RBOCs Prepare to Roll Out Video

Oct 3, 2005  •  Post A Comment

For the top three Regional Bell Operating Companies and their video dreams, the hard part might be what comes next.

Verizon Communications became the first of the telephone companies to begin offering a video product to consumers, introducing late last month its FiOS TV service to residents of Keller, Texas. In terms of channels, the product offering mimics what’s currently being offered by cable and satellite operators, but at generally lower prices.

On the face of it, that’s likely to be good news for consumers, who have seen their cable bills soar at rates that outpace inflation.

It could be good news also for telcos such as Verizon, SBC Communications and BellSouth, all of which are spending billions to upgrade their networks with fiber-optic lines that can deliver a triumvirate of video, telephony and high-speed data in a bid to compete with cable’s similar three-pronged offerings and find an area of growth at a time when the RBOCs’ core telephone business is contracting.

But the order in front of the RBOCs is a tall one. Just as the telcos are beginning to roll out these new services, cable and satellite operators are moving quickly to up the ante, offering better features, faster Internet speeds and dirt-cheap phone service that has some analysts worried that the phone companies will be lured into a price war.

What’s more, the telcos have had a string of failures when it comes to delivering video-the most recent taking place in the 1990s with Americast and Tele-TV-which is quietly giving some investors agita as they see the price tag for this latest effort.

To be sure, the game is vastly different today than it was when the telcos last tried to offer video. These days the telcos’ core telephone business is facing an assault from low-cost rivals, Internet phone companies, cable operators and wireless providers. It has left the phone companies with little choice but to try to get into the video business. At the same time, it has left the telcos with little margin for error.

Whether the phone companies will be successful remains up for debate. Verizon’s pricing structure is likely to attract customers who are fed up with cable-bill rate increases. The company could also score points for having one of the most robust high-definition offerings around. Analysts say that the FiOS high-speed data product is faster than most cable modems.

However, there is increasing evidence that whatever gains the telcos make on the video side, success there could be mitigated by what’s taking place on the telephony side.

Just as the telcos are gearing up to steal video customers from multiple-system operators such as Comcast, Time Warner Cable and Cablevision, those same MSOs are aggressively deploying their own telephone product, convincing many telco customers to cut the phone line in favor of a cable.

It doesn’t stop there. Cable and satellite companies are preparing to cut deep into any advantage the telcos might have in their offering by bolstering where they can. Already, a number of cable operators have ratcheted up their broadband speeds at no additional cost to subscribers, and as they migrate subscribers to an all-digital platform, their HD offerings will likewise be robust.

The advantage in this forthcoming battle just might tilt toward the cable companies, some Wall Street analysts are predicting.

The cable operator to watch, according to some analysts, could be Cablevision, which has the most exposure right now due to its overlap with several markets in which Verizon is planning to launch FiOS TV. Credit Suisse First Boston estimates that 19 percent of Cablevision’s footprint overlaps with Verizon markets, and Cablevision has been extremely aggressive at marketing its triple play, with impressive results. Many believe Cablevision’s response to Verizon could set the tone for how other cable operators respond to the arrival of Verizon or SBC. (Comcast and Time Warner each have around 4 percent exposure, while Cox Communications has 3 percent and Charter has 1 percent.)

A lot of how this battle plays out will rest with cable companies’ telephony business. Using voice over Internet protocol, cable operators have been able to undercut the telcos on price by as much as 60 percent when taxes and other fees are taken into account, said Jeffrey Halpern, a telco analyst at Bernstein Research. What’s more, the introduction of VOIP has been a major factor in reducing subscriber defections, known as churn. Indeed, during the second quarter, a traditionally weak period for cable operators, those MSOs with VOIP services often saw their subscriber counts either hold steady or grow instead of following the traditional path of declining.

And while the RBOCs’ video business is likely to offset part of the loss of the phone business, the phone companies’ video business is expected to generate lower margins than what cable companies get, in part because the telcos, with virtually no customers, have had to pay a slight premium over what cable operators pay for content.

“The question remains, can the Bells make money providing video?” said UBS securities analyst John Hodulik. “Given Verizon’s pricing and channel lineup, the unit economics look very different than what the company is used to in the voice market.”