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Verizon's Video Vision


Terry Denson may have the most daunting job in telecom these days. Verizon Communications Inc.'s (VZ) 39-year-old vice-president for video programming and content marketing was hired last September to build a pay-TV service from scratch to compete with well-established cable and satellite giants. "At first, I didn't think [the job] was a good opportunity," says Denson. But the No. 1 U.S. phone company was prepared to spend a bundle -- $15 billion or more -- in the next decade to lay souped-up fiber-optic lines directly to households. That helped convince the career TV exec that the concept could fly. With an upgrade like that, Verizon would be poised to provide the TV channels and other video services its customers now get through cable or a dish on the roof.

Denson is in the hot seat because Verizon's future hinges on its transformation into a media company. It may appear crazy to shell out billions for the chance to enter a fiercely competitive business, but there's little choice when the traditional phone business has steadily eroded during the past five years. At the same time, cable companies are aggressively moving in on phone customers by offering an alternative service using Internet technology. To fight back, Verizon is madly trying to rewire U.S. homes with its own ultrafast network. About 3 million of the 30 million U.S. households that receive its phone service will be connected directly to fiber-optic lines by the end of 2005, says Verizon. "Verizon needs a competitive response to the cable industry," says John C. Hodulik, an analyst at UBS (UBS).

Clearly, the war for TV subscribers is intensifying. Cable is battling satellite services, which added 3 million subscribers last year -- 1 million of those defecting from cable, according to Sanford S. Bernstein & Co. And Verizon won't be the only worry. Phone company SBC Communications (SBC) Inc. says it, too, plans to roll out a video service as part of a $7 billion upgrade to new fiber-optic lines. What's more, cable's stronghold in cities could be challenged as Verizon looks first to urban areas. Arguing that the company should not have to go through the arduous process of applying for the municipal franchise pacts required of cable outfits, CEO Ivan G. Seidenberg pleaded his case before a group of powerful broadcasters on Apr. 18 in Las Vegas: Help us win an exemption from Congress, he urged the TV execs, to lower "the biggest barrier to our entry into video."

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It all sets the stage for Denson, a relative unknown in Big Media circles, as he tries to turn a telecom giant into a player on the entertainment scene. First, he's nailing down deals with big programmers that would give Verizon 100-plus channels, at least initially. He expects all the major channels to be on board by the end of the year, when its service officially launches. In addition to deals with Court TV, Discovery Networks, and premium channel Starz Entertainment Group, NBC Universal announced on Apr. 18 a distribution deal with Verizon for all of its broadcast and cable channels. Showtime Networks Inc. (VIA) and A&E Television Networks are close to announcing deals, too, BusinessWeek has learned. Details aren't being disclosed. But one thing is certain: Verizon isn't worried about clutter. It's carrying all the channels programmers operate rather than just a few. Says Henry Schleiff, CEO of Court TV: "We understand who brought us to the dance -- cable. But Verizon represents a new player at the table, and that can only be good for a content provider like us."

Denson will need all of his experience -- and his fat Rolodex. A native of Rochester, N.Y., with a law degree from Georgetown University, Denson worked for 10 years at ABC on talent and rights-acquisitions deals. He moved into sales and marketing at MTV, where he sold the network to small cable operators. He then jumped to Insight Communications Co. (ICCI), the nation's ninth-largest cable operator, where he negotiated with programmers. Denson knows it will be a hard slog to make Verizon's TV foray a hit. "We don't fall prey to hubris," he says.

But Verizon's push in Washington for exemption from local operating agreements is plenty bold. "As we see it, we were already granted franchise agreements from the states [as a phone company]," says Thomas J. Tauke, Verizon's executive vice-president for public affairs, policy, and communications. "So we are just looking to streamline our entry into the marketplace." Tauke says Congress could take up the issue this summer. Meanwhile, the company will have to go to the trouble of obtaining franchise agreements town by town, as cable has already done. So far, Denson says talks with more than 100 municipalities are in progress. The company's first trial is set to begin sometime before June 30, with 200 households in Keller, Tex., a Dallas suburb. There, Verizon will be going head-to-head with cable operator Charter Communications (CHTR) Inc., which has recently ceded some customers to Verizon's Internet service. But "that's leveled off," says Charter spokesman Dave Mack. "Competition isn't new to us. We will respond." Denson is also targeting Tampa, Boston, and New York. Analysts figure Verizon could sign up as much as 20% to 25% of the various markets. But "it takes a while to build out," Denson concedes.

That patience could be strained. Cable and satellite together have 97 million subscribers, and cable has already completed most of its $95 billion-plus upgrade of lines that allow two-way interactivity. And while high-speed digital subscriber line (DSL) service has been a boon to phone companies such as Verizon, cable has a triple-play offer: video, broadband, and now phone. Eventually, the theory goes, Verizon will be able to match that or even go one better by including a wireless offering for a quadruple play. But so far the company says a four-way bundling isn't in the offing.

Meanwhile, Denson has some serious selling to do. One pitch to consumers, he says, is price. Verizon's basic all-digital package of 100 channels will cost about $40 a month -- "our line of scrimmage," says Denson. That's about $10 cheaper than digital cable and on par with satellite. Fatter bandwidth could be a draw, too. The fastest cable modems let customers download up to five megabits per second of data. The first iteration of Verizon's fiber network will download 30 megabits per second. Another plus: Verizon will have two-way capability, something satellite has struggled with. So Verizon can sell such services as video chat, high-definition video, and interactive gaming.

Verizon's first big test comes this summer in Texas. If Verizon can persuade a good percentage of the folks in Keller to buy their TV from a phone company, Denson won't be little known for long.

By Tom Lowry and Spencer E. Ante in New York


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