Competing with cable comes with hurdles
By Kathryn Balint
UNION-TRIBUNE STAFF WRITER
January 23, 2006
Telephone companies are spending billions of dollars to enter the television market in San Diego and across the nation, a move that will increase competition and could lead to lower prices for TV service.
The telephone companies' Internet technology conceivably could deliver thousands of channels, allow customers to watch NFL games from different camera angles and permit the viewing of recorded shows on any TV in the home. One day, the digital feed could allow viewers watching a show such as "The O.C." to click on a trendy outfit and buy it - much as is done on the Web.
But the phone companies face legal, technical and business hurdles. There is debate over whether phone companies need to obtain the same kind of franchises that are required of cable companies. Also, the phone companies' TV technology is so new that there are concerns about whether it can handle tens of thousands of customers at once.
TV service is one of the keys to the phone companies' survival. Cable companies have been stealing phone customers with their new telephone services, and cable continues to dominate the TV market. Cable companies are entrenched with nearly 70 percent of U.S. video customers; satellite TV has a 28 percent market share. Only 1.5 percent of subscribers get TV over the same Internet technology that phone companies are using.
The phone companies' strategy is to fight back with lower TV prices. They hope it will be their ticket into America's living rooms where customers are fed up with rising cable bills.
AT&T - the new name for SBC Communications - is spending as much as $4.8 billion to upgrade its system for TV service. It will offer TV to 18 million U.S. homes, including in San Diego County, over the next two years.
The largest local telephone operator in the county hasn't said when it plans to begin service here, but ABI Research principal analyst Mike Arden said he heard that San Diego is on the early rollout list. He said San Diego is seen as a lucrative market because customers here are likely to buy telephone and Internet service from the same company that provides TV.
Last month, AT&T launched service in San Antonio, where it has its headquarters. Customers in some other cities may begin receiving service as early as this summer.
AT&T is the first major phone company in the United States to use what's known as Internet protocol TV technology. While cable TV sends hundreds of channels to every subscriber on the network, Internet TV technology transmits only the channel each customer has selected to watch. This allows AT&T to use its old copper wires - originally for phone calls - to transmit video over the last mile to customers' homes. The copper wires don't have the capacity to transmit hundreds of channels at one time.
"It's fundamentally different than anything that's out there today, whether it be traditional cable service or satellite," said Jeff Weber, AT&T vice president of product and strategy. "It's much more like the way you get clips over the computer today across the Internet."
AT&T initially will sell its service in tiers, or packages of programming, as cable companies do. Later, it hopes to let customers create their own package of channels.
AT&T plans to deliver TV service over the same digital subscriber lines that provide high-speed Internet service. The company is laying fiber-optic cables to within a mile of customers' homes. The last mile of transmission is over the regular copper phone lines. The closer the cable to the home, the faster the connection and the more data that can be transmitted.
Television shows will arrive through a box on the TV in the same way some cable and satellite companies deliver channels.
The number of North American subscribers to telecommunications TV service is expected to grow to 3 million by 2009, up from 300,000 at the end of 2004, according to In-Stat market research.
Small, regional phone companies were the first to offer video service about six years ago. Today, about 200 mostly independent phone companies offer TV service in North America, said Michelle Abraham, principal analyst for In-Stat in Scottsdale, Ariz.
A poll of phone companies at the national TelcoTV Conference in San Diego in November showed that 47 percent planned to roll out TV service within six months. An additional 20 percent planned to launch in six to 12 months.
Verizon Communications, which operates in 28 states, including California, is spending $15 billion over the next decade in preparation for selling TV service.
Phone companies are eager to offer video service, in part to offset declining revenue from calls.
"Basically, you've got telcos looking at this price erosion for what is their basic service, and they're thinking, 'All right, we've got to replace those revenues somehow,' " said Matt Davis, broadband director for the Yankee Group research firm in Boston.
The phone companies have an uphill battle.
"We already compete aggressively in the cable TV industry with satellite," said Marc Farrar, vice president of public affairs for Time Warner Cable's San Diego division. "I would think that it would be a tough market to enter, given the existing state of the marketplace."
One obstacle is the legal question of franchises. Under federal law, cable companies are required to obtain franchises from cities before being allowed to offer television programming. A franchise generally requires a cable company to offer service to everyone within the city limits.
San Diego is divided into two franchise areas. The neighborhoods north of Interstate 8 are served by Time Warner Cable; those south of I-8 are served by Cox Communications.
Verizon Communications is negotiating franchise agreements for TV across the United States, while AT&T argues that its service isn't subject to franchise regulation.
"This is Internet technology," AT&T's Weber said. "This is not a cable service, and therefore we don't need a franchise to be able to deliver this service."
The city of San Diego said AT&T must obtain a franchise to deliver TV in the city, whatever the underlying technology.
"The bottom line is they need a franchise to deliver cable-like television service to subscribers within the city of San Diego," Deputy City Attorney Paul Edmonson said.
AT&T is suing Walnut Creek, a San Francisco suburb, because the city insisted that the phone company get a franchise to sell TV service.
Cable operators say they want a level playing field.
"Our industry is not opposed to additional competitors," said Brian Dietz, spokesman for the National Cable & Telecommunications Association, a trade group. "However, the rules of the road should be the same for all of the providers."
Meanwhile, the phone companies are still tweaking their Internet TV technology to deliver television to large numbers of customers.
"The problem is that the technology is not quite there yet," said Arden, the ABI Research analyst in Oyster Bay, N.Y.
He said small phone companies have been able to successfully offer Internet TV because they serve a few thousand customers. But the technology has difficulties handling individual programming requests from tens of thousands of customers at once, Arden said.
"Instead of sending one big signal out to everyone, you have each person interacting separately, one channel at a time," he said.
Weber describes the technology as "cutting-edge stuff."
But at first, the company's service won't come with all the interactive features that have been touted, and it may not come with some features, such as high-definition TV or as many channels, as cable companies already offer.
"It'll be just your basic television programming," Arden said. "It's not going to be as cool as it will be maybe five years down the road."
While phone companies work out the details, they're in jeopardy of losing more ground to the well-established cable companies.
U.S. cable companies have about 64 million TV subscribers and 23.5 million high-speed Internet customers, and they've begun poaching the telecommunication companies' core business by providing telephone service. In San Diego County, Cox Communications rolled out telephone service in 1998, and Time Warner launched phone service in 2004.
At the same time, the number of TV competitors is growing. Google and Yahoo announced plans this month to offer TV shows over the Web, and Verizon Wireless plans to roll out the closest thing to broadcast television on cell phones with technology developed by San Diego-based Qualcomm.
The phone companies hope to make inroads with lower prices.
"The price of cable has gone up exponentially," said Robert Johnson, president of Consumers for Cable Choice, an alliance of consumer organizations funded in part by phone companies. "It's directly a result of a lack of competition."
When Verizon launched its TV service last fall in the Fort Worth suburb of Keller, Texas, the local cable company responded by offering high-speed Internet and digital cable TV for half the usual $100 a month.
Still, after spending billions of dollars on new TV technology and undercutting cable on prices, the phone companies don't have a sure bet.
"Is it sustainable?" said Davis, the Yankee Group analyst. "I think that's still a question. Our question is how quickly they can break even and how long can they sustain losses as they enter this market."
Kathryn Balint: (619) 293-2848; email@example.com
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