Verizon FiOS TV up 356% Year Over Year

Verizon has broken the one million TV customer mark for the first time, growing its subscriber base 356 percent in 2007. Clearly, Verizon's network construction and video franchising phase now is yielding to the marketing phase. The next couple of years will provide us with a better handle on just how well Verizon will do as a provider of video entertainment services, but FiOS TV does not appear to have suffered the technology or performance challenges that have beset at&t's U-verse offering in the past.

So the issue now is how well Verizon will do in the market share battle with cable companies, as each swaps share in their legacy businesses while trying to gain the upper hand in the broadband access business. Up to this point cable has had the advantage, gaining more voice customers than Verizon and at&t have gained video customers.

Depending on whose data one wished to cite, telcos either have closed the gap with cable or are taking more new share in the broadband access business than cable companies are. The installed base generally is seen as reflecting a lead for cable, but the installed base gap is expected to close over the next couple of years, by most estimates.

FiOS, FTTN as Marketing Platforms

BT plans to launch its 24 Mbps service in April 2008 with available coverage reaching in excess of 50 percent of the U.K. market by April 2009. It will be using a fiber-to-node network very similar to at&t's FTTN network, with copper drops. Both BT and at&t believe that is sufficient bandwidth for anticipated customer demand. In at&t's case that also includes IPTV and HDTV services.

They might be right. But there is something more than bandwidth at issue here, and that is the marketing platform. If you have Millenial children, ask yourself what their preferences are in the area of broadband and video entertainment providers (You know they all rely on their mobiles).

Up to this point, though, it has been the common pattern to buy both video and broadband from the cable company. What we need to watch is what happens when services such as Verizon's FiOS fiber to home service are available. The issue is not just how much bandwidth they need or will pay for.

The issue is whether FiOS or fiber to home services are a more compelling product than cable modem services.

at&t launches VoIP in Detroit

At&t says it will soon launch VoIP for U-verse customers. The service has been launched in the Detroit market. The service is a replacement for traditional landline service and is priced accordingly.

A $40 monthly fee provides unlimited domestic calling while a $20 a month plan provides 1,000 long distance minutes. The service includes an online call manager portal, unified messaging, click to call from the TV, and simultaneous ring of up to four separate telephone numbers.

So the long march towards VoIP by dominant telcos begins. As just about everybody now recognizes, VoIP will in some cases represent an incremental change in user behavior, in some cases a replacement for traditional calling and in some cases a better way to do traditional calling with a better user experience.

Pretty soon we'll start to get some insight into the ways VoIP helps traditional telcos, in addition to representing a threat to established revenue streams. Without widespread fiber-to-customer networks and a complete shut-off of traditional time division multiplex infrastructure, it will be hard to say for certain.

But Verizon executives think they will save operating expense when they are able to shut off the TDM voice network and shift everything over to IP.

New Verizon FiOS Offers Will Cannibalize Data T1s

Verizon now is selling symmetrical FiOS connections aimed at small and mid-sized businesses at speeds of up to 20 Mbps as well as 50 Mbps downstream with a 20 Mbps upstream. The new offerings will put pressure on data T1 sales, but not necessarily integrated T1s used to support both data and voice, in all likelihood.

In some states (Connecticut, Florida, Massachusetts, New Jersey, New York and Rhode Island) small- and medium-sized business customers can subscribe to 20M/20M service with a dynamic IP address for $99.99 per month; or with a static IP address, the 20M/20M service is $139.99 per month -- both with a two-year term agreement.

The fastest speed available in these states is now 50M/20M for $199.99 per month with a dynamic IP address, or $239.99 per month with a static IP address -- both with a two-year term agreement.

In other states (California, Delaware, Indiana, Maryland, Maine, New Hampshire, Oregon, Pennsylvania, South Carolina, Texas, Virginia and
Washington) small- and medium-sized business customers can subscribe to 15M/15M service with a dynamic IP address for $99.99 per month, or with a
static IP address, the 15M/15M service is $139.99 per month both with a two-year term agreement.

The fastest speed available -- 35M/5M with a dynamic IP address -- has been increased to 30M/15M for $199.99 per month, or $239.99 per month with a static IP address both with a two-year term agreement.

The plans are also available with 12-month agreements at higher prices.

Along with the introduction of FiOS Internet service at symmetrical speeds of 20 Mbps or 15 Mbps, the company has also increased the speed on its fastest business Internet plans and lowered prices by as much as 35 percent.

Verizon FiOS Internet Service for Business allows business owners to choose either a dynamic Internet protocol (IP) address or a static IP address.

FiOS Internet service for small businesses is available as part of a bundle including local and long-distance calling services from Verizon, or as
a stand-alone Internet access service.

Usage-Based Pricing Not Unusual

At some point, as more Internet service providers begin to adopt "buckets" of use as the dominant subscription model, there will be outcries about whether this is fair, since most users in the U.S. market have come to expect flat fee pricing for "unlimited" use.

That has not been the dominant model in Europe, for example, and though there might be some incremental impact in usage patterns, I don't think anybody would argue that metered usage is terribly and inherently unfriendly.

It also is highly unlikely to the point of implausibility that ISPs in the U.S. market will move to a strict metered usage regime. The reason is simply that the objective--matching consumption to the cost of providing access--can be addressed more simply and palatably by using the "bucket" model, much as mobile calling or texting plans can be purchased based on expected usage.

In that regard, it might be helpful to recall that consumer pricing has used any number of models. Pay-as-you-go had been the dominant packaging and pricing model for all long distance plans, mobile and fixed, until at&t introduced "Digital One Rate." Local calling, on the other hand, has used a "fixed fee, all you can eat" model.

Cable TV has used a mixed model: essentially "flat fee, all you can eat" for ad-supported video and movie channels, but usage-based pricing for on-demand pricing.

The model used for Internet access started at the other end of the continuum: unlimited use (subject to some acceptable use policies) for a flat fee. Only recently have some voice providers moved to that model.

Of late, though, there has been a bigger move to "buckets" that match usage to price. There's no particular reason to believe a move in that direction will affect the vast majority of users. Most customers have usage patterns that fall within a reasonable zone, and won't, in practice, notice anything different even if usage-based pricing becomes more prevalent.

Providers obviously will want to minimize disruption, and there's no question but that lower prices have driven high demand. Nobody will want to jeopardize their market share by raising prices for most customers other than the small percentage who consume a disproportionate share of bandwidth.

Over time, more attention will have to be paid to the relationship between retail pricing and usage as video starts to change usage patterns, though.

Lots of SMEs Now Buy Video

Entertainment video of the sort delivered by cable, satellite or telephone companies often is thought of as a consumer application. But there's new evidence that lots of small and mid-sized businesses and organizations buy video services. To be sure, bars have long been a key business customer for video services.

What is striking is the degree to which lots of businesses now want to have video services available at the workplace. Whether for employee benefit or keeping up with the news (branch offices of financial services firms, for example), SMEs now appear to be far more willing than formerly to buy entertainment video services.

FiOS Best, Says Consumer Reports

The February issue of Consumer Reports features a survey of broadband access providers, and names the Verizon FiOS service, best for reliability and performance for its Internet, television, and telephone services.

Better cable companies include Cox, Bright House and Wow, the survey indicates.

For Internet service offered through a cable company, Wow, Cincinnati Bell and Bright House also did well in the survey. Verizon's DSL Internet service was rated "average" for value, reliability and support, but scores for performance were lagging, according to Consumer Reports.

Slowing Economy or Just Slowing Growth?

That's the question as at&t Chief Executive Officer Randall Stephenson claims slowing economic growth has led to "softness" in the home-phone and Internet businesses while Verizon COO Dennis Strigl says that's not the case.

“We have seen virtually no economic impact,” Strigl says. "Any challenges facing the company have more to do with competition," said Strigl, than the economy.

It is possible Verizon's customer base simply isn't feeling the economic pinch or hasn't felt it yet. It is possible Verizon simply is faring better in the competitive battle with cable and other contenders. Maybe there is some other explanation.

Could it be FiOS? Also, Stephenson pointed to wireline voice and broadband growth. In some ways, that is no surprise. Landline share continue to shrink, in large part because of wireless substitution and cable market share gains.

Broadband adds have been slowing for a couple of quarters, at least, in part because most people who rely on the Internet already have broadband, and suppliers now are facing customers who don't own PCs, so have no need for broadband; customers who think dial-up still is adequate; and customers who have PCs but don't use the Internet. It is no surprise that broadband additions are slowing.

Verizon Shifts to GPON

Verizon has begun installing Gigabit Passive Optical Network (GPON) optoelectronics as part of its FiOS deployments in California, Maryland, Massachusetts, New Jersey, New York, Rhode Island, Pennsylvania, Virginia and Texas. GPON will replace the former broadband passive optical network (BPON) technology Verizon has been using up to this point. Users won't notice anything different, at least at first.

In years to come, they well might. BPON delivers 622 Mbps to 32 potential users in the downstream, with a shared 155 Mbps in the upstream.
GPON supports 2.4Gbps downstream and 1.2Gbps upstream that can be shared among 32 to 64 users. Basically, that means a downstream bandwidth increase of four times and an upstream improvement of eight times.

At some level, GPON is a logical and improved enhancement to BPON technology, and its price now is closer to BPON than was the case some years ago. At another level, the move is protection against the cable industry's upcoming upgrade to Data Over Cable Service Interface Specification 3.0, which will support channel bonding and shared downstream bandwidth as high as 160 Mbps.

Depending on customer take rates, the FiOS GPON network can support much more bandwidth that DOCSIS 3.0, absent some sort of major network upgrade by a cable operator.

So long as on-demand techniques are used to deliver video, most of the additional bandwidth can be allocated for other data-focused uses. As this chart from the IEEE shows, after video, it is data demand which grows most.

Unbundling Price Impact Unclear

The American Cable Association, which represents 1100 small, independent cable operators, has called for unbundling of cable channels, though the large cable operators and programmers oppose such rules. On the face of it, unbundling seems to offer an antidote to higher retail prices.

The thinking is that allowing users to pay just for what they want will drive lower prices. Oddly enough, it probably wouldn't. Once consumers start toting up the costs of discrete channels, and assuming most people have seven favorites, costs might be higher than what they are paying to receive lots of channels they don't watch.

Advertising is the reason. When cable channels are carried on the most-popular "expanded basic" tiers, they have a larger number of eyeballs to sell advertising against. Take away that access and advertising becomes a much-smaller revenue possibility, which then means programmers will raise their rates for carriage. So prices go up.

To be sure, smaller video providers do have to pay higher wholesale rates to get program access, but programmers counter that volume discounts account for the higher wholesale costs.

Smaller operators also object to "tying" policies that require carriage of lesser-viewed channels to get access to the most-popular, "must have" channels. The policy obviously is helpful to programmers, as they gain shelf space for niche channels.

Supporters of tying policies say program diversity clearly will suffer if tying policies aren't allowed. There are elements of truth to that claim. Lesser-viewed channels might be forced to on-demand distribution, which will reduce potential revenues, again compelling those channels to raise prices.

Distributors don't like tying policies since scarce shelf space gets eaten up by channels with low viewership.

Sometimes the obvious solutions actually produce results counter to what people think.

Video Penetration Higher than We Think?

By some estimates U.S. cable video penetration is in the mid-60s, at the upper level at 70 percent. Satellite video is said to be between 25 percent and possibly 28 percent. And yet at the same time some estimates show "no provider" other than over-the-air transmissions for as many as 26 million homes, something on the order of 23 percent of U.S. households.

The numbers don't square, and there are few explanations other than false reporting by cable and satellite operators; incorrect housing statistics or much-higher-than-expected numbers of homes where consumers are buying multiple subscriptions. False reporting of those sorts of numbers is so unlikely as to be implausible. One has the impression that consumers tend not to buy both satellite and cable video service. Try and think of someone you know who does this.

One can make the argument that multichannel video subscriptions are nearly 100 percent, or as low as 75 percent. So things are better or worse than we might think. It is hard to tell which is the case.

Qwest Really Isn't Interested in IPTV

Qwest Communications International Inc. no longer will pursue cable franchise agreements with Colorado cities or build community-wide TV service in areas where it's recently won franchise approval. That's more confirmation of Qwest's strategic direction in video, which is to rely on its partner DirecTV for linear TV services.

Though Qwest plans to upgrade its broadband capacity in 10 major markets and 10 smallers ones in the company's 14-state service area, that is solely for the purpose of broadband-based services other than entertainment video.

Qwest still supports the idea of statewide television franchises. But it won't seek such a franchise.

Digital TV Transition: Not Y2K

In February 2009, all over-the-air analog TV broadcasting will be shut off. Some observers are concerned that consumers aren't acutely aware of the coming changes, resulting in massive disruption of the TV experience on the day of the analog broadcasting shut off.

Maybe not. The only potentially-affected customers are those who rely solely on over-the-air signal reception. Customers of cable, satellite or telco TV services won't have to do anything. To be sure, cable, satellite or telco TV providers will have to supply a new digital decoder if one is not already in place. But the point is that the providers will take care of their own customers, and that's 85 percent to 90 percent of all TV viewers.

Of those customers who have over-the-air connections, those who have bought TVs with digital tuners will not notice anything other than universally-better pictures. So the real issue lies with a single-digits number of viewers who have analog-only tuners.

By the time the transition nears, every mass market electronics retailer will have taken steps to push the sale of digital decoders. So this will not be anything like a feared "Y2K" event.

Mobility and Video Will Drive Growth

If Bear Stearns analysts are correct, mobile penetration will zoom past 100 percent, as will digital TV penetration, quite soon. Which suggests those two types of devices are where ad revenue opportunities are brightest, not to mention other sorts of "for fee" services and applications.

Google Threat to Telcos: How Real?

Yesterday at the Stealth Communications Voice Peering Forum, there was spirited discussion about Google, and on Google's impact on the broader telecom industry. One line of thinking was that Google wasn't as big an issue as sometimes thought, because the one thing it really has succeeded at is advertising. The implication is that Google will not, or cannot, emerge as a force in the mobile or landline parts of the telecom industry.

The other point of view is that Google already has become a factor, even if it is only as a force reshaping all of advertising.

Likewise, some people are going to argue that Verizon Wireless and at&t Wireless announcements about the openness of their networks are essentially "no big deal." Customers already could swap Subscribe Information Modules" in at&t and T-Mobile phones because both carriers use GSM, and that's just a feature of a GSM network.

That misses the point. The entire U.S. wireless industry now has formally and publicly embraced the notion of open networks. There won't now be any retreat from that position, as end users increasingly will expect it, as every consumer expects such openness in Europe.

And though it sometimes seems as though all essential regulatory debates have ended in the U.S. market, the converse is true. In large part because of what now is happening in Europe, policymakers ultimately are going to have to reexamine the basic national framework for telecom regulation in the U.S. market.

The argument that a capital strike is inevitable in any "functional separation" regime, or a "structural separation" regime, does not seem to be borne out in the European markets. Carriers might not like the framework, as it is helpful to competitors. But dire consequences: a capital strike that cripples robust broadband access deployment, does not seem to be occurring in Europe, where such a strike might have happened.

That is not an endorsement of "anti-telco" restrictions. What is required is some encouraging, stable policy that provides clear incentives for rapid, aggressive optical access investment on the part of the leading U.S. telcos, and assures their investors that a predictable return is possible. "Structural" or "functional" separation essentially can "guarantee" a carrier that most wired broadband traffic (other than cable's) will flow over the carrier's owned pipes.

In essence, regulators can ensure that nearly 100 percent of broadband access traffic. other that that provided by cable operators, flows over the incumbent wired telecom network. Granted, the U.S. and European markets are diverging. Cable is a big factor in the U.S. market and is driving measurable and effective competition to a large extent.

The issue is whether some sort of separation can be crafted that actually creates a better investment climate for incumbent optical access facilities. That isn't the way separation traditionally has been viewed. But circumstances might be changing. A company whose "reason for living" is the "best possible optical access", serving virtually every potential retail competitor, with reasonable assurances of a return on investment, might be worth looking at.

The analysis will not be easy. Cable is a huge "fact on the ground". It might be too late to create a regime where all retail services flow over one huge physical access network. Also, cable operators historically have resisted giving up their networks. But there's a cost to upgrading those networks, and the financial markets never like it when cablers have to invest heavily in those networks.

But even large global carriers are discovering that spending more of their dear capital on transport facilities might not be the best way to proceed. It might seem improbable at the moment that such a fundamental new debate is possible. But give matters a couple of years. Demand for access bandwidth is going to explode. Carriers, with the exception of Verizon, will need to respond.

Financial markets will need reassurance. Maybe the current regime continues to work. But maybe it doesn't. Watch the European markets. If bandwidth demand continues to explode, and European end users start to routinely receive much more bandwidth than U.S. consumers do, there will be an inevitable demand for doing something in the U.S. market.

Broadband Access Revenue: Bad News

Broadband access penetration might be climbing just about everywhere. Unfortunately, it looks like revenue is going to fall significantly, if Yankee Group analyst Vince Vittore is right. He projects Digital Subscriber Line revenue, which represents the overwhelming share of global revenue, is set to fall precipitously.

You might think fiber-to-home (OLT)revenue or cable modem revenue (CMTS) is poised to take up the slack. Vittore doesn't think so.

It looks like broadband access is turning out to be a product just like the Internet: useful, ubiquitous, necessary and something service providers can't make much money on.

Global Broadband Access Prices

Average prices in October 2007, according to the Organization for Economic Cooperation and Development. In the U.S. market, speeds keep going up and prices down.

Charter Communications, for example, will be upgrading speeds in most of its markets over the next three-to-four months. Charter's 3 Mbps tier will be bumped to 5 Mbps, the 5 Mbps service will be upgraded to 10 Mbps service and the company's 10 Mbps tier will be boosted to 16 Mbps downstream and 2 Mbps upstream. Prices apparently will vary by market.

Verizon in October launched a new tier of symmetric internet access service over its FiOS network that increases upstream and downstream speed up to 20 Mbps.

New Qwest FTTN Plan

Though it might be said to be a baby step, Qwest Communications has decided to up capital spending by an incremental $200 million over the next two years to bring 20 Mbps service to 1.5 million customer dwellings. The fiber-to-node plan obviously will rely on Digital Subscriber Line of some sort for the drop, but Qwest did not specify which particular approach it has in mind. It could use ADSL2 or VDSL, of course.

Basically, the company, which normally spends between $70 million and $100 million on fiber-to-node access plant, is incrementally spending the extra $200 million to pick up the tempo.

In a bit of a twist, Qwest will not deliver linear entertainment video over the network, relying instead on its DirecTV satellite service for that. Instead, it really sees the FTTN upgrade as a data services play.

As is always the case, investors seem not to like the idea. They didn't like Verizon's FiOS plan or fiber-to-customer plans launched by independent providers in France, for example. Investors fear Comcast and other cable companies will wind up spending more money on upgrades of their own as well.

Qwest is doing the right thing. Bandwidth is the reason any terrestrial wireline network has for existing. Failure to invest in bandwidth means business death. Sure, investor expectations have to be managed. But were in up to the investors Qwest would pay out a dividend and condemn itself to ulimate bankruptcy.

The program is not nearly as sweeping as upgrade programs underway at Verizon and at&t. Qwest simply can't afford that. But neither can Qwest sit still and do nothing. Investors might finally be seeing the fruits of at&t and Verizon investments in broadband infrastructure. They will see the same at Qwest, as unpopular as the investments are.

FiOS Goes 20 Mbps Symmetrical

Some residents of New York, Connecticut, and New Jersey now are able to buy Verizon's new symmetrical 20 Mbps FiOS service. The 20/20 service costs $64.99 per month and includes Verizon's Internet Security Suite and 1 GByte of online backup (up to 50GB can be purchased.

A small business version is certain to be offered. Can you guess what this will do to T1 demand and pricing where the offer is available?

How Long Can Cable Keep Prices Up?

For years, cable companies boasted the fastest residential broadband speeds, allowing them to resist lowering their prices. But that pricing stability may be changing, according to a new analysis by market research house Pike & Fischer.

For an expanding number of homes, at&t and Qwest can match or exceed cable offerings with downstream speeds up to 7 megabits per second. And with the launch of its fiber-based FiOS service, Verizon now can exceed cable modem speeds at competitive prices in a growing number of markets.

For customers signing a contract, FiOS delivers speeds of 5 to 10 Mbps downstream and 2 Mbps upstream for $40, and 15 to 20 Mbps downstream and 2 to 5 Mbps upstream for $50, note analysts at Pike & Fischer. Verizon has also begun offering FiOS "triple-play" service bundles priced below $100. This is forcing cable operators in FiOS markets to respond.

Significant downward price pressure will be the result. Cablers soon will find out that in capacity and access markets, unlike some content businesses, the typical and expected trend is lower prices over time.