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Telco’s Take on Cable

Apr 4, 2005  •  Post A Comment

Terry Denson will be among those attending the National Show this week in San Francisco. He won’t make speeches or appear on panels, but his presence, along with that of others on a similar mission, should stir concern among those with a vested interest in wired cable TV systems such as Comcast, Time Warner and Charter.

Mr. Denson is VP of programming and marketing for FiOS TV, the brand name for a video-content service being developed by Verizon, one of the two largest U.S. phone companies. According to spokeswoman Sharon Cohen-Hagar, customers in parts of 14 out of 29 states where Verizon operates will be offered FiOS TV by the end of this year, as a stand-alone service or as part of a bundle of services that includes voice, high-speed data and broadband.

FiOS TV will include all the latest bells and whistles, such as DVR service, high definition and hundreds of video-on-demand channels. “We expect to be a very potent competitor,” Ms. Cohen-Hagar said. “No. 1, we will deploy in our [telephone] franchise territories so our customers know us already. They know our brand, and we think it’s very strong. We also have a good history of customer service, unlike, frankly, the reputation of some cable companies.”

Like boxers before a big bout, there is a lot of trash talk right now between the phone giants and the cable giants. Both think they have an edge. Each is quick to belittle the other. The stakes are high.

For the phone giants, it is literally a matter of life and death. While telco video efforts in the past failed, things are different this time. The technology has improved. More to the point, consumers have shown they prefer one provider and one bill, whether it is telco or cable. Once the computer and TV are wired to a system, the rate of churn drops significantly and the difficulty of luring that customer away grows exponentially.

“The competitive environment is such that we need to deliver these new services,” said Denise Koenig, spokeswoman for SBC, which has launched Project Lightspeed to lay more fiber-optic lines at a cost of $4 billion and develop a proprietary video content service that will be launched at a cost of at least $1 billion more.

Along with Verizon and BellSouth, SBC is leading the assault against cable, and for that matter satellite, even though all three are also satellite TV resellers. The telcos will continue to sell satellite in areas where they have not yet laid high-capacity fiber-optic lines. And if you ask cable multiple system operators, the telcos will also offer satellite across their huge territories to hide the fact that they are delivering new bundled services only in upscale areas. Cable, by law, must offer service in its entire territory.

Consider BellSouth, which has had a video service called Americast since the late 1990s. It has rolled it out only to specific areas where it has fiber-optic, and it makes economic sense. Americast has only about 50,000 subscribers in 14 of its Southeastern markets. BellSouth also has signed up 200,000 customers for DirecTV service. “We are looking at a mosaic approach to video services,” explained Brent Fowler, spokesman for BellSouth. We’ll have choices for customers. We won’t target one specific way to deliver video content.”

BellSouth and the other telcos are testing a different way to deliver that video content in the future, over IPTV, or Internet protocol television. It means the signals are sent over a nonpublic part of the Internet.

The advantage is flexibility. Cable sends all the data one might need all the time. With IPTV, data is sent only as the customer needs it, so the telco can have a bank at the headend with huge amounts of capacity.

As a result, in demonstrations, IPTV not only offers quality video, but also allows the user to get multiple signals at once (such as watching several basketball games at the same time and also getting reams of statistics). With IPTV the viewer can get different camera angles of the same game or event. SBC’s Ms. Koenig said bundled customers might use a Cingular cellphone to program their DVR while away from home. Cingular is 60 percent owned by SBC and 40 percent by BellSouth, and both plan to incorporate its wireless into their bundles.

According to SBC, video delivered over IP does not require local franchise agreements, which is an economic advantage over cable. “The FCC has ruled and said it is a hands-off approach to IP-based services,” Ms. Koenig said. “They’re not subject to the same legacy regulations that are meant for different technologies.”

BellSouth and Verizon, however, along with cable MSOs, say franchise agreements are necessary, and they are going after them. SBC stands firm that it doesn’t have to pay that estimated 3 percent tax.

“We will offer a service that is different from what is out there,” Ms. Koenig said. “This platform offers a huge amount of new features, so I think customers are definitely going to be interested.”

That is a key question for the telcos. This is not 1980, before cable, the VCR and satellite. “Consumers are not desperate for another delivery platform into the home,” said analyst Jeffrey Logsdon, managing director of Harris Nesbitt. “Some may choose it. But it is much harder today to dislodge video business from cable. Cable can also bundle services. Cable also offers a voice product.”

Mr. Logsdon is still skeptical that the telcos can really take large numbers of customers away from cable. He said they are entering the video market as a defensive strategy, not because it is an opportunistic moment; to succeed, he said, they will have to offer a lot of services and very competitive rates. He also wonders how long they will be able to stomach paying $500 and up to acquire each sub, which is what it is costing DirecTV at present. “I am highly skeptical,” said Mr. Logsdon, “that [telcos] can get even a 10 percent market share in the next seven years.”

Part of it will depend on cable’s response, added Mr. Logsdon: “Cable has to continue to do a better job of providing added value to consumers to keep the churn low.”

So the battle is set. It appears 2006 will be the crucial year. That is when all three telco giants will be in a position to offer the same triple threat of services (voice, data and video) that cable offers. “Only those who dare to fail greatly,” said the late Robert F. Kennedy, “can ever achieve greatly.”