network, as it did when it entered the wired-phone business some 10 years ago. It will use Sprint Nextel Corp.'s cellular network, which has been besieged with problems after Sprint's troubled integration with Nextel. Cox President Patrick J. Esser contends that Sprint's network is improving thanks to $8 billion of expected upgrades this year. And he insists Cox will keep control of billing and service.
Cell-phone service, however, is one area where consumers seem less eager to switch. Surveys show that people are content with stalwarts such as Verizon Wireless and aren't in a hurry to fold in their cellular bill with everything else. It will be up to Esser and his team to convince them that this, too, is a job for the cable guy.
By Roger O. Crockett