Telcos Lack Video Numbers

Apr 25, 2005  •  Post A Comment

When each of the nation’s top three telecommunications companies last year outlined its plans to roll out a video service over fiber-optic telephone lines, they all boasted that their respective products not only would be more robust than the offerings from cable and satellite, but also would cost consumers less.

However, as each company moves ever closer to realizing its dream of delivering TV through a phone line, there are indications they might have difficulty keeping their promise of being a low-cost alternative without taking significant hits to the bottom line.

At issue is whether the telcos-Verizon Communications, SBC Communications and BellSouth-have fully taken into consideration the steep costs associated with playing in the video space. With no established video customer base to speak of, the telcos are at a serious disadvantage when it comes to negotiating carriage agreements with content providers.

What’s more, the telcos are likely going to have to spend big money to deploy the high-tech set-top boxes required to deliver newfangled television technologies that are at the heart of their television dreams. Plus, it’s unclear whether the phone companies are going to have to obtain franchise licenses in each locality in which they do business. If they do, they could be forced to pay local governments up to 5 percent of revenues.

Verizon, SBC and BellSouth each are spending billions of dollars upgrading existing phone lines in preparation for a video business set to be introduced either later this year or next year. SBC is slated to spend $5 billion to reach nearly 18 million homes passed by 2007, while Verizon said it expects to spend around $3 billion, with the hopes of reaching 5 million customers within five years. BellSouth likewise has fiber-based video plans but has held back in terms of details, saying only that it is presently in a trial phase.

Verizon is the only telco to provide details of its carriage agreements, announcing last week a deal with NBC Universal Cable for 12 of its cable networks and NBC, as well as a pact with A&E Television Networks to carry seven channels and on-demand content. That deal comes on the heels of carriage agreements with Starz Entertainment Group and Discovery Communications. Verizon also is a member of the National Cable Television Cooperative, which strikes master carriage agreements for smaller operators.

Verizon is looking to offer consumers a video package that strongly resembles a traditional cable menu-only bigger and cheaper, sources said. There will be two tiers. The first is an expanded basic package that includes at least 50 networks, including those commonly found on analog systems. The second is a sports-oriented package, with more than 15 sports-themed channels. In a bid to keep costs down, sources said, Verizon is guaranteeing sports programmers that this tier will penetrate around 45 percent of its subscriber base.

An SBC spokeswoman refused to provide details, citing competitive reasons. A BellSouth spokesman likewise declined, but pointed out that the company has experience negotiating carriage agreements with content providers for its Americast phone-based video product, which has 50,000 subscribers in three states.

While neither Verizon nor NBCU would provide the financial terms of their carriage agreement, many observers believe NBCU held all of the cards in the negotiation, enabling it to get a fair price, a favorable channel position and the flexibility to introduce new channels on Verizon’s systems-something that is getting increasingly tougher to do with a cable operator, since channel space in cable has grown scarce.

“With Verizon, we wanted to make sure that all content was carried on strong economic terms, to make sure our broadcast service was carried in full and to allow us to look to do different things with the digital spectrum,” said David Zaslav, president of NBCU Cable. “This [carriage agreement] meets all of those things.”

It also signals that the bargaining strength in these carriage deals rests with programmers. Craig Moffett, a cable analyst at Bernstein Research, pointed out that with virtually no video subscribers to tout in conversations with cable programmers, the telcos “enter those negotiations with little or no negotiating leverage.”

One programming executive said that while program access rules require that he sell to the telcos, he said he wasn’t obligated to offer the sort of discounts given to large-scale distributors such as Comcast or Time Warner Cable.

Another disadvantage the telcos have is that they are entering a mature market. Ten years ago, when satellite operators were negotiating carriage deals, the universe for pay-television subscriptions was still growing, which enabled satellite companies to argue for more competitive rates because it helped expand a programmer’s potential base of viewers. The telcos can’t make that argument. Instead, any subscriber they gain is likely coming from either a cable or satellite operator, further reducing the incentive for a programmer to yield on price.

“I think everyone has a deal, or is in the process of negotiating a deal, with Verizon,” said one programming source. “But to get the penetration they’re aiming for, they’re going to have to steal every customer from somebody else’s hive.”

Yet even as questions are being raised about the telcos’ ability to compete effectively, the emergence of the phone company as a provider of video is piquing the interest of more than a few programming executives, who believe that if the telcos can gain enough customers it could diminish the power that multiple system operators currently wield over cable programmers.

“If they can get to a million subs, it might make the MSOs a bit more flexible and bring a little bit of leverage to the programmers,” another programming source said.

James Hibberd contributed to this report.