An Ugly Battle For The Clicker

If all goes according to plan, the next few years will bring an extraordinarily expensive battle for consumers' living rooms, as telephone companies spend billions to update their networks and leap into next-generation TV.

Just underscore that phrase "if all goes according to plan."

We are talking about rewiring the world, or at least a good chunk of the U.S., and the telcos are girding for a very long war. The time frame may be a decade. The spending of just one major player -- Verizon Communications -- is expected to exceed $15 billion.

Telephone companies have long tried to layer content businesses atop their networks, which go into virtually every home, with a notable lack of success. In the early '90s telcos made noises about running what were quaintly called "information services" over phone lines. Newspaper executives feared -- seriously -- that telcos would kneecap their plans to provide 900-number-style services, like, say, horoscopes. But telcos' efforts amounted to little, and one media trade magazine delicately noted that "readers used to getting their information for 50 cents or less are not easily persuaded to pay more than $2 a minute for it on a telephone line." In the mid-'90s Pacific Telesis and BellSouth signed up content partners for first-generation interactive services -- which sometimes meant operator-assisted database services. But despite some lovely names -- R.I.P., Bell Atlantic brainchild Stargazer -- none launched.

THAT WAS A SIMPLER, more innocent time, when forward thinkers routinely talked up the imminent potential of video-on-demand -- while living in a 9600 bits-per-second, dial-up world. But even in a broadband world, telcos face ludicrously difficult terrain. They're entering a field full of established players -- and, via satellite providers like DirecTV, established challengers -- in a zero-sum market in which growth equals pilfering rivals' customers. Cable outfits such as Time Warner (TWX ) now offer cable telephony -- and Google (GOOG ) just announced plans to join Skype and Vonage and provide 'Net-based phone service -- speeding erosion of telcos' cornerstone business. Then there's the $15 billion-plus Verizon has earmarked to rebuild its network all the way down to individual households, with fiber-optic lines to allow two-way interactivity. (If, like Verizon, your annual cash flow tops $25 billion, that cost becomes less terrifying.)

Telcos need to lasso major programming sources -- which they've begun doing -- from HBO to broadcast networks, especially since they're counting heavily on video-on-demand. Barring government or legal intervention, they must also win franchise rights in every municipality they wish to serve. (There are thousands in the U.S.) established cable players are upgrading their networks as well. And telcos must wrap their collective brain around selling an entirely new service. All of this has to happen, more or less, right now. Verizon expects its redone network to be available to 3 million homes -- around 10% of its current customer base -- by yearend. But Deutsche Bank Securities (DB ) analyst Viktor Shvets figures Verizon won't win 2 million subscribers to a TV/broadband/telephony package until 2008, and even then, the packages will be available to fewer than half of Verizon's present-day customers.

Sound daunting yet?

Maybe not. One veteran cable executive says it's a mistake to assume customers can't be poached. Verizon plans to underprice cable, and next-generation technologies may open next-generation revenue streams. Souped-up TV platforms could give "tremendous advantages to the telcos," says Adam Gerber, senior vice-president of Starcom MediaVest, and can "create easily measurable and trackable platforms for advertising" -- one attribute of Web advertising present-day TV cannot match.

But telcos' prospects would be more compelling if their earlier bids for next-generation media services hadn't failed so miserably. They're also uniquely ill-suited to attack cable's Achilles' heel: lousy service. As a pal likes to point out, no one pulls you aside at a cocktail party to say how much they love their cable or phone company. The battle for the living room may boil down to telco vs. cable, but don't expect either to win consumers' hearts. This fight is to see who is least despised.

By Jon Fine

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