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THE ISSUE: Clash of the Technological Titans

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As president of Verizon Delaware, William R. Allan has become a rather accurate prognosticator of attendance at Public Service Commission hearings. As he drove to the Lewes-Rehoboth Fire Station 3 on September 25, he anticipated a small crowd for the hearing on Verizon’s application for a television video franchise in Delaware’s unincorporated areas. Pre-meeting banter outside the fire hall among Verizon officials and PSC members set the over-under attendance figure at six. Allan opted for the under.

He was off by about 60.

“They had a conference room upstairs we had planned to use, but it was way too small,” he recalls. “We wound up down on the apparatus floor, sitting on the back step of fire equipment, projecting our presentation onto a cinder-block wall from a folding table.

“It really blew me away. I’ve been attending these public hearings around the country for years, and it was amazing the number of people who came out on a Monday night.”

Allan apparently overlooked the enormous role television plays in the life of the average American—and the average Delawarean. Huge, high-definition television sets, hundreds of channels and pay-per-view options make many us happy homebodies who cocoon in our own private multiplexes, saving on $3-a-gallon gasoline, $9 movie tickets and $5 popcorn. According to a recent Time report, watching television continues to be our favorite leisure activity. (On average, Time says, men in the United States watch three hours and 28 minutes per day. Women watch two hours, 41 minutes).

By the time of the September 25 Public Service Commission meeting, Verizon had already secured franchise agreements for its high-speed fiber optic (FiOS) television service in Newark, Bellefonte, Delaware City, Odessa and Townsend. Under the 15-year agreements, Verizon will pay those communities franchise fees based on the company’s gross revenues on cable services. And on October 31, after a series of public hearings like the one in Lewes, the PSC approved Verizon FiOS TV service for unincorporated areas from Angola to Hockessin.  

The nascent Verizon TV cable network figures to be a formidable competitor to cable giant Comcast, which serves all of New Castle County and parts of Kent and Sussex, as well as other regional cable providers. Such competition bodes well for the consumer. According to the Federal Communications Commission, independent telecommunications analysts and consumer advocates, pay-TV rates drop when competitors enter the market. Initially, Verizon’s basic cable would cost about $40 a month as a standalone service, about $35 if combined with its Internet or phone service. At this writing, Comcast rates are $33 each for its “triple play” of digital TV, Internet and phone service.

Verizon’s product offers a broad collection of programming, with more than 200 all-digital channels, two dozen high-definition channels, more than 2,500 video-on-demand titles and more. It’s delivered over a fiber-to-the-premises network that the company claims has “industry-leading quality and reliability.” Verizon is the first provider to offer such a communications network, connecting homes and businesses directly to fiber optics on a widespread scale.

Verizon’s efforts in the First State are part of a nationwide FiOS initiative estimated to cost $22.9 billion. FiOS (FiOS means fiber optic service.) The cost includes rewiring more than half of Verizon’s copper telephone network so it can sell cable TV and super-fast Internet connections. The company hopes to offset the cost with $4.9 billion in savings from now until 2010, thanks to the reduced maintenance requirements of a fiber network. The project is expected to generate positive operating income beginning in 2009.

Verizon launched FiOS TV in September 2005 in Keller, Texas, and currently offers the service in parts of California, Florida, Maryland, Massachusetts, New York, Texas and Virginia, as well as Delaware. Public hearings also have been held in the neighboring Pennsylvania counties of Montgomery, Bucks, Chester and Delaware. The company now has video franchises that cover about 3 million households and more than 100 franchise areas. Its goal is to completely rewire markets serving 18 million homes by the end of 2010.

The project has investors and experts debating whether it makes economic sense to replace the copper wires all the way to every home. Verizon is gambling that its investment will give it far more capacity than any rival for such next-generation services as Home Media Digital Video Recorder and Media Manager, which lets customers access photos and music from their personal computer and play them on their TVs or entertainment centers, where they look and sound the best—no more crowding around the PC to see the vacation photos.

“We believe it’s all about bandwidth, delivering a variety of high-speed services to our customers,” Allan says.

In Delaware, Verizon expected to have television customers in Middletown-Odessa-Townsend and the Wrangle Hill areas by the end of 2006, with Newark and Hockessin to follow early this year. These areas already have Verizon’s FiOS Internet service. “It gives our Delaware customers the opportunity to really be on the leading edge of some high-tech services,” Allan says. Installation of fiber optics has also created hundreds of jobs, he says.

Comcast, which has had a virtual monopoly on cable television in most of Delaware for years, is hardly panicking.

“We welcome competition, but it must occur on a level playing field with competitors living by the same franchise rules that govern cable television providers,” says John Lamontagne, director of public relations for Comcast’s eastern division. “A level playing field means equal terms and conditions for all providers in all aspects of franchises, from build-out requirements to customer service standards, reporting requirements and more.”

“Build-out” is a touchy term with Verizon.

“Deploying [fiber-to-the-premises] is a massive undertaking, and we have a duty to spend those dollars wisely,” says Allan. “That means we can’t deploy everywhere all at once. We need an initial return on investment so that we can continue to expand the network. So we start where we can deliver the service most efficiently.”

Verizon looks at factors like network readiness, consumer demand and the potential length of the cable franchise process. Some barriers to entry, like exorbitant fees and build-out requirements, discourage investment because they don’t deliver the return on investment a company needs to expand elsewhere.

“When governments impose unreasonable franchise terms on us, our business compares those requirements against rules in other states that create open markets,” Allan says. “And like any smart business, we gravitate toward the open markets.”

He points out that when Comcast and other existing cable companies agreed to create networks in entire franchise areas many years ago, they were basically awarded exclusivity in exchange.

“They had the market to themselves,” Allen says. “So new competitors entering these markets start with zero customers, zero market share. Requiring new entrants to match up to what the cable incumbent has had decades, in many cases, to build is a tremendous barrier to competition and, in fact, is a major reason there’s not more competition in cable markets today. The best way to promote increased cable competition is to let the market work, not to impose build-out requirements that will prevent, rather than encourage, new competitors from entering a market.”

It’s been suggested that Verizon is offering FiOS only in affluent areas. “This is an argument that some competitors threw up to slow us down, and it’s just not true,” says Allan. “We have a very diverse customer base that we’re providing service to.”

Meanwhile, Comcast has invested $39 billion to upgrade its network and “is already there with the most robust broadband network, offering digital video, video on demand, high speed data, high-definition programming and, now, voice products,” Lamontagne says.

“We’re already offering lightning-fast HSI speeds, along with built-for-broadband features that let consumers take advantage of the speeds. We’ve increased our speeds by 400 percent in less than two years and will continue announcing faster speeds.”

Maybe so, but Verizon has made inroads in the Comcast TV market. Patty Barr, of Davidsonville, Maryland, recently switched to Verizon FiOS TV service after three years as a Comcast customer.

“Comcast was all that was available,” Barr says. “Before that we had a dish, which was horrible. The Comcast picture went out a lot, and we would have to wait for it to come back. The Verizon picture is better, and we haven’t had any trouble. Plus, Comcast had to run wires everywhere. Verizon came in and got rid of the wires and put in nice little wall jacks.”

Verizon is supplying the Barr household with phone, Internet and television service at a cost, she says, that is $50 to $60 per month less than Comcast’s.

Cathy Rossback, another Davidsonville resident, had been a satellite Direct TV customer for about 15 years before switching to Verizon in August. “Satellite TV was the only thing that was available,” Rossback says. “Verizon gives us a lot better picture and a lot less disturbances. I thought my TV set was going before, but it’s great now.”

Rossback and her husband got the basic $39-per-month package and added two other sets of premium channels, bringing the total bill to about $60.

While Verizon scrambles to get into the cable TV fray, the juggernaut that is Comcast rolls on. Third quarter 2006 earnings easily beat Wall Street expectations and sent its shares to a 52-week high, spurring speculation that it was interested in buying Yahoo Inc. or Spring Nextel Corp. Comcast reported adding 1.48 million revenue-generating units during the quarter. (Each revenue-generating unit represents a service bought, so a customer who buys cable, phone and Internet service counts as three RGUs.) The company also reported adding 10,000 basic cable subscribers in the third quarter, an improvement from the same period in 2005, when it lost 44,000 subscribers.

With the vast resources at the disposal of both these communication giants, a long and fascinating war for the Delaware cable dollar seems inevitable, replete with rate cuts and creative package options. Logic, and history, indicate that the real winners will be Delawareans. 

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