Leichtman Research Group

LEARNING FROM MASSACHSETTS

In September, 2005 Verizon fomrally introduced FiOS TV in Keller, Texas. By the end of 2006 Verizon had 207,000 FiOS TV subscribers nationwide, and grew even more rapidly in 2007, adding 736,000 more subscribers. Today Verizon has over 1 million FiOS TV customers, and is the ninth largest “cable” television operator (and 11th largest multi-channel video provider) in the country. To better understand what impact FiOS TV is having on cable (and DBS) providers, we can look to data from Massachusetts for guidance.

At the end of 2007, Verizon provided FiOS TV service in 61 communities in Massachusetts – with 34 beginning in 2006, and 27 added in 2007. So far in 2008, the company has added two communities and announced plans to extend the service to 30 more towns in the Commonwealth. Recently released data from Massachusetts’ Department of Telecommunications and Cable reveals that Verizon grew from the sixth largest “cable” TV provider in Massachusetts at the beginning of 2007, to the third largest operator at the end of the year. By the end of 2007 Verizon had 78,406 cable TV subscribers in the state, up from 11,982 at the beginning of the year.

In assessing the impact of FiOS TV on the market, we can look at the industry on a statewide basis, as well as just in those communities where FiOS is available. These two approaches tell slightly different stories.

Analyzing the effect of FiOS on other cable operators on a statewide basis reveals only a modest impact.

Total Video Subscribers in Massachusetts

2006 2007 Net Gain/Loss

Verizon FiOS 11,982 74,406 66,424

Comcast 1,663,807 1,652,233 (11,574)

Charter 210,502 209,696 (806)

RCN* 68,432 63,589 (4,843)

* Includes estimates for subscribers where RCN is an OVS provider, where Annual Cable Fee filings are not required.
Subscribers at year end

While Verizon gained 66,424 subscribers in Massachusetts in 2007, the three largest cable operators at the start of the year lost only 17,223 subscribers

Comcast lost 0.7% of its subscribers in Massachusetts in 2007 – a figure similar to the annual companywide total

Charter, the second largest provider in the state, lost just 0.4% of subscribers in Massachusetts in 2007

RCN, a cable “overbuilder”, lost 7.1% of its subscribers in the state in 2007

Looking at the data only in communities where FiOS TV is available demonstrates that FiOS’ impact on incumbent providers in these areas is predictably more significant than it is statewide.

Total Video Subscribers in MA Where FiOS TV is Available

2006 2007 Net Gain/Loss

Verizon FiOS 11,982 74,406 66,424

Comcast 361,870 327,258 (34,612)

RCN 39,424 35,001 (4,423)

Charter 9,047 7,243 (1,804)

In the 61 communities in Massachusetts with FiOS TV available in 2007, Verizon gained 66,424 subscribers in 2007, while the three cable operators serving those communities lost 40,839 subscribers

At the end of 2007, Verizon had about an 18% video penetration of the more than 400,000 households with FiOS TV available

In 2007, Comcast lost 9.6% of all its subscribers in the 58 communities where FiOS was available – and in the 34 towns where FiOS had been available for more than a year, Comcast lost 13.5% of subscribers in the past two years

RCN lost 11.2% of its subscribers in 2007 in the 12 towns where FiOS was available, and lost 20.6% of its subscribers in FiOS towns over the past two years

In the three Charter towns with FiOS available, the company lost 19.9% of its subscribers in 2007

The combination of these two sets of data helps to bring us to a fuller assessment of the impact of video rollouts from Verizon (and AT&T) on the industry as a whole.

With over 85% of households nationwide subscribing to some form of multi-channel video service, and the economy affecting the new housing market, growth potential for the multi-channel video industry is more squeezed than ever before. With this highly saturated market, where a Telco provides video service, it now produces subscriber losses for the cable provider in that market, and likely for DBS providers as well.

Yet, as demonstrated in Massachusetts, the overall impact of the Telcos on the cable business is not as dramatic, because of the extent of the rollout to date. In 2007, in areas of Massachusetts where FiOS TV was not available, Comcast gained 1.8% of subscribers, nearly offsetting its losses in FiOS towns. With the addition of the 30 new communities, Verizon expects to have FiOS TV available to over 500,000 households in the state – equal to about 20% of all households.

Verizon and AT&T combined now have landline video services available to about 14 million households nationwide (with services not yet being marketed to all of these households). Comparatively, the top cable operators have telephone service available to over 95 million households. This disparity in availability resulted in cable companies adding 4.5 times more telephone subscribers in 2007 than Telcos added video subscribers. (While the Telcos added nearly one million landline video subscribers in 2007, cable operators added about 4.5 million phone subscribers during the year.)

After years of talking about providing video services, Verizon (and now AT&T) have finally taken some action and, by the end of 2008, both companies will likely be among the top ten cable providers in the US – with Verizon on track to end the year as the seventh largest cable provider. Yet, with an earlier and more ubiquitous rollout of telephone service, cable providers Comcast (#5), Time Warner (#7), and Cox (#9) were each already among the top ten telephone providers in the country at the end of 2007.

No matter how you slice the data, it is clear from what is happening in Massachusetts and nationwide, that market competition (for video, phone and broadband services) is impacting “traditional” industry roles, and providing consumers with more choices.

This article is from the 1Q 2008 issue of LRG's Research Notes. Click here to read full issues of LRG's Research Notes.

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