Despite having their best year yet for selling DSL service, U.S. telephone companies are falling farther behind their cable rivals in selling broadband and will have to be very price competitive to crack the video market against both cable and satellite, according to a new report from The Convergence Consulting Group Ltd., a Canadian consultancy.

In "The Battle for the North American Couch Potato: Bundling, Internet, TV, Telephone," TCCG examined the strategy, prices, products and technology of telcos, cable companies, satellite providers and others in both the U.S. and Canada. Its analysts believe that, in the U.S. particularly, cable companies are well positioned to stem the tide of basic cable subscriber loss and to continue dominating broadband usage through well-priced service bundles.

"Even with the [the former Bell companies] raising their speeds (due to network investments), we forecast that cable will add more residential broadband subs per annum than DSL/fiber until late in the decade, and retain its dominant share into the next decade," the report states, in its executive summary.

U.S. telcos will continue to trail cable for at least the next few years, says TCCG analyst Brahm Eiley.

"The numbers definitely tell that story," he said. "DSL had a wonderful year and those numbers are strong, but they are still trailing cable and they will continue to trail cable because they are still paying catch-up."

Particularly troublesome to telcos, he adds, is the fact that the top nine cable companies capture an average of 35% of their cable companies with their broadband service, compared to a 15% penetration ratio for telcos. That is offset, somewhat, by the telcos' much higher penetration rates for basic phone service versus basic cable service.

By contrast, Canadian telcos were quicker off the mark in DSL deployment and have a stronger competitive position versus Canadian cable companies, Eiley said.

"If we look at the breakout of residential DSL subs to residential cable subs, in Canada, right now, residential DSL has 43% of the market, cable has 56% and the other 1% goes to satellite, wireless, broadband power line and other options," he pointed out. "Whereas in the States, it's a 64% cable to 35% telephone company split. There was more of a push early on in Canada to get into DSL and the telephone companies were much more willing to cannibalize their dial customers. The RBOCs were far more reticent to make that switchover quickly. They've been paying for it ever since."

As cable companies move into voice, particularly with an addition of voice over IP to their service bundle, TCCG expects them to capture about 11% of the residential voice market by 2007, based on a substantial price advantage.

As the telephone companies move into the video market--both SBC and Verizon say they will launch video service later this year--they must be able to compete effectively on price, Eiley maintained.

"In Canada, both Manitoba [Telephone] and Sasktel realized that if they didn't have a quadruple play, they would be beaten badly by [cable rival] Shaw," he said. "They have effectively matched or undercut Shaw when they offer services in a bundle. We think that is a real lesson to American guys. Unless you come out with something very interesting--like every channel has interactivity, video-on-demand, etc.--they are not going to be able to charge a premium for TV offering."

Even so, the telephone companies will not begin to make an impact on the video market until 2007, when they are projected to have 2% of the TV subscriber base, says the TCCG report.