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MSOs Sue Verizon

Jeff Baumgartner
2/12/2008

The legal battle between Verizon Communications Inc. (NYSE: VZ) and the cable industry is heating up again after three major MSOs filed a complaint with the Federal Communications Commission (FCC) , alleging that the telco uses illegal marketing tactics to keep voice customers from switching service providers.

According to the “Accelerated Docket Complaint” filed Feb. 11 by Comcast Corp. (Nasdaq: CMCSA, CMCSK), Time Warner Cable Inc. (NYSE: TWC), and Bright House Networks , Verizon’s “unlawful retention marketing practices” have resulted in “thousands” of lost cable voice customers.

The complaint alleges that Verizon is trying to induce customers to cancel their orders and stay with the carrier while their telephone number ports are still pending.

In claims that Verizon is violating sections 222 and 201 of the Communications Act, the complaint points out that carriers are barred from using “carrier-to-carrier information” to trigger retention marketing campaigns. While the FCC authorizes LECs to use “win-back” campaigns after the LEC executes the carrier change, it’s unlawful to enlist them before the change is made, the MSOs argue.

The alleged practice amounts to “blatantly anticompetitive conduct,” they claim, noting that they began to become aware of the situation around June 2007.

The MSOs are asking the FCC to enjoin Verizon from continuing this kind of marketing. They are also seeking unspecified award damages.

In response, Verizon says it’s doing no such thing and that the suit is an attempt by cable to stifle competition.

“This filing should be seen for what it is – another cable company effort to block consumer choice as competition heats up,” reads a Verizon statement emailed to Cable Digital News. “Verizon’s retention marketing is lawful, does not interfere with number porting and, most important, it allows consumers to choose a better alternative. It’s hard to believe that cable companies would attempt to block consumers from receiving information about additional services and lower prices.”

The complaint documentation explains in some detail how MSO VOIP service orders are ported and confirmed in markets in which they compete with Verizon. Once an order is confirmed, the cable operator submits a Local Service Request (LSR) to the telco’s wholesale operation requesting that Verizon port the customer’s number to the cable operator. Verizon then sends a confirmation to the cable operator, typically within 24 hours of receiving the LSR.

The MSOs claim that Verizon has been canceling an “unusually high number” of local number portability requests during the time in which the ports remained pending. They also claim to have evidence from would-be cable customers that Verizon contacted them shortly -- “in many cases, within 24 hours” -- after placing the order with cable, occasionally offering them gift cards in exchange for canceling their orders and remaining with Verizon.

It’s not known how many customers accepted these alleged offers, as the figures were redacted in the version of the complaint obtained by Cable Digital News, but the MSOs claim the number is in the “thousands.”

The complaint says that after some informal contact and a cease-and-desist letter sent to Verizon, the MSOs and Verizon tried but failed to resolve the issue via a mediation session on Dec. 10.

The courting life
Verizon's legal team has been busy, having just filed VOIP patent suits against Cox Communications Inc. and Charter Communications Inc. . (See Verizon Sues Charter Over VOIP Patents and Verizon Sues Cox.)

Those suits have emerged as Verizon continues to grapple with cable, suffering voice-line losses to MSOs while at the same time using FiOS TV to sap away some of cable’s video market share. In both cases, one side is going after the other’s bread and butter. And it appears that all the parties involved are willing to take this battle to the courtrooms.

“You can’t help but notice the symmetry in the timing of this legal action,” says Sanford C. Bernstein & Co. Inc. analyst Craig Moffett.

He estimates that Verizon’s line losses are closing in on an annual rate of 11 percent. “If [Verizon] is suffering these kind of line losses even while they are allegedly tampering with the number porting process, you can only imagine that the line losses would be even worse under other circumstances,” Moffett notes.

Time Warner Cable said it signed up a record 285,000 digital voice subscribers in the fourth quarter, extending its total to 2.9 million. It just announced it had breached the 3 million mark. (See TWC Dials Up VOIP Milestone and Time Warner Cable Survives Q4.)

Comcast, which reports fourth-quarter numbers Thursday, ended the third quarter with 4.1 million phone subs and claimed recently it had unseated Embarq Corp. (NYSE: EQ) as the fourth-largest residential phone service provider in the U.S. (See Comcast Unseats Embarq.)

Privately held Bright House does not break down its voice customers, but it has an overall base of 2.4 million cable subs.

Meanwhile, recent data from Massachusetts suggest Verizon's FiOS TV is having an effect on Comcast. In areas where the two compete head-to-head, Comcast lost 28,762 video subscribers in 2007, but Comcast gained 24,176 subscribers where FiOS wasn’t available. (See A Tale of Two Cities .)

— Jeff Baumgartner, Site Editor, Cable Digital News

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