Verizon switches on TV service

Launch of paid TV service marks opening of bid to take on cable providers in video. But Verizon has a long road ahead of it, analysts say.

Verizon Communications officially launched its paid television service on Thursday, opening its push to take on cable companies in the video market.

Keller, Texas, will be the first town in the United States to get Verizon's television service, which runs over its Fios fiber network. The company held a press conference Thursday to outline details of the new service, including pricing and channel availability.

Keller residents will pay $12.95 for the basic service, which includes 15 to 35 channels, and $39.95 for 180 channels. Sports and movie packages can be added for $5.95 and $11.95, respectively.

The pricing is aggressive, analysts said. A comparable package from cable provider Charter Communications, which also serves Keller, costs about $47.99 for 97 channels, according to a report published by Sanford Bernstein analyst Craig Moffett. Comcast, the largest cable provider in the country, charges about $68 for a package that includes 115 channels.

The Fios video service seems to be in line with satellite providers. EchoStar charges $37.99 for 120, and DirecTV costs $45.99 for 155 channels, for example.

Verizon plans to offer more than 300 channels of programming from a slew of content providers, including Walt Disney, Showtime Networks, A&E Television Networks, NBC Universal Cable, Starz Entertainment Group, Discovery Networks and Movielink. The company is continuing to negotiate contracts with other content providers, Bob Ingalls, president of the retail market group at Verizon, said during the press conference.

Verizon expects to add five more markets to its television service by the end of this year, including the Texas towns of Wylie, Sachse and Westlake. It then plans to expand to markets in Florida, Virginia and California, where it has already obtained video franchises.

"We passed 1 million homes at end of 2004," Ingalls said. "And we will have 3 million at the end of 2005. We expect to offer video service to these customers in 2006."

Dealing with franchises
Verizon scored a huge win earlier this summer, when Texas passed a law that granted new TV service providers a statewide franchise. Without this, Verizon would have had to go to every city and town in the state to get permission to offer its service.

Obtaining local franchise agreements is one the biggest hurdles Verizon faces in rolling out its service in other states, since the process significantly slows the introduction of service.

But Verizon faces other obstacles. Even after its Fios fiber network is completed at a location and it gets a city's permission to offer its video service, it must still convince customers to sign up.

Verizon predicts that 20 percent of Keller residents will subscribe to the video service, Ingalls said. The company said 30 percent of households there have signed up for its broadband service, which was launched a year ago.

But convincing customers to sign up might not be as easy as it sounds, especially considering the history of the satellite video providers, which also compete with the cable companies.

"It has taken DirecTV 12 years to reach 12.5 percent market penetration" in the United States, Moffett said. "For much of that time, they were the only game in town in rural America. And they entered the market at the time with unquestionably the best video product on market."

The market situation was also much different when satellite providers started their push. Back in the early 1990s, roughly 60 percent of Americans subscribed to a paid television service, Moffett said. Today, about 80 percent of Americans have either satellite or cable television service.

The deck is stacked against Verizon in yet more ways. Verizon is already paying 15 percent to 20 percent more for the same content the cable operators offer, Moffett said. And its labor costs are twice as high as those of cable companies, because it uses labor union workers and must pay related pension benefits, he added.

"The phone companies are in the awkward position of initiating a service in an already mature market with a disadvantaged cost structure," Moffett said. "And on top of that, they have to offer the service at a discounted price just to compete. It's a hard strategy to sustain long-term."

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