Hawaiian Telcom is invading Oceanic Time Warner's television turf in an effort to gain additional revenue

FED UP with his local cable television company a few years ago, Mike Marando happened to get a call from a budding competitor that promised to provide everything the cable company was offering: specifically, television and high-speed Internet service.

"I said, 'Your timing is fortuitous, I just unplugged one of your competitors for lack of consistent (Internet) service,'" Marando recalls .

Approximately three years later, Marando, who lives outside of Sacramento, Calif., is still using SureWest Communications as his television and Internet provider. In fact, he likes SureWest's service so much that he's become something of an evangelist for the 92-year-old telecom that started out as the Roseville Telephone Co.

SureWest may be thousands of miles from Hawaii, but its business plan is strikingly similar to the one Hawaiian Telcom is rolling out. And like SureWest's, Hawaiian Telcom's plan includes television.

Hawaiian Telcom will not say precisely when it plans to launch its television service.

But the company has filed for a cable television franchise license for Oahu with the Hawaii Department of Commerce and Consumer Affairs. Mike Ruley, the company's chief executive, recently told investment analysts that the company eventually plans to roll out television over the phone lines statewide.

The phone company's move toward television comes as Hawaiian Telcom faces increasing competition for phone service from wireless providers, as well as companies like Oceanic Time Warner Cable, which markets telephone service along with its cable television and high-speed Internet service.

Such competition has resulted in what Ruley has called an "unacceptably high" loss of land-line customers.

Under Ruley's new management, Hawaiian Telcom last year launched an aggressive campaign to stem the line losses. But just as that campaign has began to show traction, the company embarked on an enormously complex transition to a new operations system, which has created frustration for thousands of customers.

Now, a year after spinning off from Verizon Communications Inc. and becoming an independent company, Hawaiian Telcom appears to be girding for the next stage, one in which it will no longer simply be playing defense. Hawaiian Telcom plans to take the fight to Oceanic Time Warner in a particularly big way by going after its core television customers.

"We're moving on the offensive versus the defensive side of the business," Ruley told analysts last month.

Nate Smith, president of Oceanic Time Warner's Hawaii division, said he can understand why Hawaiian Telcom is looking at television.

"The land-line business is tough to be in right now," he said. "They're absolutely right to be looking at alternative revenue streams for their distribution system."

Smith added: "There are some good things about competition. If you're smart, it makes you better."

Large investment

As Hawaiian Telcom describes it in regulatory filings, the new television service seems straightforward. But laying the groundwork to do Internet protocol television, or IPTV, has hardly been cheap.

The company says it has invested about $105 million to $110 million into a new infrastructure backbone, which will enable the company to offer a type of DSL that is needed to deliver IPTV over the phone lines.

This network investment comes on top of roughly $100 million the company is spending to establish new business support systems in Hawaii. The company believes these business operations systems eventually will provide the nimbleness the company needs to launch ambitious new services such as IPTV, as well as the ability to bundle various services into promotional packages.

Hawaiian Telcom says it will not have to dig up streets and put up new poles as it would if it were building a big coaxial cable system. Customers will need only a new ADSL2+ modem and set-top boxes for their televisions.

Television shows will be sent to Hawaiian Telcom by satellite, and the company says its vendor list "represents a significant number of the largest video content providers in the world."

Although Hawaiian Telcom lacks television experience, its primary investor, the Carlyle Group, has plenty. The company owns a majority interest in Insight Communications, which has approximately 343,000 customers in Kentucky, Ohio and Illinois.

Hawaiian Telcom executives declined to be interviewed, but in a written statement Ruley called the new service "TV for the 21st century."

"IPTV delivers an experience that people are comfortable and familiar with right from the start, yet it also offers many new and exciting possibilities," he said.

Bundling services

Hawaiian Telcom points to SureWest as an example of an independent phone company that's gone into the TV business.

SureWest's IPTV looks a lot like regular cable television. The company offers 282 channels available in various packages, as well as high definition television -- all delivered over the phone lines.

The company also offers the sorts of bundled packages of services that Hawaiian Telcom executives often talk about. In SureWest's case, the bundles include a "triple-play" package of telephone, Internet and television. SureWest now is offering all three services, including 160 television channels, for $75.90 per month.

Ron Rogers, a SureWest spokesman, also points to the company's ability to offer high-definition television over the phone lines, which he said SureWest was the nation's first IPTV provider to do.

"We basically have to be able to offer a competitive price, but also offer things that differentiate us from our competitors," Rogers said.

Steve Hawley, a Seattle-based telecom industry analyst, says that phone companies are smart to get into the TV business.

Not only is it positioned to offer the "triple-play" service, Hawaiian Telcom also could offer what Hawley has called the "quadruple play," giving mobility to its television and Internet services through Hawaiian Telcom's wireless phone network.

But Hawley said it could take years for Hawaiian Telcom to take much market share away from entrenched cable companies.

"I'm in favor of what they're doing because it's probably one of the few things they can do to stem the loss of customers to the cable company," Hawley said. "But the contrarian in me says, 'Not so fast,' because it took satellite television 20 years to get a 20 percent market share."

Tackling system glitches

In the meantime, Hawaiian Telcom has much more mundane chores to take care of, namely getting its business support system running flawlessly. System glitches have caused frustration for thousands of customers, and the company still is working on the system.

As Hawaii's Consumer Advocate, John Cole represents ratepayers' interests before the Hawaii Public Utilities Commission, which regulates Hawaiian Telcom's phone business.

"My preference would certainly be that they get their ducks in a row on the phone side" before starting a new service, Cole said.

That's exactly what Hawaiian Telcom is doing, Ruley said.

"Clearly, our first priority is resolving the temporary challenges with customer service, and we are making steady progress," he said. "We'll get customer service fixed first, and then we'll roll out major innovations. Our vision for the future is to deliver competitive choices and high-quality customer service at the same time."

Still, Cole warned that Hawaiian Telcom's recent customer service problems could create lasting public relations problems that could hurt the company down the road when it tries to roll out these innovations.

"If you're upsetting people making them angry about one thing, they're going to be less likely to choose you for the other service," Cole said. "As a consumer, that's how I view things."