Verizon’s FiOS Strategy is Focused on Low Hanging Fruit – But It Will Eventually Be About Price

Implications: I had been a naysayer of Verizon’s FiOS content strategy. I, like so many others, had said that Comcast had a much larger territory and could serve so many more people than Verizon. However, I had forgotten a critical element about Verizon’s strategy; they don’t care about serving everyone, Verizon and Comcast are not competing for the same customer but Verizon does not want all of Comcast’s customers. Verizon is not subject to the same regulatory and local politics that govern a cable television operator.

Analysis:

Verizon’s FiOS is racking up the numbers. When you are not required to serve an entire community, you can cherry pick the best customers in a market. The cable companies are losing customers and that is due to several reasons; poor customer service, poor quality, and fewer features than FiOS. FiOS is the new flavor of the day.

However, what many analysts and supporters of FiOS are not saying is that the cable companies are very much tied to the areas in which they operate. Cable companies are required to provide all broadcast channels and even local town programming to the local viewer. I can see town hall meetings, local town news, local weather, local town sports, who won the high school basketball championship, and when the town parades are being held. I have already heard it from analysts about this aspect; their answer: WHO CARES!!!! My answer is the consumer. The cable companies provide a level of local flavor FiOS cannot and will not.

The fact is there are four factors upon which a consumer will measure Verizon FiOS and a Comcast or a Cablevision; pricing, picture quality, content type, and Internet data speeds. In the beginning, FiOS will look like it is eating the cable operators lunch. This should be no surprise; FiOS is different and a lot of people despise the way the cable operators have treated them in the past; PAY BACK can be painful.

Pricing is hard to compare. Both companies provide different numbers of packages with different data speeds. However, according to Comcast the high-speed Internet additions declined to 450,000 from 538,000; year-over-year 3Q2006 over 3Q2007. Furthermore, the 662,000 additions of digital voice subscribers were below the original 2007 projection of 725,000 additions.

FiOS has superior picture quality. Just look at it. Yes this is an anecdotal statement. But picture quality, unless it is static, is a subjective thing. According to Cablevision, they have had customers defect to FiOS and those customers are claiming that the picture quality of FiOS is better than Cablevision.

No comments have really been made about content type. I am sure they all show the same movie channels: Starz (east coast and west coast flavors), HBO (all 10Gillion flavors), Encore, AMC, etc. So other than community access FiOS has the same programming as Cablevision. I believe that content differentiation will eventually be key and that this differentiation will occur in the arena of local content.

This is not just a story about FiOS v. Cablevision, it is a story of FiOS v. all cable companies. The bright side of FiOS for the cable companies is that Verizon is targeting multiple dwelling units; aka apartment buildings and multi-family homes. In other words, Verizon is targeting major metropolitan areas. This is the standard Verizon tactic: go after the Cream first. There is nothing wrong with this strategy. For the cable company operators this means they have a tiny amount of time to get their strategic act together.

When you look at pricing, picture quality, content type, and Internet data speeds, you need to ask yourself a question just how high a market barrier has FiOS, Comcast, or Cablevision actually set. Picture quality in a cable network can be fixed with better outside plant and the cable companies are upgrading their plant. Content type is largely the same, even thought the cable operators are very local oriented, Wall Street does not think localization of content is important. Internet data speeds are a big deal but frankly unless it affects a video stream what average consumer really cares if you can up load a file at 2MB per second or 5MB per second. Comcast provides a business Internet package that lets you download at 8MB per second and upload at 1MB per second. Verizon FiOS has a package that lets you download 5MB per second and upload at 2MB per second. Verizon FiOS also has a package that lets you download at 30MB per second and upload at 5MB per second. Verizon also has a package at 5MB per sec/2MB parsec and 15MB per sec/2MB per sec. However, here is the key point. To the average consumer the differences in speed don’t amount to much of a difference. To my developer friends, the upload speeds mean everything but then again a software developer working from a small office or their home is not the mass market.

At the end of the day with all else being equal, it is going to come down to pricing. What I am trying to figure out is how is Verizon going to sustain its build-out when the cost to connect a home with FiOS is $842 and that is not including marketing costs? For a cable company like a Comcast or Cablevision the cost is between $200 and $275 to connect a customer. Verizon’s pockets may be deeper than the cable operators. This ultimately is a waiting game, i.e., a wait-them-out, wear-them-out strategy.

The war between the telephone companies and cable companies for each other’s traditional market spaces will continue to take numerous twist and turns. Between leveraging technology and regulation, regulation will play a key role in the battle for eyeballs. The most obvious example of a regulatory victory was Verizon’s success in having the FCC begin an examination of exclusive sports entertainment programming and related costs. Funny thing is they are so busy getting into their new lines of businesses they are ignoring the ones that made them successful in the first place.

There will be a balancing out of market share where both telephone company content companies and cable operators will be fighting for tooth and nail for small pieces of each other’s market. In other words, we will soon see a maturing of this content space. Ultimately all of the fighting is good for the consumer and the investors.