AT&T and Verizon plan must-lose-money TV

Today's New York Times business section has a long cautionary article about AT&T and Verizon's new initiatives in distributing television. And you know what? They're right to be cautionary. Despite their massive sizes, these telco giants are companies in trouble.

Nearly 10 years later, the core business of the Baby Bells - renting phone lines - is under attack as never before, shrinking by an average of 4 percent each year over the last three years. Nearly 13 million people are forgoing land lines, relying entirely on cellphones instead, according to CTIA, a wireless-industry trade group. While the erosion has been minimized by the ownership stakes that Verizon, AT&T and BellSouth have in Verizon Wireless and Cingular, the cable companies and small independent concerns like Vonage and SunRocket are picking off thousands of customers a day with their Internet-based phone lines.

In just two years, the cable industry alone has persuaded about two million households or businesses to forsake the phone company. Cablevision has signed up more than 600,000 customers. Time Warner Cable is nearing one million accounts. And Comcast, the country's largest cable operator, with 21.5 million customers, has finally turned its marketing machine on the phone business, meaning that the pace of defections is likely to quicken.

The Baby Bells "see their land-line business as an ice cube melting in the sun right now, so they need to become a purveyor of content," said Todd Dagres, a partner at Spark Capital, a venture firm focused on media and technology.

So telco fiber seems like a natural place to go to rebuild the business. After all, fiber can deliver countless new channels of TV, new interactive capabilities, and new revenue streams right? But that's a technology solution to an unasked question. As the article notes:

Few television viewers will scurry to sign up with Verizon or AT&T because they prefer those companies' network architecture.

So what is the unasked question? Its a marketing question, namely, "What consumer problem does this offering solve?" Do consumers want 300 more channels of TV? Again, the article takes a swipe at that question:

But just how much prospective customers care about receiving hordes of niche channels - like the Gospel Music Channel and Blackbelt TV - remains unclear.

"There's also too much of a good thing," said Joseph Laszlo, an analyst at Jupiter Research. "If Verizon added the Lint and Dust Channel, they would just end up with a program guide that is difficult to navigate."

Regular Blackfriars readers will recognize this problem -- it's the tyranny of too much, and Verizon and AT&T are just trying to make it worse by me-too'ing Comcast's offerings with more channels at a lower price. And this isn't going to be a cheap wager: just Verizon plans to invest $22 billion to do so by 2010 -- money that will almost certainly never be paid back in any time frame that will benefit current stockholders. And while SBC has a more conservative investment plan, it faces the same challenges of rewiring the US to deliver on this promise.

So what can the telcos do to rebuild their businesses instead of creating a new cable competitor? They could start by exploiting using their unique assets to solve real consumer issues and do so in a way that differentiates them from cable and satellite companies. Some early initiatives could include:

• Bring high fidelity phone calls to market. With fiber networks, there is no reason to constrain phone calls to 3 KHz any more. Even today, millions of aging consumers struggle to understand people on phone calls because the high frequencies are cut off. VOIP companies like Skype already are doing this, but the Baby Bells could make it a mainstream option.


• Sell upstream bandwidth. The whole concept of ADSL was created to deal with the limited bandwidth of copper wires. With fiber, there is no reason to throttle upstream bandwidth any more. Consumers who want to run a homework server for their elementary school or stream a video to grandma would no longer have to jump through hoops -- usually involving hosting companies -- to do so if telcos start to offer symmetrical upstream bandwidth. The great thing about this service? It's one that cable and satellite companies cannot easily replicate.


• Consider selling TV shows instead of renting them. Apple is already proving the market for downloaded video programs, and South Korean consumers already have shown a willingness to pay for downloading TV shows over their fiber networks. Time demands on modern consumers have already killed appointment TV; why not profit from the need for time-shifted TV instead of trying to replicate the cable rental model? And this type of service can be delivered over existing networks today.

There's no question these types of initiatives aren't as sexy as meeting with Eiger at Disney and negotiating a content deal. But they will serve telco customers' current needs better, generate revenue earlier, and cost less to deliver than this grand vision of Baby Bell TV. And at the end of the day, isn't the public interest what the telecom business is supposed to be about?

My prediction is that these TV initiatives by the telcos are going to be about as successful as the 500 channel video-on-demand cable experiments in Florida about a decade ago. And it's all because consumers are already overwhelmed with the tyranny of too much content and not enough time. Adding more content and services doing the same thing isn't going to help.

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