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Cable Technology Feature Article

March 08, 2011

Frontier FiOS Video Challenges Illustrate Scale Issues

By Gary Kim, Contributing Editor

Communications and video entertainment are scale businesses, requiring a certain amount of size to operate profitably, as is the case in many other businesses. Frontier Communications, which recently acquired assets from Verizon (News - Alert), is the latest example. 

Frontier Communications paid $8.6 billion for Verizon's cable television, broadband Internet and landline phone business in 14 states, but has discovered the impact subscriber scale can have on a video entertainment business. 

Frontier recently notified cable regulators in a number of communities that it does not intend to renew its video franchises in a number of Oregon communities. The notification does not affect current offerings, but does put franchising authorities on notice that Frontier might not extend its current franchises for another 12-year term.

Frontier Vice President Steve Crosby says the company's "actual implementation decisions will be business driven." At this time, there is no change in its FiOS (News - Alert) video offerings, for the moment including the Yamhill County cities of McMinnville, Dundee and Newberg and Clackamas County city of Wilsonville.

The termination will cost the three local cities $171,000 in franchises fees per fiscal year. However, the decision will probably be felt more keenly by FiOS TV customers, at least some of whom it is trying to mollify with subsidized deals on DirecTV (News - Alert) satellite service.

Frontier earlier had announced rate hikes of about 46 percent that the company has yet to impose. The standard, 220-channel plan -- originally priced at $65 -- would have been repriced to $95. The higher rates were supposed to take effect at the beginning of the year for new customers, and Feb. 18, for current customers with expiring contracts; but no actual hikes yet have been announced and put into place. 

Frontier also raised its FiOS TV installation charges from $79 to $500, in part because each new install reportedly costs about $800 in additional cost, per home. 

One has to wonder whether scale is a direct cause of the issues. Verizon most likely has programming agreements that are much more favorable than what Frontier Communications can obtain, at its current level of subscribership. 

German market research firm Goldmedia in 2009 studied IPTV launches in Germany, Austria and Switzerland and determined that building and launching an IPTV (News - Alert) service becomes viable for a service provider when they have at least 2.5 million broadband customers. That obviously is a hurdle few rural telcos can match. On the other hand, lots of small rural telcos now offer IPTV, and though nobody I've talked to actually claims to be making much money on it, it is not impossible for a small rural telco to offer IPTV. IPTV does not turn out to be the "silver bullet" for telecommunications companies, but has to be very carefully managed to succeed," argued Roland Berger Strategy Consultants.

Also, many rural telcos operate their own classic cable TV services, and that approach can provide better economics for a small rural operator than an IPTV approach.

The point, though, is that communications and entertainment video are scale businesses. Programming costs are but one example. As large as Qwest (News - Alert) Communications once was, among U.S. telcos, Qwest did not have the scale to make a business out of its own wireless business. 

Gary Kim is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Tammy Wolf