For an industry that’s never been lauded for its nimbleness, Verizon and SBC are moving quickly to build fiber networks that will compete with cable’s hybrid fiber-coax plant. Not only do they have huge footprints of available customers, they’ve got plenty of marketing muscle and are experts at database marketing, a tactic cable operators have yet to master. "I’m growing more confident in the telcos each week," says Lindsay Gardner, EVP, affiliate sales and marketing, Fox Cable Networks. "I’m gaining more respect for what the telcos are doing because I see the growing concern on the part of the cable operators." Of course, questions persist over strategy, regulation and timing. Some wonder whether Verizon and SBC and their sister Bell companies will be able to attract video customers faster than cable has been attracting phone customers. By nearly all accounts, the telco threat appears real this time. U.S. telephone companies could garner a million video customers by the end of next year. By the end of 2008, telcos could have more than 4 million video customers, according to estimates from Convergence Consulting Group. That’s the equivalent of 5% of cable’s current subscriber base. (Not all of those customers will come from cable; some will come from DBS. Programmers also expect the pool of multichannel video homes to grow incrementally from its current 86% of total TV households.) Just as satellite competition changed the video landscape a decade ago, forcing cable operators to upgrade their networks, improve customer service and introduce a bevy of new products, the entrance of telcos in the video market will force further shifts: "If [cable operators] don’t continue to serve customers well and offer them new value-added types of services, they’re going to lose their core video base. That just puts them in a very precarious situation," says Peter Winkler, global marketing director of PriceWaterhouseCoopers’ entertainment and media practice. "There is a lot of pressure on [telcos] because they’re making this foray into video service even as their core telephone business is being rapidly eroded by cable operators and other competitors," Winkler continues. "Their hand is being forced." Coming Soon: Verizon Video The fierce competition between cable and satellite actually has helped pave the way for the Bell companies to launch video services. Consider: DirecTV and Dish have done a good job of convincing customers that digital is better, and cable has done well extolling the virtues of on demand and broadband. That means Verizon and its brethren will spend less energy – and less money – on consumer education. "We can walk into a market and say, `Hey, we’ve got VOD,’ and people are going to understand that," says Terry Denson, VP, programming and marketing, for FiOS TV, Verizon’s brand name for its suite of services over its new fiber-to-the-premises network. Denson surprised the industry when he defected from Insight last September. Denson is taking his cues from cable and satellite in designing Verizon’s programming options. The company’s lead offering will be a national programming package with local market insertion, which Denson says will be competitive with cable’s expanded basic and DirecTV’s Total Choice package. Like satellite, every customer will be digital. Like cable, Verizon will pitch video on demand as a key point of distinction. In late February Verizon announced a long-term agreement with TVN, which will provide the telco with VOD programming. Verizon has announced fiber builds in 12 states to date, and plans to pass 3 million homes with fiber this year. In all, its capital investment could total some $20 billion by 2010, according to Bernstein Research. Its video offering will compete with satellite on package and price, and with cable on value, Denson says. "We’ll just be able to offer more content, which means more choices," he says. In terms of premium multiplex channels, Verizon plans to offer "as many as we possibly can." That could be a boon for premium networks such as Starz and basic nets such as ESPN, which have products and services not carried by the cable industry. Programming executives interviewed for this story were enthusiastic about the potential of deploying new revenue-generating services over an all-fiber network that the telcos say will have virtually no bandwidth constraints. "We expect all of our services to be featured," says Ed Huguez, EVP, sales, Starz. Satellite carries all but two of the 13 Starz networks; with cable, it varies by system. The telco platform could be a good venue for newer Starz offerings such as the broadband movie service Starz Ticket, Huguez says. Verizon initially will focus on rolling out hi-def, PVRs and VOD using a combination of Microsoft TV’s Foundation software and its IPTV Edition software. Eventually the company plans to add more advanced IP-based interactive services that will allow, for example, customization of the interactive programming guide and content searches from PCs and other devices. Both SBC and Verizon are expected to deploy applications for viewing digital photos on TV. Down the road, content and communications services will work on connected devices from wireless phones to PCs to the Xbox gaming platform. While premium nets with smaller subscriber bases could see bumps in total subscribers with the addition of another distributor, some programming say they expect additional revenue to come from the ability to sell a wider array of content and, to a lesser degree, from subscriber license fees. "This is a great opportunity to open [services such as Ticket] as a new revenue stream for us," Huguez adds. "In that sense, yes, it expands our business model and it expands our service." Denson is focused on signing deals, but, as he notes, while he and his team are meeting with as many programmers as they can, "there’s only so much time in the day and so many bodies." Telcos’ affiliate deals for the most part will mirror the current cable and satellite models. Since the agreements are being negotiated from scratch, Denson says it’s easier to incorporate all of Verizon’s platforms—including video, VOD and broadband—from the start. "Discussions are more open and creative than what I’ve witnessed in my previous capacities," he says. As far as getting programming deals done, Denson’s cable and network background helps. "By hiring former cable people like Terry, [telcos] can do deals much quicker than previous people in those roles because they didn’t understand the cable business and the programming side as well," says Bill Goodwyn, president, affiliate sales and marketing, Discovery. SBC Wants Its IPTV Even as the video landscape morphs with new services and new distributors, the telecom industry is morphing in a frenzy of mergers. SBC’s $16 billion acquisition of AT&T could have lasting ramifications on its video plans, if the merger itself doesn’t distract the company. For starters, the combined company will be able to take advantage of AT&T’s advanced IP backbone and billing and ordering system. The company will have an enormous customer base. SBC owns a 60% controlling interest in wireless carrier Cingular (Verizon owns the other 40%), with its 48 million customers, and 5 million SBC Yahoo DSL customers. Those customer relationships, coupled with SBC’s 54 million access lines, give it a far wider base to market to than any other distributor, says Dan York, EVP programming, SBC. York declined to go into detail on SBC’s video plans, but says he expects SBC’s packet-based IP video network will enable a more flexible linear channel offering. He also expects SBC to do more with its bandwidth in the way of HD, VOD and true interactive TV, not to mention high-speed data, with upstream speeds up to 1 Mbps—far faster than cable’s current offering. "I think that they really have a sense of broadband and video content for the high-speed pipe," says Sean Bratches, president, Disney and ESPN Networks affiliate sales/marketing, of what he perceives as telcos’ differentiator. "They realize that [the broadband pipe] is capable of passing quality video-centric products like ESPN 360 and Disney Connection, and they perceive that as a means to drive the business." Like cable, the telcos’ focus will be on selling bundles. As SBC spokeswoman Denise Koenig points out, 60% of SBC customers already take more than one service. "Our strategy has always been the more you buy, the more you save," she says. SBC will add people who are focused on video marketing to its already extensive marketing department, York says. SBC is building a programming staff in Los Angeles "similar to what you might see at a satellite company or a large MSO," he says. Get Them Before They Get You Massive competition from the Bells in the video arena is still a couple of years away. That gives cable that much more time to doggedly eat away at telcos’ core phone subscribers. For now, at least, it’s still somewhat of an uneven playing field. Denson is aware of everything that has to align in order for Verizon to ramp up its video customer numbers. So far, Verizon has announced deals only with Discovery and Court TV. The telco needs to firm up channel lineups, marketing plans and franchise agreements. (Although if Verizon has its way, it won’t be required to obtain franchises in service areas where it already has a network and where it already is offering service.) There’s also hardware and software vendor agreements to be finalized. Signing deals with broadcasters will be another hurdle. They would like the newest entrant to the video world to pay to carry the over-the-air nets, something cable has resisted. If the Bell companies are forced to pay cash to carry broadcasters, their programming costs could rise, pressuring margins, according to Bernstein Research analyst Craig Moffett. That could ultimately limit their video pricing flexibility, Moffett said in a research note. The telcos need to make sure their business plans make sense before they convince programmers to sign up. "I think the biggest questions that remain are what is their footprint and how fast are they going to build," says Mark Greenberg, EVP corporate strategy, Showtime. Questions also remain over how SBC and Verizon will transition the current satellite subs they’ve acquired through deals with DirecTV and EchoStar. A Kinder, Gentler Negotiation Process? Terry Denson thinks he knows how Verizon can avoid the bad blood that has characterized cable’s relationships with programmers in recent years: He plans to communicate better. That means listening more to programmers’ concerns. And it means keeping programmers informed of Verizon’s targets and how it plans to meet them. "It starts with a commitment to a better relationship," says Verizon’s VP, programming and marketing. "My belief is you start by showing the other organization that you understand its initiatives [and] needs, and that you are open to meeting those initiatives." That doesn’t mean cutting deals will be a cinch. "Affable," "amiable" and "pleasant" aren’t the first words that come to mind when describing talks in which one side wants to pay as little as possible and the other wants to charge as much as possible. "I haven’t heard the word `easy’ and `negotiation’ in the same sentence," says Coleman Breland, EVP, affiliate marketing and sales, Turner Network Sales. That being said, Turner’s telco talks "are going on a positive track," Breland says. "We’re trying to understand their business model and how they’re going to approach the customer and what does that mean for us in terms of the Turner brands." The fact is, programming deals today are far more complex than they used to be. Not only do they need to incorporate networks and the technologies available today—from VOD to hi-def to interactivity—but they also have to account for developing and, in some cases, yet-to-be-developed technologies and networks. Then, of course, there are the basic issues of pricing and packaging. Price increases dominated the most infamous recent cable-programmer feud, that of ESPN and Cox. —M.S.

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