SBC’s Fiber Plan a $4 Bil Gamble

Nov 15, 2004  •  Post A Comment

At first blush, SBC Communications’ ambitious plan to begin rolling out a phone-line-based video service in a year would appear to be more bad news for cable operators already hit hard by the rapid growth of satellite companies.

But some observers suggested that such an assessment might not take into account certain realities in the television business, including a maturing video delivery marketplace and, particularly in neophyte SBC’s case, potential difficulty in obtaining content.

SBC, the second-largest phone company in the United States, last Thursday unveiled details of a $4 billion fiber-technology initiative that would enable the company to offer video, voice and data services starting in late 2005.

By deploying fiber technology directly to homes in new housing developments and to neighborhoods in more established communities, SBC said it will begin constructing its new network next year, with plans to introduce video services by the end of next year. By 2007 SBC expects to have its fiber technology available for about 18 million households, or half its footprint.

Offering some form of discounting for customers who take SBC’s bundled package of TV, phone and high-speed data, SBC officials hope in five years to reach a 20 percent market penetration, making it the second-largest provider of pay TV services in the areas where fiber technology is available. If it achieves that goal, SBC said, it would surpass the penetration rate of satellite companies EchoStar Communications and DirecTV Group and be second only to the cable companies operating in those communities.

“This is the logical transition [for] a 19th century [telephone] network,” said SBC Chief Financial Officer Rick Lindner.

For its part, Verizon Communications, the largest Regional Bell Operating Company in the United States, is likewise spending big money rolling out fiber directly to both new and older homes and hopes to have fiber technology available to 3 million homes by the end of 2005. Another RBOC, BellSouth, has said it, too, will offer fiber, though it has been less clear about its plans.

San Antonio-based SBC’s move is part of a broader push by the RBOCs to steal back market share they have lost to cable operators, which are bolstering their video offerings with high-speed data and, more recently, telephone service.

The Bells first responded by striking alliances with EchoStar and DirecTV to bundle the satellite companies’ service with the Bells’ voice and data offerings in a package that has generated significant numbers of takers in the year since the first alliance was struck. However, many have viewed the partnerships as only a temporary fix, arguing that the Bells’ prospects were limited with the copper-wire technology that’s found in most homes.

Now the strategy is to build a new network that uses Internet protocol technology, enabling large chunks of data to flow to customers without any risk of choking the network.

By and large, analysts agreed that SBC, and Verizon for that matter, stand a good chance of grabbing customers’ attention, given the RBOCs’ local presence and customer familiarity. Yet there are also a number of key risks that could be difficult to overcome.

Chief among them is timing. Analysts noted that the RBOCs in delivering video are entering a maturing marketplace, where satellite operators are growing largely at the expense of cable.

Another big challenge could be the Bells’ ability to easily obtain content. Craig Moffett, a cable analyst at Bernstein Research, noted that because the RBOCs are starting from scratch, they are in a weaker position when negotiating with content providers, unable to influence carriage discussions with promises of large audiences the way Comcast, at 21.5 million subscribers, can.

Mr. Moffett said that disadvantage could cut two ways. First, it could end up costing the RBOCs more to obtain programming because they don’t have the subscriber numbers that often come with discounts from content providers. Second, having to pay higher prices for programming could limit the Bells’ ability to offer customers the sort of discounts that could lure them away from cable or satellite.

Thus far, cable executives have largely dismissed the Bells’ plans, saying that it will take the phone companies years and billions of dollars to achieve what cable companies have today: a network capable of offering advanced services.

“Technically, we are ready [now],” Comcast Chairman Brian Roberts said of the Bells’ fiber plans during the company’s third-quarter earnings call last month. He added that when the RBOCs are up to speed, they will be “fourth or fifth competitor in the market.”

SBC, for its part, said the company will remain profitable while deploying its fiber technology.