Telco’s Offering Underwhelming

Sep 19, 2005  •  Post A Comment

After all of the hype surrounding the arrival of the telephone companies’ video product, and the predictions that it would alter the competitive landscape for cable and satellite operators, there are some early signs that the fervor might be overblown.

Verizon Communications recently began conducting trials in Keller, Texas, of its FiOS TV video product. If the Keller example is any indication of what Verizon will be offering throughout the country, the conclusion by some on Wall Street is that while the company is coming to market with a robust offering of video channels, the pricing structure isn’t likely to change the game very much.

The phone giant is offering an expanded basic package with 35 basic channels and 160 digital channels for $39.95 a month, plus a $3.95 monthly set-top box rental fee. That compares with $45.99 for DirecTV’s comparable service and $42.99 for EchoStar Communications’ similar DISH Network package, both of which charge nothing for a set-top box, and $49.39 a month for a similarly fashioned package from Comcast, which also doesn’t charge a fee for the first cable box.

“The good news for Verizon is that, contrary to concerns that it wouldn’t be able to get sufficient content and that its higher cost structure might force it to price the service at a premium, it is offering a full programming lineup at a relatively attractive price,” Banc of America Securities analyst Douglas Shapiro said in a research note.

“However, the offering seems extremely similar to the offerings of most cable and DBS providers, and though its pricing is cheaper than some cable MSOs’ regular pricing, it is comparable to or, in some cases, more expensive than current promotional cable pricing and regular DBS pricing,” he said. “In other words, it looks a lot like what is already out there.”

Such a “me-too” product could prove to be challenging for Verizon, as it attempts to grab a piece of a market that cable and satellite companies have long battled over. Verizon and fellow telco SBC Communications have spent months telling the entertainment and investment communities that their respective video services would be more than an alternative to what’s already being offered by companies such as Comcast and DirecTV. Should the final product offer few differences, the telcos could be setting themselves up for another stumble in the video space.

The stakes are high for the telcos. They are spending billions to upgrade their networks with fiber-optic technology capable of delivering video, voice and data services to residential customers-all in a bid to take on cable operators, which are now offering a similar trio of services. In a lot of ways, analysts see the phone companies’ latest foray into video as a do-or-die proposition. The phone companies’ core wire-line business continues to contract in the face of competition from wireless companies, and more recently, cable operators. If they aren’t able to turn their video dreams into reality, these companies are likely to face an even tougher road ahead.

But whether the phone companies can make it work remains to be seen. Verizon is conducting its trial at a time when the wind is clearly at the back of the cable sector. After having spent the better part of this year duking it out with DirecTV and EchoStar, cable operators are now getting their groove back, slowing the satellite operators’ subscriber growth rates by offering a triple-play offering of voice, video and broadband that satellite can’t match at present.

According to an analysis conducted by Craig Moffett, a cable and satellite analyst at Bernstein Research, satellite growth decelerated in the first half of 2005, falling 16 percent versus the year-earlier period. In the second quarter alone, the growth rate sank 40 percent for the two satellite companies, while cable operators lost far fewer subscribers in the quarter, which is typically their worst. Most analysts have attributed cable’s improved subscriber performance to several multiple system operators’ rollout of their cable-based voice product.

With the introduction of FiOS, Verizon now has its version of the triple play, but Mr. Moffett said it could be at least a year before the FiOS product has a material impact on Verizon’s bottom line.

Timely Rollout

And that assumes that Verizon is able to roll out the service in a timely fashion. While the phone companies got a boost in Texas with the passage of a law that allows them to obtain a statewide franchise, other states are resisting such a move, which means the phone companies will be required to obtain franchise agreements in every community where they plan to offer the service.

Another question is the types of carriage agreements Verizon has nationally. Bernstein’s Mr. Moffett pointed out that some of the channels included in the Keller trial were E! Entertainment, G4 and TV One, all of which are controlled by Comcast, which has never indicated it inked a programming deal with Verizon.

Mr. Moffett asked whether several of the channels in the Keller trial were available only as part of the test in that market, in which case he noted the final set of channels available once the service is officially available might be different.