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Overview

An examination of wireline video subscriber patterns in 34 Massachusetts cities and towns after the introduction of Verizon Inc.’s FiOS TV reveals three early takeaways:

1. Initial incumbent cable subscriber losses can exceed 10%.

2. Traditional overbuilders, such as RCN, can take a disproportionate hit, effectively insulating the incumbent cable provider.

3. As many as 40% of FiOS TV subscribers could well be coming from DBS.

Those conclusions stem from an analysis conducted by OneTRAK into the video subscriber patterns for Verizon FiOS TV in 34 Massachusetts cities and towns covering a combined 285,000 homes passed. Comcast is the incumbent cable operator in all 34 cities, while RCN Corp. provides service in nine of those communities.

The subscriber statistics for all three companies, as of Dec. 31, 2006, were recently made public by the Massachusetts Department of Telecommunications and Cable, which requires all cable operators in the state to file year-end subscriber count figures by municipality. Verizon spent much of the spring asking the state to withhold its subscriber counts from the public. Only in the past month did the state rule that Verizon’s numbers would be publicly available, just as year-end subscriber counts for all cable operators are made public.

Massachusetts market-level assessment

In Lynnfield, North Reading, Reading and Winchester, where Verizon had marketed FiOS TV for the longest period of time – between six and 10 months – Comcast’s penetration fell anywhere from 7.8% to 13.6%.

In two other markets where FiOS had been available for longer than six months, and where RCN also offered service, it was RCN that took the major hit from Verizon.

In Verizon’s initial Massachusetts market, Woburn (launched Jan. 24, 2006), the company generated 1,356 subscribers by Dec. 31, for a penetration rate of 8.8% across Woburn ’s 15,391 homes. During that same period, Comcast’s penetration fell only 1.3% from 10,081 subscribers to 9,945 subscribers, while RCN took a 15.7% hit, losing 474 subscribers to end the year at 2,550 subscribers. Verizon’s launch produced a net gain of 746 new wireline video subscribers across the three providers in Woburn .

Massachusetts communities with Verizon FiOS service

In Burlington , where Verizon launched service June 29, FiOS counted 765 subscribers by year’s end. Comcast lost 138 subscribers, a 2.7% drop, while RCN lost 318 subscribers, a drop of 13.2%.

In all six cases, Verizon’s entry served to expand the market, causing overall wireline video penetrations to rise.

In the nine RCN/Comcast communities, RCN lost share in all but Stoneham , where it actually added 325 subscribers despite FiOS TV’s launch Aug. 30. In the eight other communities, RCN’s subscriber losses ranged from 2.8% to 15.7%.

Comcast actually increased subscribers in six of the nine communities where it went head-to-head with RCN and Verizon. However, in four of those communities, Verizon did not launch service until December.

The most notable exception was Wakefield , where Verizon launched service Aug. 30 and generated 564 subscribers by year’s end. Comcast added 96 subscribers in Wakefield , while RCN lost 403 subscribers.

When the subscriber additions across all 34 communities are rolled up, Comcast lost 5,216 subscribers across a base of 204,160, a drop of 2.6%, while RCN lost 1,813 subscribers, or 7% off its base of 25,895 subscribers. Verizon’s gain was 11,982 subscribers. Again, the average amount of time Verizon was in any one market was about 90 days. 
 

Impact on DBS Providers

The next question is how much did Verizon eat into DirecTV’s and DISH’s share in these cities? While Verizon may have expanded the video pie to some extent, it likely didn’t go beyond a few percentage points.

Multichannel video is fairly well penetrated across the country, especially in the 34 suburban Boston communities in this study. It’s hard to imagine the non adopters, who haven’t subscribed to cable or satellite for whatever reason – be it economic or general lack of interest in cable or satellite programming - would find FiOS TV a totally different and palatable service, compared to what local cable operators or DirecTV and DISH have been offering.

Verizon is not a low-cost video provider, with FiOS TV starting at $42.99 a month. The price-sensitive or economically challenged subscriber isn’t likely to be a prime candidate for Verizon.

If 3% of Verizon subscribers (359) were new to the category - a charitable figure - that would mean Verizon siphoned off 11,623 video subscribers from either Comcast, RCN, DirecTV or DISH.

Given Comcast and RCN lost a combined 7,029 subscribers in those 34 cities, that means 4,594 FiOS TV subscribers came from DirecTV/DISH, which translates to 40% of its total subscriber base. The remaining 60% migrated from Comcast and RCN.

DirecTV has slightly more national subscribers than DISH, but likely took a disproportionate hit, since Verizon has a marketing relationship with DirecTV. Verizon knows the identities of DirecTV subscribers in a Verizon data and phone bundle. Many of those subscribers could have been FiOS data subscribers that Verizon targeted for its video service.

Final thoughts

The initial analysis is just that - initial. It takes several years for true “overbuilder” statistics to settle into a pattern in the marketplace. Verizon will likely continue to see double-digit penetration gains in markets where it launches FiOS TV service.

The question becomes at what point, and at what speed, do those gains slow down? The Massachusetts examination represents basically a 90-day look into FiOS entry. Changes in product offerings (DirecTV’s 100 HDTV channels) and marketing tactics will all play into individual market dynamics, which can alter the growth and decline curves of the combatants.

Please direct any questions to Matt Stump at matts@onetouchintelligence.com

FiOS in Massachusetts: A local analyst view

Industry researcher Bruce Leichtman follows consumer broadband and video trends, and is a Boston DMA resident who operates his market research firm out of Durham, N.H. As such, Leichtman is in the perfect position to apply his industry experience to an analysis of the subscriber counts of Comcast, RCN and Verizon in these 34 Massachusetts communities.

While the results are interesting, they represent a small segment of the overall competitive landscape, he said, recalling the early numbers Verizon touted for Keller, Tex.

The early gains Verizon has made against Comcast may not necessarily re-occur against other cable systems, he said, even other Comcast systems in that market, because of the heightened marketing activity surrounding the early Massachusetts rollouts.

The Boston area, Leichtman points, is a heavily saturated, mature, multiple-product market. “Boston is a tremendous market for Comcast,” Leichtman said, in terms of penetration. It was one of the first cable markets to offer broadband data service and was an early AT&T Broadband (now Comcast) phone market, he pointed out.

One surprise, he said, was the susceptibility of an overbuilder to Verizon. With Comcast, RCN, DirecTV and DISH already in the market, it would seem difficult for a fifth entrant to gain a foothold.

But consumers who have subscribed to an overbuilder “have already chosen to make a different choice than the dominant cable provider,” he said, so they are likely to be open to other options, like Verizon, as well. Verizon, he said, represents a “comfort zone with a known brand.”

One of the striking things to Leichtman is Verizon’s heavy market-wide advertising push, even though FiOS TV is only 10% or so of the market. “They are everywhere, with TV, direct mail, billboard, etc.”

“It’s all defense,” Leichtman said, as Verizon’s goal is for Verizon to retain data and phone customers. “They only have 10% of the market, yet they are marketing like mad.”

Even if a prospective subscriber can’t get FiOS TV, he said, Verizon will sell them DirecTV to keep them in a Verizon broadband and phone package. Leichtman points out that Verizon had its best quarter ever for DirecTV additions with 125,000 in second quarter 2007.

The advertising serves to “confuse the market a little bit,” he said, since Verizon’s chief video product in the market is actually DirecTV.

“It’s all about curtailing phone losses,” he said. “It’s a strategic thing. It truly is a strategy that goes way beyond FiOS.”

“I look at the numbers and see Comcast has lost about 2%, Verizon has got 4% and RCN lost 7.5%,” he said, but he adds that it’s early in the competitive game. “We have to be very careful in extrapolating results in an individual market as it might portend for the future,” he concluded.