Battle to Provide TV, Internet and Phone Service Heats Up

NEW YORK — The war for TV, Internet and telephone customers is escalating this year as phone companies push deeper into cable's territory and cable firms prepare a high-tech counterattack, promising new video features and greater online speeds.

The ultimate winner will be consumers benefiting from more competition, analysts say.

People should expect a marketing frenzy this year, with promotions for speedier Internet connections and broader offerings of high-definition TV programming.

"It's turning into a customer-oriented marketplace, and both sides see it as an all-or-nothing game now," said Jeff Kagan, an industry analyst based in Atlanta.

After some initial skepticism, investors have warmed to the phone companies' pricey deployments of new fiber-optic networks. But Wall Street beat up on cable firms last year, although many hope for a stronger 2008.

"The cable companies are going to wake up and embrace this new kind of competition," Kagan said. "We want both sides to be successful. If one wins and one loses, then eventually the customer loses because prices go up."

High fiber

A big driver of the contest is New York-based Verizon Communications Inc., which in 2004 began a six-year, $23 billion deployment of FiOS, a network of fiber-optic cables reaching to homes and businesses. The network is in parts of 17 states, mostly in the Northeast but also in states including Florida, Texas and South Carolina.

FiOS provides phone service, digital television and Internet access with download speeds of 20 to 50 megabits per second. The company says a few customers are testing connections of 100 megabits per second.

Typical connections from the biggest cable providers top off around 10 megabits per second, although some have begun offering high-end plans up to twice as fast.

Verizon's advantage on the upload side, where it offers speeds of up to 20 megabits per second, is often far greater. Upload speed has taken on more importance as Internet users increasingly post videos and other content online.

More than halfway to its goal of giving more than 18 million homes network access by 2010, Verizon has more than 1.5 million FiOS Internet customers and more than 1 million TV subscribers, largely in suburban areas.

The challenge to cable is growing, but is relatively small for now. Last fall there were more than 65 million basic cable subscribers and nearly 35 million getting high-speed Internet from cable, according to the National Cable & Telecommunications Association.

Verizon's new goal is to take on cable in big cities. The company has deployed its network in some urban areas and is negotiating for franchise permission to sell TV service in cities like New York and Washington.

"We see those as an attractive part of the market," said Link Hoewing, Verizon's vice president for technology policy.

Atlanta-based Cox Communications Inc. is already mixing it up with Verizon in New England.

"Verizon is a PR machine," said Cox spokesman David Grabert. He said Verizon has "pulled out all the stops" and is spending heavily to get each new customer.

"We're definitely holding our own," Grabert said. "It's expensive for them to overcome that inertia the cable companies already have. It's really them that has the challenge of keeping up with us."

Cox Communications is a corporate sibling of Cox Newspapers.

Another major phone company, San Antonio-based AT&T Inc., has deployed its fiber U-verse network to give access to 8 million homes in 12 states on the way to reaching 30 million by 2010. AT&T has more than 230,000 U-verse TV customers, 100,000 of them added in the last three months of 2007.

AT&T's deployment has reached into some big-city neighborhoods in states such as Texas and California. The company recently began a U-verse push into Southeastern states, starting with Georgia and a preliminary deployment in Atlanta.

Unlike Verizon's FiOS, which brings fiber all the way to homes, AT&T is largely laying fiber to neighborhoods, where older copper lines serve as the final leg of the connection. The network has less capacity than Verizon's, but AT&T says its system makes economic sense since it is cheaper, faster to deploy and less disruptive to homeowners.

AT&T is using fiber to homes for new housing developments and will put in fiber when copper needs replacing or consumer demand for bandwidth increases, spokesman Fletcher Cook said.

Nearly all the TV customers also buy U-verse Internet access, which offers downloads of up to 10 megabits per second. That "more than meets the needs of our customers," Cook said.

Talk of 100-megabits-per-second connections can be misleading, he said. Cook said congestion on the Internet and its various interacting networks limits speed long before data reaches homes.

A majority of U-verse's customers have defected from cable, Cook said.

"Many of our customers have been unhappy with their choice in the market," Cook said. "Customers are happy to have a new service provider."

That's a reaction that should concern cable companies, said Greg Gorbatenko, a media analyst with Jackson Securities.

"A lot of people have incentive to move because of high cable rates, which show little sign of ceasing," he said. He said cable companies like industry leader Comcast Corp. could suddenly "get stung and lose a lot of subscribers really fast."

Cable strikes back

Cable companies drew first blood in this contest years ago by stealing away telephone subscribers. That push into the core phone company business is much further along than the recent TV incursion by AT&T and Verizon.

Philadelphia-based Comcast said last month that it had become the fourth-largest and fastest-growing provider of residential phone service, with more than 4 million voice customers.

Comcast also is spearheading the counterattack in the Internet speed contest with a new technology to squeeze more bandwidth from existing cable networks. Dubbing it "wideband" technology, Comcast says it will deliver download speeds of up 100 megabits per second to customers over the next two years with the potential to get even faster.

Comcast says some customers should start seeing that technology this year, although the company has not announced details for residential plans.

No. 2 Time Warner Cable Inc. and No. 3 Cox Communications are testing the technology, which goes by the name Docsis 3.0.

Bandwidth limitations are a prominent challenge across the industry.

Federal regulators have been investigating complaints that Comcast secretly limited some customer file-sharing. Time Warner Cable said last month that it would test bandwidth caps in Beaumont, Texas, charging subscribers extra for downloading more.

A battle in HD

Other challenges as companies try to squeeze more and more information through their networks are less obvious. Cable firms have had to adapt their technology to make room for high-definition video, which eats up far more space in their delivery pipes than traditional TV.

"HD is the big video battle this year," said Jupiter Research analyst Doug Williams. He said that since the phone companies are still in their video infancy, much of the HD marketing war is between cable and satellite providers.

To compete and free up space for HD channels, many cable providers are embracing a "switch digital video" technology, which invisibly allows them to limit the channels they send to neighborhoods to the most popular and those currently in use. Previously, cable companies pumped all channels to home cable boxes.

Time Warner Cable is using the technology as part of a big push this year to offer HD shows and new TV features, said spokesman Alex Dudley. Those features include some of the time-shifting abilities familiar to users of digital video recorders.

A feature coming this year called "start over" will allow customers to restart programs while they are currently running, Dudley said. Unlike a DVR, viewers won't be able to speed past commercials.

"There's no question competition has increased," Dudley said. He said cable has a big advantage over its new challengers.

Phone companies "are making a lot of noise and a lot of promises," he said. "But we are in your neighborhood right now ready to hook you up."