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Verizon's salvo on cable TV

Phone giant's deal with NBC Universal is first step toward tackling cable providers head-on in the paid-TV market.

Verizon Communications is well on its way to challenging cable providers head-on in the paid TV market, as it rolls out an advanced new fiber-optic network and begins to attract high-level programming partners.

The New York-based phone giant is spending billions of dollars on state-of-the-art technology that's expected to leapfrog its aging copper network, as well as cable operators, in raw capacity.

But in an effort to get to market more quickly, it will use traditional broadcast technology to deliver its TV service, rather than newer Internet-based technology that's slated to become the centerpeice of pending services from other phone companies. That's helping speed all-important content licensing deals in advance of Verizon's planned TV launch later this year, although it could ultimately leave the service short on new features.

News.context

What's new:
Verizon is spending billions of dollars on state-of-the-art fiber-optic technology that's expected to leapfrog its aging copper network, as well as cable operators, in raw capacity.

Bottom line:
Verizon's push into the TV market with its FiOS TV highlights the competitive pressures local phone companies are facing from their cable rivals. Its deal with NBC Universal marks Verizon's first step toward tackling cable providers head-on in the paid-TV market.

More stories on Verizon Communications

On Monday, Verizon announced that it had struck a deal to carry all of NBC Universal's channels on its television service, which is called FiOS TV. It will begin offering the new service late in the third quarter of this year in Keller, Texas, a suburb of the Dallas-Fort Worth area, the company said. Verizon has already signed deals with Discovery Networks and Liberty Media's Starz Entertainment Group. But the NBC Universal deal is its first major broadcast and cable content provider.

"We want to go to market with a service that is familiar to customers," said Sharon Cohen-Hagar, a spokeswoman for Verizon. "It's important for us to not get too far ahead of our customers. But we will still have a lot of aspects of our service that will be different from the cable companies."

Verizon's push into the TV market highlights the competitive pressures local phone companies are facing from their cable rivals. Cable companies such as Comcast, Time Warner Cable and Cox Communications have taken a significant lead in offering broadband Internet access to their TV customers. Many cable companies have packaged voice calling into their plans, creating a "triple play" of services that have caused customer erosion among the Bells.

The Bells have responded by investing heavily in upgrading their networks to create their own triple-play packages. Verizon is in the process of running fiber-optic lines directly into millions of homes to offer faster Internet access, hundreds of TV channels and calling plans.

SBC and BellSouth are not running fiber into homes. Instead, they're running lines to neighborhood "nodes" and then delivering their services through common copper wires.

Giving users reason to switch
With roughly 80 percent of the U.S. population already subscribing to some form of paid TV service such as cable or satellite, the TV market will not be an easy one for the Bells to break into. As a result, they will need to differentiate themselves in some way.

"The biggest challenge for the phone companies in offering a TV service is figuring out how to compete in a market that is already very well-served by cable and satellite," said James Penhune, an analyst with Strategy Analytics. "They have to give users a reason to switch to them."

Internet-based TV could be the answer. IPTV will allow users to customize their viewing. Instead of surfing through hundreds of channels of programming they probably never watch, they can download only the TV show or movie they want, when they want it. What's more, the Internet will allow viewers to be more interactive with their content. For example, sports fans could select a particular camera view or users could set up a slide show of their own digital pictures.

But IPTV is still in the early days of development. Microsoft, which has developed IPTV software, is still testing out its solutions. Only a handful of carriers have started testing it. Bell Canada, Swisscom and Telecom Italia plan to do limited pilot programs. SBC has said it will start testing its IPTV service by the middle of 2005 with commercial deployment by the end of the year. And Bellsouth has just started testing IP TV gear in its labs.

Another obstacle that could potentially slow down the deployment of IPTV is access to the content. In order to offer an IP TV service, the phone companies will need access to movies and TV programming that is already available to cable and satellite operators. While content providers such as Viacom, Disney and NBC Universal welcome the addition of a new distribution channel for their content, the details of how this can be done using IP technology haven't been worked out yet.

"We are a content company," said Carl Folta, a spokesman for Viacom. "In our view, any additional distribution channel is a good thing for us. But there are a lot of considerations, such as piracy and copyright, that have to be dealt with when you look at distributing content other ways."

While these agreements will most definitely be worked out at some point, it will take time, he added. Unfortunately, time is not something the Bells have in great supply.

Forced to make compromises
"It's been much easier and much less expensive for the cable companies to add voice to their networks than for the Bells to add TV to theirs," Penhune said. "So if the Bells are going to compete, they need something and they need it fast."

In order to get to market quickly, Verizon has been forced to make some compromises in terms of the technology and the kind of service it will offer. Instead of using the more cutting-edge IP technology, Verizon's television service will initially be based on traditional broadcast technology that will allow it to deliver digital and high-definition television over its network, a service that is almost identical to what cable companies currently offer. It plans to add IP capabilities to the service later.

By contrast, SBC Communications, which is the next Bell in line to deliver TV services, plans to go straight for IP-based TV. The nation's second-largest phone company has earmarked $4 billion to upgrade its network with fiber-optic lines and newer DSL technology to boost enough bandwidth to support video.

Called "Project Lightspeed," SBC has already signed up two technology heavyweights--Microsoft and Alcatel--to build out the system for consumers. Microsoft will provide software to power the interface that consumers see on their TV screens, representing a huge coup for the company.

SBC's IPTV service, called "U-Verse," allows SBC to add more digital features, such as digital video recording and more high-definition stations, without needing a lot of bandwidth. SBC hinted that viewers will get on-screen caller ID when someone calls, and the ability to watch multiple screens showing multiple angles during live events.

While Verizon has already struck agreements with several content providers, SBC has yet to announce any deals. Company spokesman Wes Warnock said SBC continues to meet with TV executives, but declined to comment on the progress of these talks. He pointed out that SBC has hired a number of satellite TV executives to help the Bell strike deals to host outside content.

Warnock said SBC will begin launching U-Verse to select customers by the end of 2005 or the beginning 2006. The company had previously said it would launch U-Verse by the end of 2005.

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