From Reuters, July 3, 2006

Verizon’s TV Licensing May Be Only Half the Fight

By Ritsuko Ando

Verizon Communications Inc. looks increasingly impatient to roll out its Web-based television service nationwide, suing a Maryland county last week for hampering its entry, but getting licenses may only be half the battle.

Analysts say that while Verizon’s state-of-the-art fiber optic network allows multiple channels of high-definition video and faster downloading, the phone company must show more proof that its multibillion-dollar investment is worthwhile.

Verizon will not say how much it is spending on the Internet protocol television service, named FiOS, on which it is banking to win back customers lured away by cable operators’ “triple play” of Internet, phone and video bundles.

But analysts estimate Verizon is spending around $700 to $1,000 per customer, double the spending of rival phone company AT&T Inc. and spooking shareholders.

“The market hates Verizon’s level of capital expenditure, although you could say it’s a necessary evil,” said Kent Custer, an analyst at A.G. Edwards & Sons.

Even after a recent recovery, Verizon shares are still down around 2 percent over the past year, while AT&T is up about 19 percent.

Verizon says its investment will pay off as demand grows for high-quality video, speedy downloading of movies and interactive television and gaming — in short, having more computer-like functions.

“This is a once-in-a-century network upgrade,” said Shawn Strickland, head of Verizon’s FiOS TV product line.

“TV is the growth opportunity and FiOS is the best platform for that.”

Verizon launched FiOS TV last September in Keller, Texas. Short for Fiber Optic Service, it is still available only in some communities in California, Florida, Maryland, Massachusetts, New York, Texas and Virginia. It also offers high-speed Internet access through fiber in 15 states.

Showing it is serious about expanding, Verizon said last Thursday it is suing Maryland’s Montgomery County, a stronghold of cable operator Comcast Corp., for allegedly imposing “unreasonable and illegal” conditions for a television subscription license.

BUT HOW MUCH BETTER?

Verizon is not alone in plotting a counter-attack against cable. AT&T is also launching its own Web-based TV service.

But while Verizon is connecting fiber optic cables directly to customers’ homes to optimize bandwidth, AT&T is making use of existing copper lines and as a result spending only around half as much on fiber, analysts say.

“Verizon’s network is clearly superior if you believe consumers want the high-definition video. But I have a feeling they’re spending more than they’d like to,” said Albert Lin, analyst at American Technology Research.

“The question is, how different is FiOS to cable?”

At first glance, at least, there is little difference. The equipment, such as the set-top box and remote control, are largely similar to cable’s.

Moreover, programming and prices are alike. Most FiOS customers who take triple play packages pay around $100 a month, similar to cable operators’ bundles.

Verizon says FiOS has the capacity for more interactive features. For example, in the future, a customer may be able to click on a pizza advertisement on the television screen and make an order. Friends may also use the TV to talk to other friends via videolink or email.

For now, however, analysts say the main advantages are incremental rather than revolutionary, such as quicker downloads and higher quality video.

Verizon’s Strickland said those benefits were enough to win strong customer satisfaction, and one in four households in the first market, Keller, have signed up for FiOS.

Analysts said timing was also crucial for FiOS, especially as data show customers are less likely to switch providers once they have subscribed to the all-in-one packages offered by the likes of Comcast, Time Warner Inc.’s cable unit and Cablevision Systems Corp..

“The outcome may not be based on technology alone but also on time to market — who gets the customer first,” said Richard Siderman, managing director at Standard & Poor’s.

The timing of FiOS’ nationwide launch, however, depends in part on how soon counties and states grant licenses. Thursday’s lawsuit aside, Verizon is also hoping lawmakers in Washington will approve a bill that would allow it to apply for a nationwide TV license instead of negotiating with each city.