The Telcos' TV Gambit

"All I want to do is kiss cable goodbye," a woman says in a TV commercial heralding the launch of television service as part of Verizon’s FiOS offering in the New York City area.

The commercial is part of the telephone companies’ latest, comprehensive and vitriolic assault on cable’s core business. The telcos have made various attempts to move into television delivery before, and now they’re talking a big game again.

Verizon says consumers are being won over by FiOS TV’s superior video and audio quality, fueled by its fiber-to-the-home network and numerous high-definition TV channels. AT&T, even without HD at the outset, says customers subscribing to U-verse TV, an Internet protocol TV service, compare it favorably with the picture quality of cable’s HDTV.

As they seek to corral dissatisfied cable and satellite customers and more, each telco is implying that it is beating cable on a matter of quality—their quality of service, video and audio, and overall television viewing experience.

If that is true, and the telcos figure a way to capitalize upon it, then they could turn the issue of product quality into a strategic marketing offensive against cable and satellite. Already, the telcos are suggesting that they believe that video quality, right along with customer service, is cable’s Achilles’ heel.

Yet at this point it is nearly impossible for anyone to say whether the telcos really have built a better product or not. TV beauty largely is in the eyes of the beholder, and there is a variety of factors for each consumer that will determine which service they think is better.

In theory, the type of FTTH (fiber to the home) architecture used by Verizon provides a cleaner signal path into the home than hybrid fiber coax technology used by most cable systems, according to engineers. But much of the quality depends on what happens inside the home—not really in the last mile but within the last few feet. Much of Verizon’s overall success also depends on its ability to drive down the high cost of deploying fiber and stay ahead of cable’s own efforts to offer all-digital TV options.

As for U-verse TV, which uses fiber-to-the-node architecture, AT&T is still overcoming the technical challenges of delivering IPTV and developing its product line. In September, it sent a letter to its initial customers in San Antonio, promising that HDTV, more channels, games, personal photo options and other features were coming soon.

So at this point, the question of product quality is mired in a war of words between cable and telco representatives, who are making claims and counter-claims. In the middle are American consumers, who will increasingly be presented with their own opportunities to answer the question.

The Q Word

Increasingly, telco executives keep hawking quality.

“My biggest surprise has been the importance of getting quality right – the bigger notion of quality relative to ordering the service all the way through install and experiencing it afterward,” says Shawn Strickland, VP, FiOS TV product management. “The word of mouth around our video and audio quality has been phenomenal. It’s helped us as we’ve entered these markets because the word of mouth has a multiplier effect on marketing dollars. What we’re seeing is customers are willing to pay for quality.”

Earmarking $18 billion in net capital to support its FiOS Internet and TV network from 2004 to 2010, Verizon has about 100,000 FiOS TV subscribers. It’s aiming to attract 175,000 TV customers by year-end and 3 to 4 million by 2010.

HDTV is a priority for FiOS (it claims to be “No. 1 in the number of national high-definition channels it offers”), as well as interactive TV, which has begun with local traffic and weather features called Widgets.

Strickland says, “We want to be the first place that the programming industry comes to when a new HD product is launched.”

Verizon has been touting its all-digital capability from the outset, suggesting that it has built a better mousetrap than cable’s HFC plant.

“Our FiOS TV product is fully digital from day one, with tons of high-definition content,” Verizon CEO Ivan Seidenberg said during the 2006 Consumer Electronics Show.

More recently, during a Verizon financial analysts meeting, Virginia Ruesterholz, president of Verizon Telecom, said customers “really see the difference in the quality.” Bob Mudge, EVP and COO, Verizon Telecom, added that TV retailers are displaying demos of FiOS, cable and satellite, and one store told them that seven out of 10 of its TV set buyers are adding FiOS.

Even without HD, Michael Grasso, assistant VP, consumer marketing, AT&T U-verse, says, “Customers…find the picture quality to be so sharp, so clean. In a number of cases they’ve compared our standard-def offering to the MSOs’ hi-def offering, and in many cases said it outperforms.”

Cable Fights Back

Cable operators aren’t buying the telcos’ story. “Our digital cable product is ahead of our competitors, and we certainly plan on maintaining that lead,” says Dave Watson, EVP of operations for Comcast.

Noting that Comcast recently added 100 hours of HD video on demand to its advanced services offerings, Watson says Comcast “provides an entertainment experience that the telcos are desperately trying to match.”

“They don’t have a better mousetrap,” says Time Warner Cable spokesman Mark Harrad. “To me, you yell ‘quality’ when you don’t have anything unique.”

Warren Jones, director of competitive strategy & retention, Cox, says, “We do not see anything in either Verizon’s or AT&T’s video products that materially differentiates their video services from the satellite competitors we have competed with for years.”

“I’ve never seen so much hype and baloney in my life,” says a Texas cable system manager who’s competing with a telco. “U-verse doesn’t work yet. FiOS doesn’t scale [economically]. They’re both caught in limbo-land.”

“They do like to say that, don’t they?” says U-verse TV’s Grasso of operators’ dismissals. “Yet we fly people in all the time to see our service and I’ve never seen anybody walk out without their jaw hanging down, absolutely impressed with what we’ve been able to accomplish with U-verse TV.

“And our ability to scale? Yes, we’re going to scale. We’ve already started scaling in San Antonio and you’ll see us scale in other markets,” Grasso says.

While noting that IPTV has been technically challenging, he says, “We’ve got all the right tools and the right people in place, and now it’s truly a matter of time until you see us out there, and that time line is fairly short.”

A Marketing Advantage?

Verizon says two-thirds of its FiOS TV subscribers are cable defectors. But even Strickland concedes that video quality alone probably isn’t enough to get cable subscribers to defect in droves. Verizon points to the cumulative effects of customer service, bundling, international channels, multiroom digital video recorder and interactive Widgets.

Yet the cable industry itself originally was built largely on its ability to provide better TV pictures. Satellite, too, benefited from the attention it got for its all-digital lineup. This is television, after all.

One FiOS TV subscriber interviewed for this story says the picture quality definitely is superior.

“It definitely is better than cable,” says William Donohue of Massapequa Park, N.Y. “It’s amazing. Picture-perfect reception. I’m sure the HD is about the same, but on regular TV the difference is like night and day.”

A former FiOS subscriber says the difference in picture quality was imperceptible on his TV sets, although the TVs are older models. The subscriber, Stanley Jacobs of Massapequa Park, says he and his wife couldn’t get used to the new FiOS channel lineup and remote control so they accepted a Cablevision Systems win-back offer.

“Now my wife is very happy. She has her old remote, her old channels, like channel 61 local weather,” Jacobs says.

Even if picture quality is a “selling point, would it provide a significant marketing advantage, especially when consumers have to see it first to believe it? Market researchers say customer service remains a bigger issue for cable than picture quality.

“Clarity’s not going to be a big issue, unless it’s not there,” says Steve Kirkeby, executive director, telecommunications and technology, J.D. Power and Associates. Telco IPTV services will be successful provided that they’re no worse than cable or satellite, he says.

“I expect Verizon to be immediately successful because there are a significant number of customers who just aren’t happy at all,” Kirkeby says. “They had a problem, you didn’t fix it, they’re gone.”

Bruce Leichtman, president of Leichtman Research Group, says, “The telcos are going to take some cable subscribers, so you have to figure out which ones you’ll let them get. It’s like a football game. They’re going to get yards but you want to limit those yards.”

Both the cable and phone industries have a group of potential switchers. According to Leichtman Research, 19% of U.S. households are interested in getting TV service from their local phone company while 17% are interested in getting phone service from their cable company.

The telcos’ moves into video comes as the market already is saturated, Leichtman says. The telcos also have an advantage with movers, since one of six Americans change their home location each year, and they tend to call their phone company upon arrival, he says.

Adios FiOS
Before the telcos launched TV service, cable began moving to provide all-digital service options through digital simulcast and switched digital video. Top MSO executives have denied that they’ll need to invest a lot more in capital to meet the telco threat.

Cable’s primary response to the telcos has included digital phone services and going after business customers. Time Warner has launched a $99 residential bundle in some markets. Internally, Cox in Northern Virginia has a competitive plan called “Adios FiOS.”

Comcast’s Watson says, “We expect to have 8 to 10 million phone customers before the Bells have even 1 million video customers in our footprint. We’ll continue to roll out advanced products as we always have and that will put the telcos even further behind than they already are.”

Verizon’s Strickland says there is no single killer app or silver bullet that will get consumers to switch. But, he adds, “At some point for each customer there’s going to be a tipping point where by adding that last thing you’ve got their interest and they’re willing to switch.”

J.D. Power’s Kirkeby says it’s better for each industry to fight over issues like customer service and quality rather than getting drawn into a price war.

“Forget price wars,” he says. “Let’s have service wars. How about that? How about performance and reliability wars?”

Telcos on the Marketing Trail

Telephone companies are taking to the streets, the airwaves and the Web to raise awareness of their TV services and bash their cable and satellite competitors.

Each side is engaging in enough mudslinging to rival a political campaign. In San Antonio, AT&T has hosted carnival-like parties including games and a truck with multiple U-verse TV screens, says Sanford Nowlin, a reporter covering telecommunications for the San Antonio Express-News.

“The jury is still out as to what kind of consumer interest [AT&T is] getting here,” Nowlin says. “There’s some reticence with consumers I’ve talked to about jumping on the U-verse bandwagon unless they know it works.”

Time Warner, which has a San Antonio franchise, says the effect of U-verse marketing so far has been limited. Company spokesman Mark Harrad says, “We’re up in high-speed data customers, in voice customers and even single-video customers.”

Verizon also uses grassroots tactics in addition to traditional TV, radio, newspaper, direct mail and door-to-door sales. The company declined to put a dollar figure on its overall campaign.

“We have seen all of the Hummers and pizza boxes and Chinese food containers,” Cox’s Warren Jones says of the telco ploys. “Our research says that customers have a tough time recalling many of these tactics.”

The effect on Cox video subscriptions, Jones says, has been “limited” and Cox’s phone and broadband marketing is “more than offsetting this impact.”

On the Web, customers (or people who say they are customers) have posted blog comments that herald the telco alternative. Others have posted complaints about telco TV outages, the FiOS multiroom DVR guide and the single-tuner U-verse DVR.

J.D. Power and Associates previously found that negative advertising depressed overall consumer satisfaction with telecommunications. “What are consumers to believe?” Steve Kirkeby of J.D. Power asks. “They’ll figure they’re all politicians.”