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Fiber-Optic Rollout Costs Raise Worries: Verizon FiOS TV Service Gaining Market Share

Posted on: Thursday, 23 March 2006, 06:00 CST

By Aman Batheja, Fort Worth Star-Telegram, Texas

Mar. 23--At a Keller driving range recently, golfers received free buckets of balls. At a nearby Home Depot, shoppers were given free flowers.

The promotions are part of the extensive marketing campaign Verizon has implemented in Keller to get the word out about FiOS, its fiber-optic Internet and TV service.

The effort appears to be paying off. Six months after FiOS TV was introduced in the Fort Worth suburb, nearly one-third of Verizon's customers in Keller subscribe to the service, the company said this week.

Verizon's performance in Keller is being closely watched, as it is the first area where the communications giant has offered its TV service. It has since expanded into other area cities and six other states. It will start service in Rowlett and Highland Village next week and in Plano in April, said Bill Kula, a Verizon spokesman.

Since September, it's been hard to escape hearing about FiOS in Keller. Residents have seen the brand on everything from pizza boxes to dry-cleaning bags. Verizon employees have even canvassed neighborhoods at nights and on weekends.

"Really, they're volunteering their time because they know how important FiOS is for our company," said Marybeth Yance, Verizon's regional marketing director.

Indeed, Verizon has bet heavily on FiOS, spending billions on upgrading its network nationally and running fiber-optic cable to homes. Verizon has already placed 17 million feet of fiber-optic cable in North Texas.

The technology can transfer far more data than customers now need. Verizon officials say the advanced network prepares the company for later technologies that will require more bandwidth, such as watching high-definition movies online.

AT&T, by contrast, is running fiber to nodes that are, on average, 3,000 feet from homes. It is connecting to customers from there through its advanced phone-line network. Installation will be cheaper, but AT&T will also have less network capacity than Verizon.

'Triple Play'

Telecom companies are intent on providing TV service so they can bundle it with their phone and Internet services, often referred to as the "triple play." Cable companies recently have been snagging customers by adding phone service to their packages. Charter Communications, the cable provider in Keller, plans to offer phone service in the city this year, spokesman David Anderson said.

In Keller, several FiOS TV customers said in interviews that a big reason they switched from Charter or satellite TV was that they wanted all three services on one bill; they already had phone and Internet service through Verizon. Some prospective new customers, however, are reluctant to break the contracts they have with satellite companies.

"I'm dying to switch to FiOS," said Michael Josephson, 34, who moved to Keller in October and signed a two-year contract with DirecTV before realizing that FiOS TV was available.

Josephson subscribes to FiOS Internet service and Verizon's local phone service. Bundling entices him, but the biggest draw is his belief that FiOS TV will allow him to take better advantage of his 37-inch high-definition TV. Many Keller FiOS customers say they get a clearer picture than with cable or satellite.

One thing he still likes about his DirecTV service is its NFL Sunday Ticket, which allows him to watch pro football games from across the country.

Overall response to FiOS TV in Keller has been positive, but there have been complaints of installation and service problems.

Ward Davis realized the drawback to bundling services with one company when a FiOS crew accidentally cut a fiber line in his area in January. Davis lost his TV, phone and Internet service for several hours. He still says he's happy with what he says are FiOS' clearer picture and lower rates.

The state Public Utility Commission has not received any complaints about FiOS service in Texas, said spokesman Terry Hadley. Keller city officials did not return several calls.

Verizon says it's hiring more technicians and customer service representatives in North Texas, but that the new hires are being made to cope with the greater demand for the service, not because of complaints.

High costs

Investors have grown wary of Verizon's ambitious endeavor. The company's stock dropped 26 percent last year but has bounced back about 13 percent since the start of 2006.

Much of the concern is focused on how much Verizon is spending on its fiber rollout. Last year, Verizon's average cost for installing fiber and connecting it to a home was $2,600, said Lawrence Babbio, Verizon's vice chairman and president. Babbio told investors that he expected to lower that figure to $1,605 this year with economies of scale.

Christopher King, a telecom analyst in Baltimore with the Stifel, Nicolaus & Co. investment firm, predicted in a recent report that the TV plan will reduce Verizon's earnings per share by 25 to 30 cents for 2006. Nonetheless, he thinks that the company is making the right move, considering the growing competition from cable.

Pricing pressure

King said this week that Verizon's 32 percent adoption in Keller was a "strong number" but not surprising considering Verizon has priced its TV service lower than Charter's.

"It's certainly going to put pricing pressure on the cable industry as a whole," King said.

Verizon has said its entrance in Keller will force competitors to lower prices. A Star-Telegram review of two similar packages from Verizon and Charter, for example, indicates that stand-alone TV service is $12-$16 cheaper with Verizon.

Colleen Burke-Buesing, a Keller resident, remains unimpressed with the price difference. She switched to FiOS from DirecTV in September.

"We were hoping for a little bit more of a competitive edge, but that doesn't seem to be there," she said, adding that she's still generally pleased with the service.

Last fall, Verizon representatives said Charter offered a drastically lower rate in Keller in response to FiOS TV's entry. Politicians said the same thing at a Senate hearing on video franchising last month.

Charter has denied that, insisting that it lowered prices about a year before FiOS TV came to Keller, in response to competition from satellite providers.

"There's not a specific Verizon FiOS defensive plan," said Wayne Cramp, Charter's vice president and general manager for the Fort Worth area.

Charter has lost about 4 percent of its market share in Keller since FiOS debuted, said Chuck McElroy, Charter's senior vice president of operations for the Southeast.

"We've seen an impact, but it's been a relatively minimal impact on us," McElroy said.

Robert Mercer, a DirecTV spokesman, said the company's market share in Keller has increased, in part because of promotions the company has run in Keller in response to FiOS .

A representative for Echostar's Dish Network would not comment for this story.

Verizon has been able to expand its TV service in Texas thanks to a law passed last year that allows phone companies to apply for statewide video franchises rather than negotiating agreements with municipalities, as cable companies have had to do. Verizon is pushing for similar laws in other states and for a national franchise system that would let it add the service anywhere it has local phone customers.

"We still believe that Texas is the gold model and is the standard by which other states should follow to bringing about video choice faster," Kula said.

The cable industry and some consumer advocacy groups have opposed any special franchises for telecom outfits, saying companies such as Verizon will cherry-pick the neighborhoods where they want to offer TV service while cable companies are required to serve an entire community.

"I think they will be very selective of communities that have higher discretionary spending," such as Keller, McElroy said.

Verizon insists that it plans to provide TV service to its entire network. Yance did agree that FiOS TV's demographics so far tend to be more affluent.

King predicted that Verizon will take more than 10 years to offer FiOS TV to its whole network. For now, it will lean more toward wealthier areas to take advantage of greater pricing power and because the service is attractive to owners of high-definition TVs, which are more common in higher-income homes, he said.

"They're not going to be putting FiOS in the inner cities anytime soon," he said.

IN THE KNOW

AVAILABILITY

FiOS TV is available to Verizon local phone customers in these North Texas cities:

Carrollton

Colleyville

Coppell

Flower Mound

Grapevine

Keller

Irving

Lewisville

Murphy

North Fort Worth

Sachse

Southlake

Westlake

Wylie

Highland Village, Rowlett and Plano are due to get the service soon.

SOURCE: Verizon

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Aman Batheja, (817) 390-7695 abatheja@star-telegram.com

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Copyright (c) 2006, Fort Worth Star-Telegram, Texas

Distributed by Knight Ridder/Tribune Business News.

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Source: Fort Worth Star-Telegram (Fort Worth, Texas)

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