Special Report: Tug of War

NEW YORK When cable companies ventured on the telephone companies’ turf by offering phone service to cable subscribers, they may have awakened a sleeping giant. To protect their core business, Verizon and AT&T responded in kind to cable’s “triple play” of video, Internet and phone service. And taking advantage of the latest technology, the telcos are building out services more capable than coaxial cable, with an eye on toppling the MSOs’ lock on video-subscription services.

It’s not the first time the phone companies have made a stab at the video business. “History will show Mike Armstrong [former chairman and CEO of AT&T] had the right strategy but at the wrong time,” says Tom Eagan, media analyst for Oppenheimer Research. “But this time, it’s more important. Now they have so much more to lose. They are being cannibalized.”

The telcos, with deeper financial coffers than the MSOs, are investing billions to grab market share. Eagan estimated it will cost each of the phone giants $20 billion to roll out fiber-based video, Internet and phone networks across its geographical footprint.

“It’s a major transformation of the marketplace,” says Jeff Kagan, an independent telecom analyst. “Consumers used to do business with both. Tomorrow we’ll choose one. It’s an all-or-nothing battle that’s gearing up.”

While Verizon FiOS and AT&T U-verse combined have yet to crack 500,000 video subs, they continue to build, introducing their advanced video services to tens of thousands of new homes virtually every week. By 2010, Price- WaterhouseCoopers estimates, the telcos will boast 10 million subscribers.

FiOS was the first to launch, in September 2005 in Keller, Texas, 30 miles west of Dallas. Today it claims a presence in six of the top 10 TV markets and a total of 348,000 subscribers. In markets where it launched early on, including Dallas and Tampa, FiOS is estimated to have nearly 10 percent of the subscription TV market.

U-verse is now up to 20,000 subscribers and says it is averaging about 2,000 installations a week, five times greater than its average rate in January.

What they lack in subscriptions, the telcos make up for in capability, as they are building from the ground up with the latest, fiber-optic technology—versus cable’s coax connection, which has less bandwidth. “We’re what you’ve come to expect from cable TV, but on steroids,” said Jason Malamud, vp and general manager for Verizon FiOS Media.

Those setting themselves up to compete with traditional cable—including FiOS, U-verse and satellite providers—have been willing to pay for content from broadcasters and cable networks alike. This makes life difficult for cable companies, which have to negotiate with local broadcasters for retransmission rights. As a result, FiOS and U-verse services offer channel lineups comparable to the cable systems and satellite, and they offer more HD channels than traditional cable.

They also offer sexy features like technology that allows a viewer to record three (in the case of FiOS) or four (U-verse) programs at once. AT&T recently launched a service that lets the subscriber program his or her DVR from a cell phone or other mobile device, in addition to an existing feature allowing U-verse TV and Internet customers remote access to their DVRs via personal computers using AT&T Yahoo’s broadband portal.

Because the systems are inextricably tied to the Internet (U-verse is entirely IP-based), interactivity is integrated into the TV services. FiOS provides TV Widgets, a free interactive feature that displays local weather and traffic information.

AT&T plans to launch the U-bar, an interactive component that would allow U-verse TV subscribers to access data services such as stocks, sports scores, news headlines, weather and traffic.

“We’re able to rewrite the rules,” says Karl Spangenberg, vp, integrated advertising and commerce for AT&T Entertainment Services. “With interactivity, we’ll be able to come up with a better sense of who is on the other side of the screen.”

Cable isn’t sitting still. According to the National Cable & Telecommunications Association, the cable industry has invested more than $110 billion over the last decade on high-speed Internet and other advanced services. Cablevision—the cable provider whose territory is most vulnerable to the telcos, with 23 percent of its footprint passed by FiOS, according to Citigroup—has stepped up its so-called “triple play” offering with pricing competitive to the telcos.

UBS analyst John Hodulik recently projected that by the end of this year, cable triple services will be available to at least 82 percent of households, versus just 15 percent for telcos.

Telcos counter that their pricing, which includes multiple set-top boxes, runs 20 percent to 30 percent cheaper than cable. “Telcos are betting an awful lot of money that they can wrestle some of the business away from cable and satellite,” says Scott Brown, senior vp, strategic relationships, marketing and technology for Nielsen Media Research, owned by Mediaweek parent The Nielsen Co. “Clearly, we’re preparing [our research services] with the assumption that they’ll be successful.”

The battle for ad dollars has just begun. In March, both services launched ad-sales initiatives, employing markedly different strategies. FiOS, with the larger market penetration, is taking a more traditional approach, targeting local cable advertisers. In a nod to cable, the service launched its first local cable news channel in the Washington, D.C., area, FiOS1, to give it an edge over satellite.

U-verse is leveraging an integrated cross-platform sell and in April signed JPMorgan Chase as its first “three-screen advertiser,” in concert with Tim McGraw’s Swampstock music festival and Neighbor’s Keeper Foundation charity fundraiser.

“We’re moving to three-dimensional chess,” says AT&T’s Spangenberg, who was brought in last year to help build a sales force concentrating on multiplatform deals. “The richest experience for the customer and the best bet for the advertiser is the AT&T household with all the services,” he adds. “That’s the center of the bull’s-eye.”

That’s an advantage FiOS and U-verse believe they can leverage with advertisers eager to harness new media with traditional campaigns.

“For video advertising to truly evolve, you’ll need innovative partnerships between programmers and advertisers,” Malamud says. “Distributors hold the key to the technology and most [cable companies] are handcuffed by legacy businesses, legacy staffs and big businesses. It’s hard to imagine game-changing partnerships with the pressure to remain successful.”

For now, FiOS’ pitch to advertisers is a familiar one to cable advertisers. Because the service starts its rollout in the suburbs and works its way in, its sub base is highly desirable. “We may be 5 percent of the market, but we’re 10 percent of the Mercedes sold,” Malamud says.

Advertisers looking for a quality audience are buying FiOS’ pitch. “It’s still very low penetration by households, but the available towns are growing quickly and it’s an option we need to look at,” says Greg Angland, broadcast media manager for Boston-based Blitz Media. “We have few options here in Boston, and the footprint was perfect for [client] Jordan’s [Furniture].”

Bob Guckenburger, president of Guckenburger & Partners, bought advertising on Tampa’s FiOS service for Jaguar of Tampa and Saab of Tampa. “I’ve put all of my TV clients into it as a hedge against [local cable system] Brighthouse,” Guckenburger reports. “I buy my reach with Brighthouse and frequency with FiOS. FiOS has concentrated on our trading area and other upscale, new areas. It’s a way to make sure I’ve captured the entire market.”

FiOS may be starting with traditional cable ad sales, but like U-verse, it’s also well aware of the potential of interactive ad sales, especially as it begins to pull data out of its set-top boxes. The company is talking to “the usual suspects” among research firms, Malamud says, to mine audience data of interest to advertisers.

Despite inroads by the telcos, there remains plenty of skepticism that FiOS and U-verse can penetrate an already saturated market. “Real competition is a long way off,” says Eagan. “Cable has helped themselves by rolling out the triple play, and every customer they add reduced the churn. The better cable operators [including Comcast and Time Warner] in the more advanced markets are going to be hard to beat.”

Until now, the telcos’ effect on the cable business has been minimal. But there’s little doubt the new entrants are making their mark. “I wouldn’t say we’re hurting them,” says Verizon’s Malamud, “but I think we’ve got them thinking.”