The Triple Play Is Out

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For us, it was a question of do it now or do it later. We know that the functionality we are capable of providing in the home far exceeds what others are capable of doing.”

That’s a gauntlet. You’re hearing it thrown down by Dennis Strigl, the chief operating officer of Verizon Communications. And operators of other multichannel video and telecommunications services — read that: cable and satellite operators — discount his assertion at their own risk.

What Verizon has done, as anyone who has taken time to keep score has noted, is decided to take fiber-optic transmission technology straight to the home. No scrimping. No laying fiber to a neighborhood node, as was done by cable operators or Verizon’s telecommunications brethren, AT&T. No, light-carrying strands of glass are being laid all the way to every home of every customer it plans to reach in its head-to-head competition with cable and satellite operators.

This makes it possible to double or quadruple capacity at will. With fiber, the only capacity constraint is how many colors of light you can send down the pipe to carry video, audio, text and other content.

Verizon can add capacity in almost limitless chunks by replacing electronics at switching offices and at customers’ homes. No new fiber needed.

Initially, Verizon supplied 622 Megabits per second of bandwidth to each 32 homes it served. That is being bumped up to 2.4 Gigabits per second this year, starting in Texas. And by 2010, every home may be served by its own lightwave, carrying 100 Mbps of traffic at a time. In theory, that’s enough capacity to transfer a complete high-definition movie to each home in less than seven minutes.

Its confidence in its capacity — and the company’s financial wherewithal — is reflected in the manner in which Verizon enters any given market with its fiber-optic system, which it not-so-catchily calls FiOS.

CHANGING THE GAME

The first market it entered — two years ago — was Keller, Texas. Until its emergence as the seeming epicenter of emerging competition between cable and telephone companies, Keller was a virtually unknown suburb of Fort Worth, a cattle and military outpost. In 1980, its population was under 5,000. This year, it will approach 40,000. The immigrants? Mostly affluent new residents, seeking access to Fort Worth, Dallas and the main airport in between.

Verizon’s regional headquarters are 20 miles away in a planned corporate and residential haven known as Las Colinas, Texas. So, using Keller as its Peoria-like test market was a matter of convenience for a large concentration of in-house information technology, engineering and product-development experts, not just economics. Progess could be monitored by the hour.

And, according to its competition, Verizon’s marketing blitz was unstinting as it tried to woo customers away. Promotional messages were imprinted on dry-cleaning bags, Chinese takeout containers and pizza boxes from Keller merchants. Advertisements were purchased in both the weekly Keller Citizen and the daily Fort Worth Star-Telegram. Sales reps worked the turf in-person, going door to door on newly turned-on neighborhoods.

What’s worse: Verizon clearly picked a target that it felt it could hold an advantage over. The incumbent cable operator, Charter Communications, did not yet offer phone service. So, from the customer’s viewpoint, the telephone company was the first outfit to offer a “triple play” of phone, Internet and TV service at a reasonable cost.

“That, to me, is the most significant aspect” of the initial square-off, says Kevin Allen, Charter’s director of government relations in Texas.

Charter removed that disadvantage by launching phone service in May 2006. But the instruction was clear: Cable did not necessarily have any inherent advantages over networks constructed by telephone companies. They could be one-upped.

And now, Strigl is ready to relegate the triple play to the dust bin. Before the year is out, cable operators can expect to see the competitive game shift to a “quad play” of TV, phone, Internet and wireless communications bundles.

“I think the game changes this year,” Strigl asserted from Verizon’s corporate headquarters in verdant Basking Ridge, N.J.

That’s not terribly surprising, given Strigl’s background. Before taking on the top daily operations job at Verizon, Strigl headed up Verizon Wireless operations.

And it is there that he clearly spies a second advantage that cable can’t match: the existence of a nationwide wireless communications network that Verizon built, owns and operates. No partnership required, as Comcast, Time Warner and other cable operators face in their joint venture with Sprint Nextel.

“I think it’s very difficult for a cable provider to give a customer a full quadruple play, if they don’t own all pieces of it,” he said last month. “Unless you have full ownership of something, it takes longer to get to market, it’s more difficult to offer a competitive price and the evolution of the technology is slower.”

How exactly will Verizon will try to top the triple play of its cable competitors? Strigl isn’t saying. Some inklings: the introduction of Verizon Wireless’ VCast Mobile TV service this spring, with customized channels from CBS, ESPN, Fox, NBC, MTV and Nickelodeon; video-on-demand services through partnerships with the YouTube and Revver web sites; and applications for businesses, such as Field Force Manager location and time tracking services. And over time, he said, you can expect that mobile customers will be able to send text messages to TV screens and home phones, not just other handheld devices.

“We’re just at the beginning of building out our FiOS business,” Strigl noted.

Which is one way of saying Verizon is not yet a big competitor in video, high-speed Internet and phone business. At the end of 2006, Verizon’s FiOS TV initiative counted 207,000 subscribers. That is barely the size of one good cable system, noted Cable & Telecommunications Association for Marketing CEO Char Beales.

For instance, the Minneapolis division of Time Warner Cable counts 206,000 subscribers. And that multiple-system operator, the second largest in the U.S., has 14.5 million basic subscribers all told.

The FiOS TV subscriber number reached 348,000 at the end of the first quarter of 2007. Even so, by the end of 2010 Verizon will only have laid fiber past 18 million households out of the 33 million households it serves in the 28 states where it delivers telephone service. Of those, it expects to pick up between 6 and 7 million customers for its FiOS high-speed Internet access service and between 3 and 4 million for FiOS TV.

Yet each of those customers “is going to come from cable or satellite,’’ said CableLabs chief operating officer Chris Lammers.

NO SLOWING DOWN

In Brian McGinn’s case, it was cable. The information technology support engineer in Hermosa Beach, Calif., had a choice of switching to Time Warner Cable last year, when it took over the Adelphia Communications operation in his town.

Instead, he took that moment to switch over to Verizon. Why? He’d been a long-time customer of Verizon for home and wireless phone service, he said, and was happy to get all four services — TV, Internet, and the two phone services — from a carrier he felt was reliable.

McGinn spends about $140 a month for a package that includes 200 TV channels, HBO, a digital recorder that serves two rooms in his house and the mid-grade of Verizon’s Internet access service. That’s where he sees the advantage of Verizon’s extra capacity, from taking fiber right to his house. “I have not noticed any significant drop in my speeds at any given time of the day,” McGinn said.

As a technician at a “rich-media” software firm called Accordent, he watches the speed of digital connections closely. “That’s one of my biggest things,” he said.

And the lowest he’s ever seen his 15 Mbps service drop to is 14.5 Mbps. In effect, he has a dedicated connection with Verizon, where he had to share bandwidth with neighbors on his cable hookup to the Internet.

One of Verizon’s chief competitors is Cablevision Systems, though, which now provides its Optimum Online customers in the New York area with a standard speed of 15 Mbps and can boost that to 30 Mbps.

Strigl contends Verizon’s approach is superior. Access speeds don’t slow down for a user when when lots of neighbors come home and get on the Internet at the same time.

“What time of day? This isn’t an issue of you have to have the optimum time of day to get your 30,” as with Cablevision, he said. With FiOS, “this is a question of: you’re going to have it all the time. This is your connection.’’

Cablevision, so far, is unfazed. “It would shock me if they actually keep going to the end of the decade,” chief operating officer Tom Rutledge, said at the end of March at the Banc of America Media, Telecommunications & Entertainment Conference in New York. He calls Verizon an “overbuilder” with a fairly traditional approach that still uses coaxial cable inside the home to deliver services.

“At the end of the day, the Verizon system is very analogous to a cable system in the home,” CableLabs’ Lammers said.

Cable operators also have the advantage of time — a three-year “head start,’’ in the view of Time Warner Cable’s chief marketing officer, Sam Howe.

In Syracuse, N.Y., a market targeted for rollout of Verizon’s triple play of FiOS Internet, video and telephone service, 28% of Time Warner Cable’s 414,000 basic-cable subscribers also take Internet service.

And another 22% take telephone as well as Internet. That triple-play rate compares to 14% in the rest of Time Warner’s service areas.

“You can count on the phone companies to always go back to the network as kind of the argument point,” says Howe. “But consumers aren’t sitting around saying, 'hey, show me the fattest pipe,’ they’re sitting around saying. 'show me the best bundle and how can you bring into it my house pretty easily.’ ”

THE PRICE IS NOT RIGHT

If there’s one thing Verizon is not competing on, in fact, it is price.

In Internet access, for instance, Cablevision customers can step up to 30 Mbps service for as little as $10 a month. The jump between 15 Mbps and 30 Mpbs at Verizon? $130 more, a month.

In Keller, in fact, Verizon increased its rates 7% after the first year. And the cable operator, Charter Communications, has bumped up basic rates $2 each of the past two years. Downward pressure on prices “simply hasn’t happened,’’ said Charter’s Allen.

Not only is Verizon not competing on price, Rutledge says, it has “inefficient’’ marketing. In New York, Rutledge calculates Verizon reaches about 600,000 potential homes with FiOS — and is buying advertising for 7 million. Which means if they stimulate interest in triple-play services, more often than not Cablevision would be the beneficiary. “That could be good for us,” he said.

Verizon also is not creating any content that explicitly shows off performance of its FiOS network.

Meanwhile, the nation’s largest cable operator, Comcast, continues to stockpile content that it thinks can distinguish its TV services from telephone or satellite competition.

One example: Its creation of original programming over the past two years for its 12.7 million video-on-demand-capable customers.

This includes Exercise TV, which lets viewers pick workouts from yoga to bellydancing and picks up 3 million views a month; and Dating On Demand, which gets 1 million views from romance-seekers. All told, with original and non-original content in its library, Comcast has served more than 3.7 billion video streams to on-demand customers in the past three years.

“One big advantage that the existing cable companies do have versus the startup telephone companies is just that we do have a wealth of experience in video and what works on television,” said Comcast senior vice president and general manager of video services Page Thompson. “So hopefully, we will have an advantage of discovering new content first and we’ll know what works and doesn’t work.”

Verizon instead is trying to educate software and programming developers about the capabilities and capacity of its fiber network, to get them to create original content.

“I am not going to say we’re never going to do any of our own inventing, but the content programming world is so rich today, that we find it to our advantage to draw upon what’s there, rather than invent our own,” Strigl said.

HIDDEN ADVANTAGES

Online gamers are supposed to flock to FiOS, since the speed of the network could give them split-second advantages in actions against competitors that require lightning-fast moves in complex environments.

In August, Verizon launched a game service called Playlinc, featuring voice chat, instant messaging and friend tracking so players anywhere could talk with each other when they play one of the 1,600 games that can be played on it, including cyborg shoot ’em up Quake 4; TrackMania Nations, where players can build tracks and “respawn” themselves when they die in a collision; or Dark Messiah of Might and Magic, featuring melee combat. For 50 days at the end of 2006, the company allowed gamers to play for free — gave away a high-performance Alienware PC gaming system every day. Tournaments with prizes worth $20,000 and $100,000 have also tried to stimulate interest.

For conventional TV viewers, Verizon is focused on creating features that enhance TV watching. One creation is a feature it calls “Widgets,” which lets subscribers use their remote controls to pull up text reports on local weather and traffic as they watch a TV show.

The company’s digital video recorders are also designed to take photos and music stored on personal computers and show them on TV. Customers can also create playlists and slide shows. This kind of media management is also being extended to mobile phones. And customers can search for programs to watch on TV, with the search program predicting some keystrokes to speed up the effort. The search can be by title or actor.

A key design principle: Make FiOS work the same everywhere. Every FiOS system throughout the country will have the same navigation system, which Strigl thinks is a clear advantage over cable operators who typically maintain multiple systems. These often have been collected through series of acquisitions.

Verizon’s effort will be judged by a different standard, its technical engineers believe. That standard: The ability for the customer to operate any feature of any service on a screen when standing “in a dark room with a beer in hand.”

“We’ll get there,” Strigl says. And, eventually, the mobile handset will take on features of the handheld remote control, as the navigation of phone and TV services are standardized.

In the meantime, Verizon is counting on the basics to win customers, like installation and service.

That’s what convinced Scott Orr of Coppell, Texas, to switch. He’d been discouraged by how one operator, Time Warner Cable, dug up his yard to install service. And the digital signals supplied by the prior operator, Comcast, had degraded by the time they reached his bedroom.

And Orr is no ordinary customer. The entrepreneur and now president of Christian Community Action, a social-services agency, spent $90,000 just to build a nine-seat home theater on the second floor of his home. He spent $150,000 all told on audio and video entertainment systems around his house. He has three HD DVRs and two standard DVRs. He says he gets more channels, including the NFL Network. He pays $40 less a month.

In the end, what does he like the most about his new TV service? It’s basic. “The picture’s better,’’ he says.

BYE-BYE TRIPLE PLAY

Once Charter started providing phone service last year, “the losses have certainly slowed,’’ said Charter’s Allen. The company has tried to keep existing customers and win back others with its own door-to-door sales campaigns, to match Verizon’s; by reorganizing its call centers, so it has specialists to respond on different phone, TV and Internet services; and by adding products and services. Tomorrow, for instance, it plans to unroll nine new digital channels and 8 new HD channels in its north Texas markets.

Meanwhile, Verizon continues to see losses in its bread-and-butter business: home and business telephone service. From fall of 2005 to fall of 2006, Verizon lost 3.1 million telephone line customers, falling to 28.5 million from 31.6 million, according to Telephony magazine. And CIBC World Markets estimates losses will continue, at the rate of 7% a year.

In the first quarter, Verizon said it added 182,000 more broadband and video customers than it lost from the decline in telephone lines. And Strigl’s point is this: Verizon needs to pick up just one triple-play customer — at $100 a month — to make up for three lost telephone lines, at $30 a month.

If cable marketers or operators want to ignore Verizon because it has well under a million subscribers, that’s fine with Strigl.

Verizon is ready to say good-bye to the triple play and enter the market with a clearly-defined “quad play” that includes home phone service, mobile phone service, high-speed Internet access and TV. And VCast, with mobile video, makes it a “quint play.”

This comes just three years after Verizon started to roll out its fiber-to-the-home network. That shows the company has come a long way in a short period of time, he said.

“I think we’re a force to be reckoned with,” he said. “But I am very pleased that we are not considered a viable competitor at this point.”

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