You Knew it Had to Happen at Some Point…

From today’s Wall Street Journal.

Can the nation’s largest phone carriers morph into state-of-the-art cable-TV providers? Several are eager to prove that they can.

Verizon Communications Inc. and SBC Communications Inc. are planning to offer video programming in several markets in hopes of blurring the traditional borders between the telecom and cable industries.

Call it connection envy. With the nation’s cable companies determined to offer Internet calling to millions, the phone companies are responding by jumping into the TV business. Both Verizon and SBC have launched risky, multibillion-dollar efforts to roll out high-capacity fiber lines that can deliver Internet service, voice and video through a single connection.

And now, the phone companies’ move into TV-land is more than just talk. Verizon is busy buying up programming that it can deliver to millions of customers over the next several years. In an early content coup, Verizon already has ESPN and HBO in its lineup, as well as basic channels such as CNN, Fox and MSNBC. The company will enter test markets in the first quarter of 2005; other Verizon customers will begin to get TV programming during the first six months of next year in cities including Los Angeles, Tampa, Fla., Keller, Texas, and Falls Church, Va.

SBC Communications, the San-Antonio based telecom giant with operations in 13 states including Texas and California, is meanwhile beginning to launch its own TV venture. The company today is expected to announce it has hired Dan York, a former Home Box Office executive, to run its video-content strategy and make content acquisitions. Mr. York most recently was a programming and development director for iN Demand Networks LLC, a video-on-demand and pay-per-view company. SBC will begin offering video service to pilot customers as soon as six months from now.

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While the companies are betting that consumers want more of a choice in TV service providers, they don’t want to simply retread their cable rivals’ efforts. Verizon, for instance, aims to deliver a more elaborate basic channel lineup than do cable or satellite-TV companies — as well as more choice in premium content packages geared to niche markets such as sports fans and Latinos.

Both phone companies also plan to compete aggressively on price, and eventually deliver content at a slightly lower cost than cable operators, which generally charge $35 to $45 a month for the most common analog cable package and about $10 to $15 extra for digital cable.

Despite their size, however — Verizon and SBC jointly control roughly 100 million phone lines — many challenges remain before companies known for dial-tone service can become big-league TV operators. Not only must they make massive capital investments to get in the TV game, they also face continuing battles for content needed to entice new customers.

Verizon, the nation’s largest phone company, has committed $800 million to roll out the new network this year, with billions more to come over the next five years. Verizon aims to bring fiber to one million homes by the end of this year, an additional two million homes in 2005 and a total of 10 million homes by 2009. SBC is investing between $4 billion and $6 billion and aims to reach 18 million of its current households by the end of 2007.

DIAL M FOR MOVIE

Key elements in big phone companies’ plans to offer television programming:

• Resell satellite video programming (e.g. DirecTV, EchoStar)

• Offer movie downloads from the Internet

• Match or exceed basic cable channel line up

• Create large video-on-demand movie libraries

• Launch niche programming

Source: the companies

The investment community is still unsure whether such spending will pay off — and whether the phone giants have the skills needed to play in the TV industry. “We do have concerns about how telephone companies will successfully work with broadcasters,” says Todd Rosenbluth, a telecom analyst for Standard & Poor’s in New York. “Their skill is to connect callers around the country. However, the telephone companies need to stop cable competition somehow.”

“Investors have a prove-it-to-me approach,” acknowledges Rick Lindner, the chief financial officer of SBC.

Indeed, not every Bell is convinced that video is worth the multibillion-dollar investment. BellSouth Corp. has still not officially decided whether it will make a push into delivering its own video service and is concerned about the high cost.

“While there is a lot of excitement and buzz around video, we’re a long way away from making a decision on whether we’ll go ahead with it,” says BellSouth Chief Financial Officer Ron Dykes. He adds that the Atlanta-based company, which already has extensive fiber in the ground, will run trials this year and next.

Qwest Communications International Inc., the local phone company in 14 Western states, has decided to roll fiber out only to new housing developments, and its chief executive officer, Richard C. Notebaert, has dismissed a blanket rollout of the technology as not economical.

This isn’t the first time that the Bells have tried to make a push into television. In 1993, Bell Atlantic tried to acquire cable giant TCI, which was later sold to AT&T; Corp. and today is part of Comcast Corp. In the mid-1990s, Bell Atlantic and Nynex (now both part of Verizon) and SBC jointly formed TeleTV and hired a CBS executive to buy content that could run over fiber. Meanwhile, the former Ameritech (now owned by SBC) and Walt Disney Co. formed Americast, a cable company that bought or established several dozen cable TV systems and tried to line up programming. Both TeleTV and Americast fizzled: Fiber technology back then turned out to be too expensive for Bell Atlantic, and innovative content was hard to come by for both ventures.

Though content is more readily accessible nowadays, the battle to control it is still considerable. Large cable TV companies such as Comcast, for instance, can get better rates for popular programs than Verizon or other Bells because prices are set by the number of subscribers they have. In an offensive move, Verizon, which sold two small cable systems in California and Florida last year, retained its membership in a content-buying consortium that allows smaller cable systems to pool together to get access to content.

Another potential snafu: offering conventional TV fare is likely to require the phone companies to acquire franchise rights, just like cable companies must do. Winning the necessary licenses from municipalities is a time-consuming process that involves lobbying and, at times, legal wrangling at a local level that can take months. Phone executives worry that the long-established cable companies and their skilled lobbyists will fight their efforts.

Both SBC and Verizon argue that their video content shouldn’t be subject to the same regulations as conventional TV programming because it will delivered over Internet technology. Current regulations may eventually be revised in Congress, but there are no immediate changes on the horizon. SBC hasn’t yet decided whether it will apply for franchise rights; company officials are debating whether instead to push hard for new regulations that would absolve them of having to take this step.

Verizon is already busy obtaining TV franchise licenses. In a sign that the New York company is serious about rolling out video service quickly, it received its first cable franchise agreement, in Beaumont, Calif., last month. The company plans to sell a package that includes most of the local TV stations and their news shows, just like cable TV companies offer, as well as standard cable-TV fare.

On the technology front, Verizon and SBC are taking different approaches. Verizon foresees high demand for video and Internet applications and wants to have a network in place that can handle growth in demand. So Verizion is investing heavily to install fiber directly to people’s homes.

SBC is taking fiber to neighborhoods rather than individual homes. That is both cheaper and faster than Verizon’s method, but will bring more limited bandwidth to consumers — yet enough to deliver a competitive TV package, SBC says.

In the end, of course, consumers will cast the final vote. In an early test of their acceptance as TV service providers, BellSouth, Verizon and SBC this year each began re-selling satellite TV service. BellSouth has signed up 90,000 customers in two months, while SBC has signed up more than 200,000 customers since April, both without aggressive marketing.

In Keller, Texas, one of Verizon’s first fiber rollouts, the community appears to be welcoming the phone giant. Without even having a TV offer, Verizon has gained a 13% share of the high-speed Internet market in the community. Negotiations for TV-franchise rights in Keller will begin next year.

“I think that when you have a community that’s primarily served by one [TV] provider, it limits the ability for consumers to have a greater influence on the quality and cost of service,” says Dave Philips, president of Keller’s Chamber of Commerce and former mayor.

Write to Almar Latour at almar.latour@wsj.com

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