Copyright 2006 Gannett Company, Inc.
All Rights Reserved
USA TODAY
August 24, 2006 Thursday
FINAL EDITION
By David Lieberman
From Lexis Nexis

NEW YORK — Nobody would mistake the lush, trimmed lawns of suburban New York City for the OK Corral. But you can almost hear the jingling spurs and blasting revolvers of a corporate gunfight erupting that could affect virtually all consumers.

About a year after telecom giant Verizon fired up its first state-of-the-art broadband network in Keller, Texas, it now is wiring some of the cable industry’s most lucrative territories for a rival, cable-like bundle of TV, phone and Internet services it calls FiOS.

“We’ve got the fire in the belly,” says Marilyn O’Connell, Verizon’s senior vice president for video solutions. She says FiOS will be available to 6 million homes by year’s end, 20 million in 2009. The company expects to eventually win 30% as customers. No. 1 phone provider AT&T (formerly SBC) has similar plans to take on cable TV.

The showdown here is with Long Island-based Cablevision Systems, which is firing back with innovative pricing packages and technologies — including some aimed at Verizon’s core phone businesses.

“Cablevision’s writing the playbook on how to compete,” says Sanford C. Bernstein’s Craig Moffett. “They’ve started playing offense while the rest of the cable industry is still playing defense.”

Not for long if they see chunks of their valuable 62 million TV subscribers switching to packages from the formidable former Bells. Verizon generated revenue of $75 billion last year, more than all cable operators combined. Verizon won’t say how many FiOS TV customers it has, but Bernstein Research estimates 47,000 homes by year’s end, rising to 4 million in 2015.

Cable hoped to avoid a fight. Its investors are impatient to see big profits from the $70 billion the industry spent in the last decade to upgrade its networks to offer more TV channels and two-way services, including phone and Internet. The stocks collectively have appreciated just 4% since August 2003.

“It’s very grim,” for cable, says former AT&T Broadband CEO Leo Hindery. Serious competition on these fronts from the phone giants means that “in no case will any of (these new) businesses make the margins that were expected.”

Few now doubt the phone industry’s commitment to spend big on new networks and services. Its current copper phone lines can’t handle today’s demanding communications services. It’s losing voice customers to Internet phone services such as Vonage and Skype, as well as to cable offerings.

Verizon’s 47 million local lines as of June 30 are down 7.4% from that point last year. The trend has helped keep shares virtually flat for three years and led to its decision to go all out to build Cable 3.0: a network of fiber-optic lines to each home that analysts estimate could cost $20 billion over the next decade.

The new network “is a play to make sure they’re not irrelevant,” says Forrester Research analyst Maribel Lopez. “It’s not just to offer video.”

Verizon ups ante on bandwidth

FiOS has been designed with capacity to offer a lot more. By stringing fiber all the way to users’ homes, Verizon has more bandwidth than cable, which typically runs fiber to a neighborhood and cheaper coaxial lines to the homes. As a virtually all-digital system, FiOS doesn’t devote gobs of spectrum to analog TV channels as cable operators do (though it does mean customers need set-top boxes for their TVs).

Still, Verizon is adding only about 3 million homes a year to those able to get FiOS, at a cost of nearly $900 per home. When someone signs up, Verizon spends $715 more for the typical five-hour, two-person job to tie the home to the system.

In taking on Cablevision, the phone company faces one of the USA’s most famously freewheeling, family-controlled companies, as well as one of cable’s most highly regarded operators.

CEO Jim Dolan is best known for his feuds with his father, Chairman Charles Dolan, and with ex-New York Knicks coach Larry Brown (Cablevision owns the team), as well as being lead singer of blues band JD & the Straight Shot.

Cablevision, which generated $5.2 billion in revenue last year, is determined to hang on to its 3.1 million basic TV subscribers. About 80% of them are in Verizon’s phone territories, and the overlaps include many of New York’s wealthiest suburbs.

Verizon recently began to offer FiOS in Long Island towns including Hempstead, Oyster Bay and Cedarhurst. This month, it won a statewide franchise in New Jersey. At the pace Verizon is rolling out service, Bear Stearns estimates that Cablevision subscriber losses will be about 2.1% by 2010. In a mature industry lacking subscriber growth, that’s worth a fight.

Verizon is deploying what it calls a “guerrilla marketing” campaign. It sends salespeople door-to-door, sets up product demonstrations at concerts and community events, and slaps messages on Chinese food containers, pizza boxes and take-out coffee cups.

The company says it has found people across all its markets itching for a choice, with about 10% of all households capable of getting FiOS subscribing in the first six months it’s offered.

“I’ve been around a lot, and I haven’t been associated with a product that had that kind of adoption that quickly,” O’Connell says. “All of the early indicators are saying that we’ve got it right.”

Many New Yorkers agree.

“We jumped at it,” says Hiram Rosas, 32, a teacher in Roosevelt, N.Y., who has Verizon’s video, phone and Internet package. “Whenever we had service issues (with Cablevision), it was, ‘We’ll get to you when we get to you.'”

Verizon’s pointed ads pour salt on wounded feelings about cable service, with slogans such as: “All I want is to cut off cable;” “All I want is to get on board with a company I like;” and “All I want is a choice other than Cablevision.”

Verizon took a more positive approach to score points with gamers: It sponsored a national video game tournament, flying eight finalists to a championship in Hermosa Beach, Calif., in July.

“They played over the (FiOS) fiber connection on the live Internet, which is unique in gaming tournaments. Usually, they’re played over local servers,” says Brian Angiolet, FiOS’ director of marketing.

HDTV and advanced digital-video recorders also are a marketing draw. More than half of FiOS customers pay extra for a set-top box with a DVR that handles HDTV channels, while an additional 10% get a box that just provides HDTV. This month, Verizon introduced (for an additional $20 a month) a DVR that can transmit recorded shows through the lines to any TV set-top box in the house.

Verizon recently raised the stakes with a free feature called FiOS TV Widgets. Viewers can press a button on the remote to see text under their show that describes local weather and traffic. Coming soon: sports scores, news headlines and stock prices.

Next year, it plans more ethnic programming packages in addition to one it already has for Hispanic viewers. It also is working on HDTV-on-demand, teleconferencing and services that blend TV, Internet and phone, including wireless.

Cablevision says subscriber loss low

Cablevision says it’s unfazed, with FiOS getting only 2% of potential customers in Cablevision markets where it has been offered for at least six months. “Verizon is not taking subscribers from us,” COO Tom Rutledge told analysts this month. “I don’t believe they’re taking significant numbers from satellite, either.”

Cablevision shrugs off Verizon’s boasts about the power of its fiber-optic lines. Because most homes are internally wired with coaxial cable, “fiber-to-the-home translates into a hybrid system that’s comparable to ours,” says Patricia Gott