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Verizon's Muddy TV Picture

By Olga Kharif From Long Island, N.Y., to the outskirts of Dallas, phone-service giant Verizon Communications (VZ) is making deeper inroads into the TV market. In the span of a half-hour on Sept. 26, Verizon won approval from officials to offer TV services in Massapequa Park, N.Y., and Fairfax County, Va.That came days after it began providing more than 300 channels to residents of Keller, Tex., a community of about 34,220 near Dallas, and it follows an announcement that Verizon inked a deal with Disney (DIS) to carry ABC, Disney, and ESPN channels over its service.

The introduction of FiOS, the fiber-optic cables that deliver TV service to homes, marks the early stages of a sea change in telecommunications: Companies that traditionally specialized in phone, wireless, and Internet services are now rushing to deliver TV and video.

New York-based Verizon and peers including SBC Communications (SBC) are locked in a land grab with cable-TV operators such as Comcast (CMCSA) and Cablevision (CVC), which have long competed for high-speed Internet customers and are now carving out a widening share of the market for phone service. Telecom providers are trying to fend off phone-line losses and step up sales growth by providing the same package of services a customer can get from a cable carrier.

STREET TEAMS. The telcos better pick up the pace. By the end of 2007, 12% of residential consumers will be buying phone service from cable outfits, vs. 4% now, according to tech consultancy Convergence Consulting Group. Over the same period, phone companies will have signed up only 2% of TV-service subscribers, CCG predicts.

That's far below the 20% to 25% share that telcos will need in order to make money on the service, says Mitch Mitchell, an analyst at strategy consultancy A.T. Kearney. As things stand, telco TV providers might not break even, on an annual basis, for 10 to 15 years, says Albert Lin, an analyst at American Technology Research.

Here's why: Verizon and peers will spend untold billions laying the fiber-optic cables that will carry TV services directly to homes and neighborhoods. Then there's the cost of programming and attracting customers. To promote the new service, Verizon has launched a direct-marketing campaign. It has also opened up special lounges where people can try its TV service and has hired street teams to do door-to-door promotions, according to Verizon.

SBC, which provides local calling from California to Connecticut, plans to spend $4 billion on the network upgrades that will let it sell TV to 18 million homes, or half its customer base, by the first half of 2008. It plans to introduce TV in one market later this year. Verizon hasn't released a total price tag for the network, though analysts estimate it could top $20 billion. Neither company has disclosed programming and marketing expenses.

TEXAS VICTORY. Getting regulatory approval to enter the market also takes time. Phone companies need to seek a government go-ahead in just about every city or county they want to enter - though the telcos are lobbying for rule changes that would let them apply for franchise licenses on a federal or state-by-state basis.

SBC and Verizon scored a victory earlier this year in Texas, when a law passed that makes it easier to win statewide clearance. Elsewhere the companies need to slog through an approval process that can take as long as 18 months and require a lot of pricey lobbying.

Verizon is seeking franchise approval in 250 U.S. cities. "We haven't been turned down anywhere we've gone," Verizon CEO Ivan Seidenberg tells BusinessWeek Online (see BW Online, 9/28/05, "Verizon: "We've Got to Fix It"). By the fall of next year the outfit may have 500,000 TV-service subscribers, estimates Lin. Its TV operations will eventually overlap with about 19% of Cablevision's base and 4% of Comcast's subscribers, according to Credit Suisse First Boston.

The telecom providers say they have the upper hand in the battle with cable operators. For one, Verizon, SBC, and BellSouth offer an alluring product that cable companies lack: wireless services. SBC and BellSouth together own Cingular Wireless, the biggest U.S. mobile-phone company, and Verizon is part owner of Verizon Wireless, the No. 2 wireless carrier. Some cable companies offer wireless calling through mobile-phone partnerships.

EARLY GOING. What's more, Verizon has shown it will compete on price. In Keller, it offers a basic service with 180 channels for $39.95 a month. In the same market, cable company OneSource Communications sells that number of channels for $47.95. OneSource has yet to lose subscribers to Verizon, reports Andy Slote, general manager for OneSource in Keller. Still, it's early going. And as Slote admits: "It will be a competitive threat." The privately held cable company is debating whether to lower its prices or to increase the number of channels it makes available for the current price.

Yet as price wars ensue, the breakeven date could be pushed out further still, analysts say. And investors are likely to grow impatient, says Phillip Swanni, CEO of industry researcher TV Predictions. Some may urge the phone companies to pull the plug altogether, he warns. "My prediction is, two years from now there won't be a TV offering" from Verizon, SBC, or BellSouth(BLS), he says. BellSouth, the biggest local-phone company in the Southeast, has plans to start its own consumer TV trial in the coming months.

BELLS AND WHISTLES. Instead, telecom providers may be better served through existing partnerships with satellite-TV carriers DirecTV (DTV) and EchoStar (DISH). BellSouth says since it agreed to resell DirecTV's service in August, 2004, it has signed up 394,000 TV subscribers.

Verizon and others reckon their own TV services will include bells and whistles they can't offer through a partnership with a satellite provider. FiOS features as many as 330 channels and 600 video-on-demand titles. And, say the telcos, the more products a customer buys, the more loyal they become. A subscriber who signed up for TV, alongside wireless calling, Internet access, and calling features, is more likely to stay on board when cable companies come calling.

Yet for Verizon and the others, the hardest part of satisfying the customer may be keeping investors happy at the same time.

With Steve Rosenbush

Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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