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Is Hawaiian Telcom's IPTV Rollout a Game Changer

Hawaiian Telcom hopes new technologies will let it play catch-up with Oceanic and stop its bleeding of residential customers

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Hawaiian Telcom has spent about $400 million over the past five years on its fiber-optic network and other systems, says CEO Eric Yeaman. That’s 20 percent of total revenue. He says comparable companies on the mainland are spending only 13 to 14 percent.

It's hard to avoid baseball metaphors when talking about Hawaiian Telcom.

Five years ago, faced with three straight quarters of losses, crippling debt and imminent bankruptcy, the century-old local telephone monopoly appeared to be down a couple of runs, with two outs in the bottom of the ninth. Worse still, the company seemed outmanned by the competition. Oceanic Time Warner Cable, the big-league team from the mainland, simply had too deep a bench. Inning after inning, while Hawaiian Telcom hemorrhaged its traditional residential landline customers, Oceanic steadily pounded out a larger and larger market share with its virtual monopoly on cable TV, at the same time collecting plenty of landline and broadband customers, too.

Hawaiian Telcom appeared doomed. Then, improbably, the phone company started hitting singles.

First, bankruptcy put Hawaiian Telcom on a sounder financial footing. With its debt reduced, the company has enjoyed 11 successive quarters of profitability. More important, the old-fashioned phone company has been investing lavishly on modernizing its infrastructure, which means it can offer new services. The most important of these is Internet-protocol TV (IPTV), a technology that leapfrogs traditional cable-TV technology and gives Hawaiian Telcom a chance in its battle with Oceanic.

The game is by no means over. Oceanic is busily investing in its own network and we wish we could tell you more about that, but Oceanic elected not to be interviewed for this story. And there are more than just two teams in this league: Netflix, Amazon, Hulu and others are persuading many people to give up on traditional ways of watching TV, though they are all still dependent on broadband Internet to reach customers at home.

Who will win the struggle between Oceanic and Hawaiian Telcom? That may depend on – to use one last baseball metaphor – who can pull off the industry’s double or triple play most often: convincing customers to sign up for not just one service, but for landline phone, high-speed Internet and TV. According to executives at Hawaiian Telcom, IPTV is the key to its triple play.

What IPTV Means

Technologically, what makes IPTV different is the IP part. Instead of using radio-frequency-based signals, IPTV relies exclusively on the zeros and ones of the digital age. In this sense, TV is just one more component of broadband – no different from voice or high-speed Internet. Among other advantages for IPTV, it is device agnostic. For example, it allows you to watch television content as easily on a tablet or a smartphone as on a television set.

“This IP-based TV platform really fully enables our capabilities,” says Eric Yeaman, CEO of Hawaiian Telcom. “We have the ability to provide mobility, so there are TV-everywhere applications. We also have Twitter on TV, and we can take popular apps that are out there and embed them into our platform and really expand its capability compared to the platform of our competitor.”

A good example of IPTV’s versatility is its multiroom DVR capability. Customers can start watching a program in one room, then transfer the program to another device or another room when they want to change locations. That’s a feature that cable providers like Oceanic have resisted because it doesn’t fit their revenue model.

Multiroom DVR is just one way that IPTV creates a better television experience, says Hawaiian Telcom COO Scott Barber. “With IPTV, you also get instant channel-change time,” he says, rather than the lag time of changing channels with a cable remote. “Instead of trying to send 300 channels to the home all at once and have a tuner and a set-top box try to find the channel you’re tuning to, which is what a traditional cable system would do, we just send the channel that you’re requesting with your remote to your TV set.” Also, being a native Internet speaker means IPTV is ideal for high-definition television.

But the main advantage of IPTV is how it changes the business model. It allows telcos like Hawaiian Telcom to finally offer the same kind of bundling options as their cable competitors. “Prior to launching TV,” says Yeaman, “it was very difficult for us to compete with Oceanic, because they had the triple-play: TV, plus Internet, plus home-phone services. Now, IPTV has allowed us to increase our capture rate on the Internet side. Nine times out of 10, when a customer buys our TV, they take our Internet service, if they don’t already have it. It also improves our retention rate on home-phone services. As a result of all this, our residential business is now growing month over month, quarter over quarter, year over year. Whereas, before IPTV, it was a declining revenue business.”

CEO Eric Yeaman, right, and COO Scott Barber stand in the demonstration room at Hawaiian Telcom’s Bishop Street headquarters, where consumers can test drive IPTV.

Mainland examples

Hawaiian Telcom’s experience parallels that of major telcos such as AT&T and Verizon, who have had their own battles with cable giants such as Time Warner, Comcast and Cox. According to Ford Cavallari, a telecom consultant with Portmeiron Ltd., in the 1990s, average revenue per user for the telcos had declined from about $150 per month to about $40 or $50. By the early 2000s, though, companies that were able to add mobile phone service for their customers could increase average revenue per user to around $100 a month, Cavallari says. “And, if you’re also selling a television product with some premium subscriptions, like HBO or Showtime, you can push ARPU back to the $150 to $160 level of the last decade.”

More important, by including IPTV in their bundles, the telcos have been able to take market share from the cable providers. Cavallari uses the example of U-Verse, AT&T’s IPTV offering (and the model for Hawaiian Telcom’s system). “They were able to get a 30 percent to 40 percent share in the space of just three years,” he says. “And, over those three years, their average net add of subscribers – people who signed up for U-Verse – has been 210,000 a month. With Comcast, on the other hand, those numbers have basically been flat.”

Indeed, over the past 11 quarters, the nation’s cable providers have been steadily losing market share to IPTV providers like U-Verse and Verizon’s FIOS system. (On the mainland, satellite providers have also been stealing market share from the cable companies, but local geography makes them less competitive in Hawaii. Also, satellite doesn’t provide the broadband and landline add-ons.) According to an August report by IHS, a leading market analyst firm, cable companies lost 598,000 customers nationwide in the second quarter of 2013 alone, while U-Verse and FIOS added 398,000 customers.

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