RBOCs Elbowing Into Marketplace

May 23, 2005  •  Post A Comment

As the multichannel universe anticipates the arrival later this year of the Regional Bell Operating Companies’ video service, questions have been raised about how the phone companies’ entry into the marketplace will affect the growth prospects of multiple system operators such as Comcast and Time Warner.

If a report released recently by investment advisers Bernstein Research is any indication, such questions might be misguided.

There is no denying that video offerings from Verizon Communications and SBC Communications are likely to change an already highly competitive marketplace. Once video is available, the RBOCs will be able to compete head to head with the MSOs on video, voice and data, and may even have an edge in their ownership of wireless providers. As such, it is likely that as the RBOCs gain customers, many of their new subscribers will come from cable.

But a lot of subscribers are also likely to come from satellite and, according to Bernstein, the impact of those customer defections is likely to be more pronounced for the satellite companies than it is for the cable operators.

The reason: Cable operators have diversified their product offerings so much that a loss of customers isn’t necessarily a recipe for lower profits and revenue. Indeed, satellite for the past couple of years has gained market share largely at the expense of the MSOs, but those defections are offset by growth in customers for other services MSOs offer, such as telephony and high-speed data, as well as advanced services such as high-definition TV and digital video recorders.

By contrast, the country’s two satellite companies, DirecTV and EchoStar Communications, are essentially pure-play video businesses, and even though they have diversified to offer products such as their own version of the DVR, the product list is far shorter than that of the MSOs. Neither DirecTV nor EchoStar offers broadband or voice packages, and thus each has fewer options to which it can turn to compensate for any loss of subscribers that might arise as a result of the RBOCs’ arrival.

“While cable’s growth over the next five years will mostly come from VoIP [Voice over Internet Protocol, a form of cable-based telephony] and continued broadband deployment, satellite’s growth will come exclusively from subscriber growth and pricing, both of which will be pressured by the Bells,” the Bernstein report said.

On top of that, a major contributor to DirecTV’s and EchoStar’s growth-the RBOCs themselves-is likely to go away once their video business gets up to speed. In a quick-fix marriage designed to level the playing field for both the RBOCs and the satellite companies against the cable operators, DirecTV and EchoStar teamed up with the nation’s top four RBOCs last year to offer RBOC customers a bundle of satellite TV, phone-based broadband and voice.

As the RBOCs go it alone in their pursuit of video business, those relationships with the satellite companies are likely to be tested. Already, SBC has informed EchoStar that it plans to step back from their partnership in markets where SBC plans to offer video service.

Boiled down by the Bernstein report: “EchoStar and DirecTV will lose important distributors at the same time they gain new competitors.”

To be sure, the arrival of the RBOCs isn’t likely to create wild swings in the video business. Due to the capital expense and each company’s deployment strategy, Bernstein doesn’t expect the Bells to alter the competitive landscape dramatically.

Bernstein guesses that by 2010 the RBOCs combined will have just 6 percent of the multichannel video market, or 6.3 million subscribers. At the same time, Bernstein predicts the U.S. video market will grow by 10.6 million subscribers, which would leave just over 4 million new subs for satellite and cable to fight over.

Big Video Dreams

In addition, Bernstein estimates that the phone companies will spend $15 billion deploying fiber wiring, and predicts it will take them 10 years to recoup that investment on a cash-flow basis. As such, at least in the near term, the video deployment is likely to be enough of an earnings drain to prevent RBOC executives from dreaming too big about their video plans.

Another challenge that could impact RBOC video growth: With no customers, the RBOCs aren’t able to command the sort of programming fee rates that more established content distributors can, which means the sort of discounts that might help spur subscriber growth aren’t likely to be seen.

“We estimate the Bells’ content costs will be at least 15 percent, or about $3 per month per customer, higher than the average for the large cable MSOs,” the report said.

Then there’s execution risk. Bernstein noted that the RBOCs have been down the video road before, and failed miserably.

Furthermore, the issue of franchise rights could have a huge impact. SBC says its service doesn’t require it to obtain franchise rights, while Verizon has set about obtaining them in a number of markets, most recently a community outside of Tampa, Fla. The issue is currently being debated at both the state and federal level, and its outcome could add another layer of expense to an already expensive venture, the report pointed out.