At Age 2, Verizon FiOS Evolves

Now two years old, Verizon Communications Inc. (NYSE: VZ)'s FiOS TV still looks an awful lot like cable. Run up and down the FiOS TV channel guide, and the programming isn't stunningly different. But Terry Denson, Verizon's vice president of FiOS TV content strategy and acquisition, says the carrier's mission isn't to have exclusive content, but a better network.

Table 1: Verizon FiOS at a Glance

Product	Verizon FiOS Internet	Verizon FiOS TV
Public Debut	August 2004	September 2005
Subscribers	1,100,000	515,000
What's the Big Deal?	Provides downstream speeds of up to 30 Mbit/s, with 50 Mbit/s available in some areas. Verizon is currently testing 100-Mbit/s speeds, too.	As "the only carrier to offer uncompressed HD," Verizon says its FTTH network allows for a simply better picture. Interactive features will only enhance the quality, but the company doesn't plan to compete by securing exclusive content.
Source: Verizon, Light Reading

"From a marketing perspective, the company will continue to place the emphasis on the network," says Denson, formerly a VP of programming for Insight Communications Co. Inc. , the nation's ninth-largest cable company. That approach will be interesting to watch as Verizon moves toward providing a more interactive TV experience.

The company has announced that it will move FiOS to an all-IPTV platform within three years. (See Verizon: HD VOD Is Coming.) That will open the door to a lot more possibilities, but they just won't be as obvious on the surface to the consumer.

The move to IPTV
"The difference between cable-like TV and IPTV is not a consumer difference," says Heavy Reading senior analyst Adi Kishore. While Kishore points out that IPTV has the potential to bring more interactive features and more on-demand content to customers, a carrier, he feels, is more likely to go with IPTV because of the "economies of bandwidth."

Cable companies and services like Verizon's FiOS send broadcast video to customers, but IPTV, in contrast, runs on a request-and-send architecture. The provider does not have to send 50 Mbit/s of bandwidth to a customer's home if his computer and TVs are off. The old cable architecture, however, is constantly feeding the home whether the consumer is there to use it or not.

So IPTV makes carriers more nimble to offer a greater variety of on-demand content and more high-definition (HD) content. In traditional cable, to add on-demand services, incremental bandwidth must be added to the network. That's not the case with IPTV.

Mad for ads
So what will really change when Verizon moves FiOS to IPTV?

One thing will be the way Verizon delivers advertising. [Ed. note: Oh. Well. Yay.] (See Targeted Ads, 2; Speeds & Feeds, 0.) IPTV allows Verizon to know what its customers are watching. That's scary, to be sure. But it does mean that there will be no excuse for not having the most compelling content on offer -- since, after all, they "know" you.

"IPTV identifies what is that one piece of content that would compel someone to switch or stay," says Denson, optimistically. "If both cable and us have the World Cup, well then that's not going to be it. It could be Indian cricket or education. The scarcity of some content is an opportunity for us. Take the Food Network for example. [Ed. note: Please!] Everyone knows it, but not many people watch it. But for some, it’s a key selling point.

"It's going to be about cobbling customers together, one at a time, and finding their key points of acquisition, whether it be content, HD, or VOD," he adds. "If they don't care about interactive applications, then you're not going to get them with interactive applications."

IPTV technology will allow Verizon to watch its customers' viewing habits and react. But it doesn't necessarily mean that Verizon will become a purveyor of exclusive content or a content owner itself. "We've found that having the exclusive right to specific content is very costly and very rarely worth it," Denson says.

So while others cite exclusive content as a key competitive advantage, Verizon says that, while FiOS TV is changing, the service won't be drastically different from cable. Verizon's stance is that the change will be gradual, with a greater emphasis on interactive features as time goes on.

Table 2: Why IPTV? Some Possible Features You Might Find on FiOS (Someday)

Feature	Benefit
Targeted advertising with hyperlinks direct to the advertiser's Website	Consumers can buy on impulse. Retailers can know what consumers their ads are reaching.
Hosted interactive games	No need to buy a console. Also, integrated billing means you don't need to fish for your credit card when buying new games.
Since bandwidth is less of an issue, more streams could change how sporting events are broadcast	Consumers can see multiple camera angles during a game and get instant statistics on players and teams.
Your content is accessible from any IP network	Watch DVR programs from your home recorder while you're on a business trip.
Your set-top has its own IP address	Program your DVR from any computer or Web-enabled cellphone.
Source: Speculation

So when it becomes a fully IP-based service, don't expect that FiOS TV will boast exclusive shows on its network, or a blockbuster movie before its theatrical release.

Verizon is betting, instead, on its ability to offer a better picture by not compressing its high-def video feeds. It will use interactive features to provide more relevant content choices and advertising to consumers. That, the carrier says, is enough to give it a fighting chance against cable.

The challenge for cable is to decide what weapon it will use (pricing? content? quality?) to fend off FiOS as it eats into its territories. "Cable can do all the things that IPTV can, it's just much harder and more complicated," says Heavy Reading's Kishore.

— Raymond McConville, Reporter, Light Reading

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