Verizon has begun an overbuild of AT&T in the Dallas suburbs, extending its FiOS service northward from Plano into Frisco and Allen, areas where both AT&T (U-verse) and Time Warner Cable offer video services.
On May 15, Verizon filed an amendment to its original cable franchise application with the Texas PUC to not only add sections of Plano, Keller and Watauga, where it already offers FiOS services, but for citywide franchises in Frisco and Allen, where AT&T offers its U-verse IPTV service. (AT&T received franchise approvals in those cities on Nov. 20, 2006.)
The filings, coupled with reports of corresponding construction activity, represent the first indication Verizon is willing to overbuild AT&T U-verse, and could have significant implications for other out-of-market territories (Florida, California, Indiana, Washington and Oregon) where Verizon operates inside AT&T and Qwest territory.
OVERBUILD COVERS ROUGHLY 60,000 HOMES
Based on a reading of the maps AT&T and Verizon have filed with the state PUC, the current overbuild appears to cover roughly 60,000 homes. Frisco counts 30,000 occupied homes and Allen 25,000 occupied homes.
The Plano amendment covers an area bordered by Route 121 to the north, Custer Rd. to the East, North Dallas Tollway to the west and Hedgcoxe Rd. to the south. That area clearly falls within the maps AT&T provided the PUC in its 2006 franchise application for the greater Dallas area.
The Frisco and Allen coverage maps Verizon filed with the state PUC mirror the established citywide boundaries, and mirror the same boundaries AT&T had in its November 2006 application.
An official in the Allen city government confirmed that Verizon has submitted plans for building permits in the city. Typically, those plans cover three to four subdivisions at one time, he said. Verizon has told city officials the company hopes to complete the Allen buildout within 12 months.
The state approved Verizon's service area amendment on June 9. Meanwhile, residents on message boards report that early construction (utility markings) has begun in AT&T in north Plano, Frisco and Keller.
The northern Dallas suburbs host a menagerie of telecommunications companies. Verizon has a sizable portion, having purchased GTE Corp.’s telephone operations more than 10 years ago. Even within individual communities, such as Plano and Keller, Verizon is the historical phone provider in some parts of town, while AT&T offers service in other parts of the same community.
Although some video overlap would appear inevitable, the Frisco and Allen forays go beyond any kind of minor overbuild.
NEW OVERBUILD ECONOMICS
The net effect is that Verizon, in one bold stroke, is striking down what had been the conventional wisdom on overbuilding, that two wireline video providers could barely survive in the same market and that three would be tantamount to financial suicide.
The track record of non-AT&T and Verizon overbuilds of cable is mixed. WOW, RCN, Knology, Grande, Surewest and others have managed to sustain a foothold in some markets, aided by the ability to offer three services---data and voice, along with video--- in effect chasing the accumulated telecommunications spending of $100+ in the average home, versus $40 to $50 for a video-only service.
But some of those overbuilders are also selling off operations, consolidating and exploring financial alternatives, indicating that overbuilds, at least by smaller competitors, is a risky business.
Verizon, of course, is not small, and also provides wireless service. The average ARPU of a FiOS subscriber is north of $120, and the wireless component could boost ARPUs to $200 a month. A sizable chunk of money is at stake.
VERIZON'S ADVANTAGES
In any “nonhome” market where Verizon offers FiOS, it has a number of advantages (business, political, technological, operational) to build beyond its initial “phone” service territory:
First, Verizon has already built a video hub office in Texas, and has the manpower (installers, technicians and CSRs) already hired. From a construction standpoint, it’s nothing more complicated than laying fiber into the next subdivision and is no different, economically, from extending service inside Verizon territory.
Second, the area has already been bombarded with FiOS advertisements, so hundreds of customers are already pre-disposed to FiOS.
Third, in statewide franchise states, like Texas, Verizon can file service area amendments without public fanfare, and start offering service in a matter of weeks, without the drudgery of going town to town for franchise approvals.
Fourth, Verizon is accustomed to competing against AT&T (wireless, enterprise), unlike cable operators who typically don't compete against each other in the same territory.
Fifth, Verizon likely believes, with some justification, its FiOS data and TV services are better than AT&T. FiOS’s top speed of 50 Mbps is five times faster than AT&T’s top U-verse speed (10 Mbps). AT&T can respond with pair bonding, but Verizon’s GPON (gigabit passive optical network) architecture will increase the bandwidth ante again. FiOS also appears to be a more stable video platform, at the moment, and isn’t subject to AT&T’s HD stream and distance-from-the-VRAD limitations.
Sixth, Verizon already has a base of subscribers in these overbuild areas: the company’s wireless-phone customers. It would be easy to text them, e-mail them or direct-mail information about FiOS TV and data services.
Seventh, the absence of copper phone plant and thus legacy wireless phone service is actually an advantage. Verizon can go in “clean” without legacy copper issues to wrestle with.
Still, can there possibly be a return on investment for Verizon to compete against not only AT&T, but incumbent cable companies (largely Time Warner Cable in this case), not to mention DirecTV and DISH Network?
If the answer from Frisco and Allen is yes, it’s time to rewrite the book on overbuild economics, again.