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Wall Street Journal, October 24, 2007 article


The Wall Street Journal  

October 24, 2007


Verizon's FiOS Challenges Cable's Clout

High-Speed TV Service
Starts Meeting Promise;
Cablevision Vote Impact
October 24, 2007

After years of promises, Verizon Communications Inc. is making significant headway with its $18 billion effort to roll out television and faster Internet service, posing a difficult new competitive threat for the cable industry.

Two years after launching its FiOS service, Verizon has signed up half a million TV subscribers and, as of the second quarter, was adding 2,600 customers per business day, the company says. In the parts of the Dallas area where FiOS service is offered, a quarter of households are taking it, Verizon estimates.

  Emerging Service: Verizon's FiOS, which pipes TV, Internet and phone service to customers' homes over fiber-optic lines, is gaining traction.
  New Threat: FiOS is threatening to ratchet up competition with cable companies.
  Assessing Impact: FiOS could be a factor in today's Cablevision buyout vote.

David Barden, an analyst with Banc of America, predicts that Verizon will have two million FiOS TV customers by the end of 2008, ranking it as the ninth-biggest provider of television service in the country, after the top six cable operators and the two main satellite TV firms.

Cable industry executives, who two years ago scoffed at Verizon's plans, have changed their tune. "Verizon is real," Steve Burke, Comcast Corp's chief operating officer, said last month at an investor conference. "Verizon is taking video customers from us."

Verizon's growing market clout is a complicating factor in today's vote by shareholders in Cablevision Systems Corp. on whether to accept the Dolan family's $10.6 billion offer to take the company private. While some prominent institutional shareholders have warned they may vote against the deal, believing the price isn't high enough, others are worried by the long-term impact of tougher competition.

Proponents of the offer note that Cablevision has far more exposure than any other cable operator to Verizon's FiOS network. The outcome of the vote appears to be too close to call. Cablevision declined to comment.

FiOS uses fiber optics to deliver television, faster Internet services and phone. Like similar cable packages it typically costs a little under $100 a month for all three services. Cable systems use fiber-optics in their networks as well but depend on coaxial cables to get the service into homes.

The FiOS network has far more capacity for high definition TV channels, online games and downloading and uploading files. It also offers a few premium features that cable companies don't offer, like digital video recorders that can pipe recordings to different TVs in the house.

On a national level, FiOS promises to change the balance of power among cable, telephone and satellite TV companies over which one can offer consumers the most attractive combinations of the latest TV, phone and high-speed Internet services. Until recently, cable companies were winning. They have about a 54% share of the high-speed Internet market and were much faster in breaking into phone service than phone companies were in offering TV. About 12 million of the roughly 90 million households that can get phone service from their cable operators subscribe to that service.

Phone company AT&T Inc. has launched TV service and has been upgrading its high-speed Internet network. But AT&T has been hoping to get by with a less expensive Internet technology. That service, known as U-verse, has been plagued with delays and software problems, although many analysts appear to have been mollified. AT&T announced yesterday that it has 126,000 U-verse customers. The company is contemplating buying a satellite-TV firm. (Please see related article1.)

Already Wall Street has gone negative on cable stocks because of concern over FiOS as well as the slowing growth of the high speed Internet business and the rollout of more high definition TV stations by satellite companies. Comcast is now trading in the $23 range, down from its 52-week high of over $30 a share in January. Verizon's stock, on the other hand, is trading in the $45 range, its highest level since early 2002, with some on Wall Street partially crediting FiOS. Shares of Verizon rose 48 cents, or 1.1%, to $44.81 in 4 p.m. in New York Stock Exchange composite trading yesterday.

Verizon is spending heavily to roll out the new service. The company says it costs $842 to connect a home with FiOS, and that doesn't include Verizon's huge marketing budget for the program. In contrast, Cox Communications Inc., the third biggest cable operator, spends about $200 to $300 to connect a customer. Verizon also has to pay more to buy programming from TV networks than cable operators.


Cable operators contend that, with network upgrades, they can deliver the same quality, content and new features as Verizon. For example, CableLabs, the industry's research and development arm, is developing a next generation of broadband technology that backers say can deliver faster broadband speeds than Verizon is offering.

To be sure, the damage FiOS does to cable's business could be limited. Verizon at this point plans to offer the service to nearly three quarters of the households in its territory, but not all.

Still, Cablevision clearly is in the front lines of the FiOS battle. Already 25% of the homes it serves are exposed to FiOS service compared with about 4% for Comcast and Time Warner Cable Inc., according to a Citigroup Research estimate. While company executives have played down the impact of FiOS, the company in the summer revised its guidance on subscriber growth downward, predicting it to be flat instead of growing 1% to 2%.

Typical of those who have defected from Cablevision is Richard Recco, of Franklin Square, N.Y., one of thousands of residents of the New York City area who have dropped Cablevision for FiOS. Frustrated with Cablevision's service, Mr. Recco says he was quick to switch. Now he says he loves Verizon's clear picture and its ability to play different recorded material in multiple rooms.

However, Mr. Recco complains that the new service has had some glitches. Technicians have been to his home nearly a dozen times since FiOS was installed in December.

Cablevision investors who are opposed to the Dolan's plan say they aren't too concerned about FiOS. They predict that the company will more than make up for the loss of TV subscribers by taking telephone business away from Verizon. Also, cable companies in the past have successfully battled back against so-called overbuilders -- companies that have built competing wired TV systems.

"FiOS is just another overbuilder and cable has trashed them," says Mario Gabelli, whose Gamco Investors Inc. owns an 8.3% stake in Cablevision and who is planning to vote "no" today to taking the company private.

But a recent analysis by Jason Bazinet, analyst with Citi Investment Research, found that cable customers are signing up for FiOS TV at four times the rate that cable customers are signing up for cable phone.

Mr. Bazinet's advice for Cablevision investors: "Take the money and run."

Write to Peter Grant at peter.grant@wsj.com2 and Dionne Searcey at dionne.searcey@wsj.com3

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