Cable's wireless quandary

NEW YORK (Fortune) -- The phone business has been very good to the cable industry.

Cable operators now provide telephone service to nearly 14 million residential customers in the United States, up from about 9.5 million at the end of 2006, according to the National Cable & Telecommunications Association, an industry trade group. Phone services have helped drive revenue growth at companies such as Comcast, Time Warner Cable (which is controlled by CNNMoney.com parent Time Warner) and privately held Cox Communications, even as growth of high-speed data lines has tapered off.

And phone calls, bundled in with the cable operators' video and high-speed data services for a package often called the "triple play," have helped make cable customers more loyal, and less likely to defect to satellite operators.

Now, though, cable operators are facing a two-pronged attack from phone companies such as AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500), the very companies from whom they poached those all those calling customers. The telcos are fighting back with video offers of their own, plus they are starting to promote the notion of the "quadruple play" - home phone, video and data, plus a service some 84 percent of Americans use: mobile phones.

(I originally thought the term "quadruple play" to be completely ridiculous; In baseball, from which the "triple play" terminology is derived, only three outs are needed to retire a side. But a quadruple play apparently is feasible, though only the first three outs are counted.)

Yet the cable industry has been remarkably quiet about how it plans to combat the phone companies' four-tiered approach to the residential market. "I think a big question for the cable operators is what are they going to do with mobile," says John Senior, director of Oliver Wyman's Communications, Media and Technology Practice.

So far, only two major cable operators, Cablevision (CVC, Fortune 500) and Cox, plan to bid in the upcoming FCC auction of wireless licenses in the 700 megahertz band of spectrum. A Cox spokesman, citing a quiet period related to bidding in that auction, declined to elaborate on the company's wireless plans.

Neither Comcast (CMCSA) nor Time Warner Cable (TWC), the No. 1 and No. 2 cable operators, respectively, will bid in the auction. A Comcast spokeswoman said the company has long-term flexibility and strategic options because of the spectrum it acquired in the wireless auction last year with its cable partners in SpectrumCo. Time Warner Cable, meanwhile, has said it has no plans to build out its own wireless network.

Both companies say they are continuing to support customers who've signed up for wireless service through Pivot, a joint venture with Sprint Nextel (S, Fortune 500) that provides mobile phone and other features in some markets.

But several people familiar with the inner workings of Pivot say the joint venture hasn't been a huge success, in part because the many partners are divided over who controls the customer relationship.

Part of the reason for the cable operators' lack of strategic vision in the wireless arena is that they are unsure if they even want to be in the mobile game. "The key question is, will consumers really want to buy a quadruple play?" says Oliver Wyman's Senior. "And will they see their cable company as having a serious mobile offer, or is that too far from their core business in customers' eyes?"

Indeed, Time Warner Cable CEO Glenn Britt recently told investors that he's not sure if consumers are interested in buying wireless voice services from a new player at this time; as for wireless data services, offered via broadband technologies such as Wi-Max, Britt also offered a wait-and-see stance.

"We will continue to explore consumers' desire for mobile broadband services and our opportunity to make a smart investment in this space," he said. "But right now, the technology is not fully baked, the products are not developed and the demand is not demonstrated."

Comcast, meanwhile, says it is focused on developing products that enhance the portability of its core in-home services, such as broadband, video programming and voice calling.

The cable operators are in a tough position these days. Their stock prices have taken a beating, and investors fear the companies will have to spend heavily to upgrade their networks to compete with satellite operators' expanding high-definition television offerings and the telcos' faster broadband speeds.

Amid all this investor uncertainty, cable executives certainly don't want to suggest that they plan to build or buy a wireless network. But to hear the folks at AT&T talk about it, the cable operators might not have a choice. Wireless joint ventures, such as the Cingular joint venture AT&T operated with BellSouth before it acquired BellSouth in late 2006, are hard to operate, AT&T executives said. Even like-minded parties have a hard time deciding who "owns" the customer, and which services to roll out first.

And truly integrating wireless and wireline services -- including some of the "portability" services Comcast would like to offer -- is much easier if the operator owns the networks outright, rather than "renting" the network from a joint venture partner. To be sure, AT&T would say this, as it is the biggest wireless operator in the United States, and has invested heavily in acquiring wireless assets.

Randall Stephenson, AT&T's CEO, argues that a company simply can't be in the phone business if it doesn't have a wireless offering: "If you don't have a wireless product," he says, "you don't have a voice product, long term."