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FIOS: The Next Wave in the Broadband Triple Play � Or Is It?

 

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July 19, 2006

FIOS: The Next Wave in the Broadband Triple Play � Or Is It?



By TMCnet Special Guest
Edward J. Dailey, Attorney, Bromberg & Sunstein LLP



Less than a decade ago, Internet connections over broadband cable television lines began as a higher speed alternative to dial up service. It was a promising way for cable companies to sell excess capacity in their cable pipelines. Today, with more than 66 million Americans connected to the Internet, broadband Internet service is a burgeoning revenue source (see “Broadband Adoption At Home in the United States,” Pew Internet & American Life Project, September 24, 2005). And when Internet services and cable television are coupled with digital or Voice over Internet Protocol (“VoIP”) telephone, established cable companies have a highly adaptable, expansive triple play which is a growing threat to the Plain Old Telephone Service (“POTS”) of the Bell companies.

Enter Verizon Corporation, which is reported to have committed $18 billion in a catch-up effort to develop its fiber optic broadband infrastructure (“FIOS”) in affluent markets from Texas to tony suburbs west of Boston. Over the last year, Verizon has spared little expense in marketing the advent of its FIOS network - from UPS direct mail campaigns to a slick website touting “the power of light” (see www.verizonfios.com). Verizon’s triple play looks to compete directly with Comcast (News - Alert) and Time Warner. But just what is being offered, and is there a market for FIOS?

FIOS is a complete fiber optic cable network from the headend transmission source into the customer’s house. A FIOS network has an exceedingly large bandwidth capacity, so it has the capability to carry a high volume of television, high definition television, Internet, and digital or VOIP telephone signals at significantly higher speed than conventional cable systems (see “Broadband Technology Overview,” Corning, June 2005). Yet, it is far from apparent that there is a present need for this speed and capacity advantage - or that consumers even recognize the FIOS advantage.

While Verizon’s major competitors may not have anticipated its aggressive move to develop FIOS, they have not been idle. Comcast and Time Warner have continually enhanced their cable networks with hybrid, high speed cable networks combining fiber optic transmission from headend sources to neighborhood distribution systems (see “Broadband Technology Overview,” supra). Of course, hybrid networks face significant bandwidth capacity and speed constraints, particularly with the advent of high definition television and its bandwidth and speed demands. Nevertheless, it appears that relatively less expensive networking and switching strategies can respond to these constraints without any immediate need for upgrade of the hybrid systems to complete fiber optic. (see “Broadband Technology Overview,” supra). And implementation of these strategies is largely transparent to customers. So, while Verizon’s FIOS network is faster and has much more capacity, the hybrid systems of its established competitors are not far behind and are not likely to be perceived by consumers as slower than, or inferior to, FIOS.

In the years before cable Internet service, dial up access was the only option for most consumers. Dial up service was interminably slow and unreliable because it used the same century old transmission technology and copper wires of Plain Old Telephone Service. When cable providers added Internet service to their networks, however, there was an immediate leap forward in speed and reliability. Consumers who lived with dial up readily perceive cable Internet service as “high speed” - even though the actual speed, other than for mili second bursts, is far less than advertised. For example, Comcast now advertises its new Powerburst upgrade with “speed bursts up to a blazing 12 Mbps” (megabits per second). The accompanying small print suggests that this “blazing” speed may be occasional at best.

Few of us have any perception of megabit speed. We know that cable Internet service is fast relative to dial up, and that is all that seems to count. In fact, the FCC (News - Alert) recognizes cable Internet speeds of only 200 Kps (kilobits per second) as high speed broadband. So, if Verizon claims that its FIOS network operates at up to 15 Mbps while Comcast or Time Warner operates at 6 Mbps with occasional bursts to 12 Mbps, there may be no marketplace consequence. This is underscored by the fact that neither FIOS nor hybrid cable operates consistently at speeds which approach what is claimed. And but for a relative handful of consumers who have downloaded software to test connection speed, it is unlikely that most consumers have a sense of actual speed or relative speed differentials between FIOS and hybrid cable. Both are “fast”; dial up is “slow.”

The problem for FIOS then is that it cannot be differentiated in the marketplace by speed and bandwidth capacity as a premium service. This leaves price. But here too, there is little difference between FIOS and hybrid cable. A comparison of website offerings shows that Verizon has, at best, offered slight price and package incentives relative to Comcast and Time Warner (see www.verizonfios.com, www.comcast.com, www.timewqrnercable.com). Of course, Verizon adds a free Wi-Fi router; but otherwise, its monthly charges for comparable Internet access and electronic mail service vary by only a few dollars - hardly enough it seems to overcome the “hassle” factor for large numbers of consumers to change network services and e-mail addresses.

It is unlikely that FIOS service will compete on price anytime soon because of the extraordinary capital and operating costs required to develop, install, manage, and market FIOS networks. Yet major competitors, which control the markets FIOS is entering, have significantly lower capital costs for their hybrid systems; and they have large customer bases to pay their operating costs. And from that advantage, the hybrid competitors clearly have the financial resources to match any price incentives offered for FIOS for some time to come.

Without a perceived advantage in speed, band width capacity, or price, what opportunity is there for Verizon? Certainly, the company has a brand and an installed customer base for cellular and POTS. And even though it is losing telephone customers at a rapid rate, Verizon’s installed base is a very large target market. The problem is that long before Verizon had a business plan for FIOS, Comcast and Time Warner and even the woe begone Adelphia had expanded their systems reach from cable television and high speed Internet to telephone services. Indeed, this move by competing cable providers, together with rapid expansion of cell phones and a proliferation of low cost Internet telephone offerings by Skype (News - Alert), SunRocket, Vonage, and others has dramatically undercut the single product offerings of the traditional Bell companies like Verizon. So, while Verizon has a large base as its target market, it has been losing that market to its triple play competitors and to niche players offering VOIP telephone services over the cable. All of this has forced Verizon to find a new business plan - perhaps out of desperation rather than from a strategic position of offering innovative technology and new services. Unquestionably, this is a catch up strategy; and it is far from certain that Verizon’s brand and remaining installed base will offset its competitors’ head start.

Verizon’s effort may be complicated further by the apparent maturation and slow down in growth of the residential marketplace for cable services. Pew’s most recent survey in May 2005 found no statistically significant growth in the residential marketplace year to year in 2004 – in contrast to rapid growth in the five years prior to 2004 (see “Broadband Adoption At Home,” supra). The Pew Internet survey authors note that high speed cable services have been adopted at a much faster pace than earlier technologies, including the personal computer. They suggest, however, that this rapid adoption may have run its course and that the marketplace for middle and high income consumers is largely saturated at 53 percent of the marketplace for Internet services. The balance of the marketplace may not be a triple play opportunity but may instead be a marketplace for lower income consumers with very different needs for Internet, cable television, and telephone services. This is not a marketplace segment with ability to pay $160 - $200 a month for FIOS or hybrid Internet, cable television, and telephone services.

Verizon’s best hope for a marketplace opportunity lies in the growing demand for high definition television with its substantial demands for bandwidth and speed. The FIOS networks can readily handle HDTV while hybrid systems rely on networking and switching strategies (see “Broadband Technology Overview,” supra). If those strategies prove inadequate in the face of demand, Verizon will have found something to clearly differentiate its FIOS network from its competitors. At present, however, the demand curve for HDTV has not taxed the Comcast and Time Warner hybrid systems.

In sum, Verizon’s FIOS strategy is high risk, and it is easy to question a strategy which appears unable to differentiate itself on technology or price. Perhaps Verizon could have made a bold leap to Wi-Fi network technologies in lieu of hardwired fiber optics. That would have differentiated Verizon from its cable competitors and would also have offered some integration potential with Verizon’s highly successful cellular telephone business. The challenge there, however, is that Wi-Fi technology has not advanced enough to provide robust bandwidth and speed. Wi-FI is a technology which is rapidly expanding at the level of home and office but is just beginning its move to broader geographic WiMAX coverage and still has a distance to go to reach the bandwidth and speed of hybrid cable. Nevertheless, major technology companies, including Motorola (News - Alert), Nortel (News - Alert), Tropos, and Cisco have invested heavily to develop high speed, high bandwidth wireless systems. But this is the road not taken by Verizon.

In the end, Verizon may have had little choice in the face of rapid erosion of its core business. It entered a competitive marketplace for triple play services late and with an undifferentiated product. Apparently, it believes there is no time to wait for the next technology.

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Ed Dailey is a partner in Bromberg & Sunstein LLP, a Boston based intellectual property law firm. His practice includes representation of municipal governments in cable licensing proceedings and litigants in broadband licensing and Internet use disputes.

 

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