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COMPARATIVE ANALYSIS OF THE RBOCS STRATEGIC ENTRY
INTO THE VIDEO SERVICES MARKET

By

Mohamed A Malouche

A THESIS

Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunications

1997

ABSTRACT

This thesis examines an aspect of the convergence between information
technologies and industries, the RBOCs strategic entry into the video services market.
Its aim is twofold. First, it provides a proﬁle of some common characteristics of RBOCs
video services targeted areas. Demographic, socioeconomic and geographical data are
examined and analyzed for every trial. Second, it compares the approaches and
motivations for the RBOCs entry into the video services market based on their prior
experiences, technologies, regulation and market characteristics.

Empirical results show that selected areas proﬁles depend on the type of services
offered and on the technology used. High-income areas are targeted when RBOCs are
offering enhanced cable services (through a better network or a better bargain than the
incumbent). High-income areas are not necessarily targeted when it comes to interactive
or broadband services. Instead these services are provided in metropolitan areas or
suburbs of metro areas. “Interim” technologies (ADSL, MMDS, DBS) are not offered in
afﬂuent places but are more likely to be provided in less costly, convenient areas, in high-

cable penetration markets.

The qualitative study of RBOCs entrance in video shows that their video
strategies depend on their other businesses, on the market structure and on the
technologies adopted. RBOCs are dropping and adding technologies and services in order
to move to more economically realistic video deployments. Two main strategies have
been identiﬁed. The ﬁrst is a network-centered strategy that focuses more on building a
broadband network through which all services would be provided. The second is a
services-centered strategy that focuses more on acquiring the experience to manage video
services through acquisitions or international experience.

In order to gain market shares RBOCs are joining forces to differentiate their
content and provide more choices. However, original programming is not yet on their
agenda and programming differences tend to relate to offering certain channels in basic

instead of as premium at competitive prices.

ACKNOWLEDGMENTS

I would like to express my appreciation and gratitude to the following individuals.
I have great respect for Professor Charles Steinﬁeld, my advisor, who inspired the writing
and supervised the preparation of this work.
Much respect must go as well to Professor Johannes Bauer who have provided me the
basis for this thesis.
I would like to express my deep thanks to Professor Joey Reagan for his insight and
assistance. Professor Reagan for whom I worked as a teaching assistant in
Telecommunications Technologies continually helped and guided me throughout the
accomplishment of this work.
I am greatly undebted to my family for the many ways in which they offered me their
support. I would like to especially thank my brother, Mehdi, for his helpful suggestions
and his tremendous patience.
Lastly, but of paramount importance, my sincere appreciation and thanks to my ﬁancee,
Myriam, for her continuing understanding, support and encouragement.

To All, I am deeply grateful.

iv

TABLE OF CONTENTS

ACKNOWLEDGMENTS ........................................................................................................... ii
TABLE OF CONTENTS ........................................................................................................... iii
LIST OF TABLES ..................................................................................................................... V
FIGURE ................................................................................................................................ vi
INTRODUCTION ................................................................................................................ l
1) PRESENTATION ................................................................................................................. l
2) PURPOSE OF THIS THESIS ................................................................................................... 3
CHAPTER 1: THEORY AND CONTEXT ......................................................................... 4
1.1) ENTRY STRATEGY, ADOPTION OF NEW SERVICES ............................................................ 4
1.1.1) Introduction ............................................................................................................ 4
1.1.2) Entry strategy: economic and marketing literature ............................................... 5
1.1.3) Adoption of new services and socio-economic characteristics ............................ 10
1.1.4) Will there be a demand for broadband video services? ....................................... 12
1 .1 .5 ) Analytical framework, Research questions .......................................................... 16
1.1.6) Limitations of the study ........................................................................................ 22
CHAPTER II: RBOCS VIDEO TRIALS DEMOGRAPHIC ANALYSIS ........................ 24
2.1) INTRODUCTION ............................................................................................................ 24
2.2) METHODOLOGY ........................................................................................................... 24
2.2.1) Introduction .......................................................................................................... 24
2.2.2) Criteria measurement ........................................................................................... 25
2.2.3) Excluded locations ............................................................................................... 26
2.3)EMPIRICAL FINDINGS ANALYSIS .................................................................................... 28
2.3.1) Broadband networks are build within each RBOC telephone service area ......... 28
2.3.2) Trials are located within or next to metro areas .................................................. 30
2.3.3) Population concentration ..................................................................................... 32
2.3.4) Aﬁluent suburbs .................................................................................................... 33
2.3.5) Conclusion ............................................................................................................ 39
2.4) NON CONSISTENT CRITERIA .......................................................................................... 40
2.4. I) High-level of education ........................................................................................ 40
2.4.2) Age ........................................................................................................................ 42
2.5) WHY A FEw TRIAL AREAS DO NOT FIT WITH THE PROFILE? ........................................... 46
2.5. 1) Suitability ............................................................................................................. 46
2.5.2) High cable penetration ......................................................................................... 48

2.5.3) Competitive response ........................................................................................... 51

2.5.4) RBOCs: “We are not redlining ” .......................................................................... 52
2.6) SUMMARY OF EMPIRICAL FINDINGS ................................................................ 54
CHAPTER III: RBOCS VIDEO STRATEGIES ............................................................... 56
3.1) INTRODUCTION ............................................................................................................ 56
3.2) HISTORICAL INVOLVEMENT OF RBOCS IN VIDEO SERVICES PROVISION ....................... 57
3.3) CONTEXTUAL CHANGES ............................................................................................... 60

3.3.1) Introduction .......................................................................................................... 60

3.3.2) Evolution of cable regulation and market structure: impact on RBOCs ............. 60

3.3.3) Evolution of video technologies and its impact on RBOCs .................................. 64
3.4) A NEW RBOCS VIDEO ORIENTATION ........................................................................... 67

3.4.1) Same objective, diﬁ'erent strategies ...................................................................... 67

3.4.2) Changing strategies .............................................................................................. 69

3.4.3) RBOCs video strategies depend on their other businesses .................................. 71
3.5) SHORT-TERM AND LONG-TERM STRATEGIES ................................................................. 73

3.5.1) Introduction .......................................................................................................... 73

3.5.2) Short term and long term video strategies at the corporate level ........................ 74
3.6) How WILL RBOCS GAIN MARKET SHARES IN THE COMPETTTIVE VIDEO MARKET:
BUSINESS UNIT STRATEGIES ................................................................................................. 94

3.6.1) Gain experience and know the customer best ...................................................... 94

3.6.2) Join forces to create content ................................................................................ 96

3.6.3) RBOCs key Diﬁ‘erentiating arguments ................................................................. 97
3.7) How ARE RBOC HAVING THE SUFFICIENT FINANCIAL RESOURCES TO SUSTAIN THEIR
VIDEO ACTIVITIES .............................................................................................................. 105
CONCLUSION ................................................................................................................ 109
APPENDIX 1 ................................................................................................................... 1 14
APPENDIX 2 ................................................................................................................... 126
BIBLIOGRAPHY ............................................................................................................ 128

vi

TABLE 1:

TABLE 2:
TABLE 3:
TABLE 4:
TABLE 5:
TABLE 6:

TABLE 7:

LIST OF TABLES

Classiﬁcation of trials relatively to Median Household Income
and nature of services ....................................................................................... 4O

Classiﬁcation of trials relatively to educational level and nature of services ..42

Classiﬁcation of trials relatively to age and nature of services ........................ 45
Original and relevant criteria ........................................................................... 55
Community proﬁle by technology and services ............................................... 55
RBOCS Short-term and long-term technical systems ....................................... 74
Summary ........................................................................................................ 110

vii

FIGURE

FIGURE 1: Analytical framework for studying RBOCS entry strategies

in video services .............................................................................................. 21

viii

INTRODUCTION

1) Presentation

The evolution of technology along with regulation changes have deeply modified
the context in which the Regional Bell Operating Companies (RBOCS) deﬁned their
strategies. Now that the new Telecommunications Act of 1996 has passed, one of the
current strategic dilemmas for all telecommunications actors is Where to invest.

Local telephony, long-distance, video, intemet, high-speed data transmission and many
other services are all strategic and growing businesses.

This thesis provides an analysis of the RBOCS entrance in the video services
market and compares their different strategic approaches in the provision of video.

It is particularly interesting to examine in detail the entrance motivations of
historically local telephony providers in a completely new ﬁeld for them. Indeed, The
economic and ﬁnancial equilibrium of RBOCS is at stake. A Deloitte & Touche study
(1996) estimates that the growth of value added services, the changes in regulation as
well as digitalization might provoke a massive redistribution of market Shares in the local
business. New entrants in local telephony services “cherry-pick” the best metropolitan
areas and neglect rural regions. A Morgan Stanley analysis (Business Week, April 1996)
estimates that the Bells could lose 25% of their residential customers and 35% of the

business market over the next 10 years.

Moreover, the US cable market is valued at $26 billion in 1995 and is expected to grow
eight percent to 11% a year to $44 billion by the year 2000 (Ameritech’s Annual Report,
1995). Cable growth is twice as much as local telephony growth (a market of $123 billion
that will grow four percent to six percent a year). Cable growth is more important than the
long distance market growth (valued at $45 billion in 1995 and expected to grow eight
percent to nine percent a year).

Finally, surveys Show that US households want more and more entertainment,
integrated easy—to-use services, and would seriously consider changing providers if they
could get all their bills and troubleshooting from a single source (C/J research, TeleSight
survey 1996).

These are reasons why RBOCS need to reevaluate their historical strategies of re-

centering into their core business, and enter the video services business.

2) Mse of this thesis

This thesis covers one aspect of the convergence between telecommunications
industries. Moreover, Telcos entrance into the cable TV market is one of the outcome of
the Telecommunication Act of 1996.

The purpose of this thesis is to see how proﬁtable companies that are losing
market Shares in the local market and therefore that need to diversify their sources of
revenues will adapt to change and cope with competition after many years of monopoly.
It will also look at how corporate strategy-makers think differently according to their
strengths, weaknesses, and to see how outside factors like regulation, technology and
competition affect RBOCS video strategies.

It will review the technological, regulatory and economic aspects of the RBOCS
entrance into video services and will compare their strategies. The empirical part will
focus on the shared behavior of RBOCS in the process of targeting locations for their
initial service offerings. Further, it will examine in an exploratory fashion, the criteria
selected by RBOCS to provide video services in particular locations, and the common
features in terms of age, population concentration, Median Household Income (MHI) and
educational level between these different areas. It will include other criteria in order to
explain the RBOCS motivations to penetrate certain areas and see Why a few locations do
not match the proﬁle. This research will focus on the relationship between type of

services offered, selected markets and entry strategies.

Chapter I

THEORY AND CONTEXT

1.1) Engy strategy, adoption of new services

1.1.1) Introduction

The globalization of the economy and the convergence of information
technologies industries have turned strategic planning of telecommunications ﬁrms to a
major management concern.

Growth through diversiﬁcation into markets where these ﬁrms have not
previously competed ranks as a top priority, especially after the recent regulatory changes.
Entry into markets unfamiliar to the parent company has received less attention in the
ﬁeld of telecommunications, compared to strategies for existing businesses. The reasons
are multiple and range from the cross-ownership bans imposed by regulation to the
reminiscence of a corporate monopolistic attitude in the RBOCS.

This research is about diversiﬁcation at both the corporate and business unit
levels. It focuses on corporate decisions that affect the diversiﬁcation ﬁeld and it looks at

the unit of the corporation that made the diversiﬁcation attempt.

Entry strategy literature as well as studies that have examined adoption of new
media services and the relation between consumption of these services with

demographics and socio-economic variables will be reviewed.

1.1.2) Ent_ry strategy: economic and marketing literature

According to Biggadike (1979), entry occurs when “a ﬁrm already established in a
line of business begins to compete in a market where it did not previously operate.”

In economic theory, entry plays a crucial role in attaining competitive markets.
Economists have traditionally assigned this role to newborn ﬁrms, but have realized that
it is also performed by established ﬁrms. In the literature on product diversiﬁcation and
multi-product ﬁrms, Hines (1957) had recognized entry by established ﬁrms and argued
that established ﬁrms can enter more easily than newborn ﬁrms. Andrews (1964) has
pointed out that recognizing established ﬁrm entry means that the “differentiated
segments of industries cease to be little monopolies but subject to Strong competition of
an Oligopoly kind.” Moreover, he argued that some of the problems faced by an entrant
such as acquiring capital, establishing a brand name or reaching economies of scale are
less severe for established ﬁrms. Caves and Porter (1975) have developed this idea into
“a general theory of the mobility of ﬁrms among segments of industry.”

Despite the importance of entry by established ﬁrms, little is known about the
strategy of the business units that made the entry and its implications. Indeed, economists
have studied the state of entry conditions (Bain 1956), the public policy implications of
diversiﬁcation (Markham 1973), the effect of entry on market structure (McGuckin 1972)

and on performance (Biggadike 1979; Green and Ryans 1990; 1995) and the determinants

of entry (Orr 1974; Goercki 1975). Business researchers have focused on the ﬁrm’s total
performance as well as on its marketing mix and product line policy (Andrews 1971).
Their focus is primarily on corporate strategy, the strategy of the ﬁrm as a whole, not on
business unit Strategy and how this unit will compete for customers in the new market.

This Study will emphasize the interdependence of the business unit strategy and
the corporate strategy and will focus on What the business unit offers to customers.

In this research, strategy is used to mean the competitive market strategies that are the
RBOCS answers to three questions: Who are our potential customers? How will we
attract them? What is the level and allocation of our efforts? Strategy here is
distinguished from corporate strategy, which is more concerned with a different question
(what businesses are we in?), and with putting together a portfolio of businesses and
product- markets.

In the marketing literature, writers have given attention to a wide array of
variables. The marketing mix is composed by four main elements: product, price,
distribution and communication. Smith (1956) classiﬁed marketing strategies into two
main categories, product differentiation or market segmentation.

A product differentiation strategy described the ﬁrm with a product orientation
designed for a large number of people rather than a consumer orientation. Smith
described product differentiation approach as “building some difference into the product
and then advertising it heavily as suitable for the mass market.” Kaufman and Lane
(1996) suggested improving existing products by adding new functions or increasing the
capacity, combining existing products in new ways or coming up with innovations that

meet consumer needs. The opposite strategy is market segmentation which focuses more

on a niche of customers with common needs or characteristics. Smith described the firms
that adopt this type of strategy as “recognizing consumer heterogeneity, dividing
consumers into groups with common needs and then designing a version of the basic
product suitable for each group.”

Kotler (1972) has classiﬁed strategies into those suitable for large ﬁrms and those
suitable for smaller ﬁrms. He argued that smaller ﬁrms should concentrate on improving
their relative position by differentiating themselves from the larger ﬁrms. He suggested
four different strategies related to three of the four marketing mix basic components:
improving the product which relates to product differentiation, ﬁnding a different
segment of the market which relates to market segmentation, opening up a new channel
of distribution which relates to distribution, or developing a superior advertising
campaign which relates to communication. Other possibilities, according to Biggadike,
are innovation in personal selling, packaging, pricing, services and promotion.

In contrast, the larger ﬁrm's objective is to “discourage” or “discipline” the smaller ﬁrms.
Their strategy alternatives are innovation, fortiﬁcation (brand proliferation), confrontation
(price war) and persecution (using their relationships with suppliers, channels and
legislators to restrict smaller ﬁrms).

According to Porter (1975), ﬁrms that follow a differentiated strategy are likely to
use all the components of the marketing mix to create customer loyalty to their brand.
Non-differentiated ﬁrms rely primarily on low price to obtain a share of the market.
Biggadike ( 1979) reported a similar concept that has been developed by the Boston

Consulting Group: cost reduction versus defensible segmentation.

A cost reduction strategy seeks the greatest accumulated volume with the
objective of attaining the best cost position relative to competitors. A defensible
segmentation strategy seeks a portion of the market which the holder can defend against
large competitors, in spite of their superior cost position.

Other strategies have been suggested by marketing researchers. Heflebower
(1954) proposed at least three strategies: market segmentation, product improvement and
improved services. Hines (1957) pointed to entry strategies that Open new marketing
channels, extend geographical areas served, and offer a specialized, high-priced product
or a mass-market, low priced product. Kottke ( 1966) discussed three strategies of entry:
offering a better product at the same price, the same product at a lower price or the same
product at the same price but with better service or more attractive terms.

Entry strategies have evolved since the 705 and among the big headlines of
today’s globalized economy is a trend that particularly affects the information
technologies industry: alliances, acquisitions and mergers. Indeed, an overriding strategic
question for management of RBOCs is whether entry into the cable business Should be
made on a competitive basis or on a cooperative basis with existing ﬁrms already in the
segment or area they are seeking to enter. A number of industry observers think that the
economics of telco entry through overbuilding existing cable systems are prohibitively
unfavorable. Dholakia and Mundorf (1996) reported research by CB S/New York Times
showing that consumers are not willing to pay very much for interactive TV: only 47%
will spend between $5 and $10 per month and 48% will Spend more than $10 a month.
Consumer willingness to pay for cable’s extra TV channels being somewhat lower than

anticipated and rising competition especially from Direct Broadcast Satellite (DBS) are

factors that limit the potential for proﬁtable RBOCS video services at least in the short-
term. Cable subscriber's interest in broadband video services has been described by
Dizard (1994) as “nonplussed.” Moreover, the inexperience of telcos in offering packages
of video programming, which is a barrier to entry, may lead them to acquire existing
cable or wireless cable or DBS companies in order to gain time. There are indeed
incentives to cooperate rather than compete. However, since cooperative strategies might
lead to the creation of bottleneck monopolies, regulators will probably dismiss this kind
of agreement.

This research will identify what entry strategy or combination of entry strategies
has been developed by RBOCS to enter video services. It will be based on the study of the
context, targeted segments and marketing mix elements.

At the business unit level, the literature provides several strategies: product
differentiation that actually uses all the mix components, market segmentation, new
channels Of distribution, superior communication campaign, innovation in packaging or
bundling, innovation in pricing or confrontation (price war), innovation or improvement
in services, extension of geographical areas served and exploitation of “market position”
(skills, brand name, prior experience, level of investments).

Theoretically, these strategies can be applied separately but they are usually
mixed. Combinations of strategies are endless because even changing only one of the
marketing mix components results in a different entry Strategy.

At the corporate level, video will compete with other multiple business

opportunities that emerged as a result of the Telecom deregulation of 1996.

10

As for business units strategies, RBOCS corporate strategies are multiple. The National
Association of Broadcasters (NAB) has identiﬁed two main orientations that have been
used by telephone companies to diversify into Video services: focusing on Operating a
cable TV system (services-centered), or developing a broadband network that will be able
to handle a lot of services (network-centered). A third strategy consists of a combination

of these two, a hybrid network/services approach.

1.1.3) Adoption of new services and socio-economic characteristics

The empirical study will examine closely one aspect of entry strategy, the targeted
markets. The diffusion theory literature has given considerable attention on the
characteristics of innovators and other adopters' categories. Perhaps the most prevalent
research topic within consumer diffusion theory has been to ﬁnd the proﬁle of innovators
for particular product categories. The overall conclusion is that there is not a generalized
innovator across product categories and that distinct innovator proﬁles must be obtained
by product category or interest domain. A review of research across product categories by
Robertson, Zielinski and Ward (1984) indicated some tendencies for innovators to have
the following characteristics: higher income, higher education, younger, more socially
mobile, more favorable attitudes toward risk, greater social participation and high opinion
leadership. Rogers (1983) showed that innovators and early adopters of innovations are
likely to be more upscale than late majority or laggards. Atkin (1993) pointed out that
Rogers’ ﬁndings “stem from the assumption that education could make one more aware

of adoption beneﬁts, while income is necessary in overcoming cost barriers to such

purchases.”

11

Adoption of cable TV studies have shown that “older households, especially those
without children, and low-income homes are relatively unlikely to have cable” (Atkin &
La Rose 1996). Papazian (1994) found that middle age and upper income are associated
with heavy investment in video equipment and services. Different research on cable
portrayed an upscale subscriber proﬁle that ﬁts with Rogers’ diffusion of innovation
theory (La Rose & Atkin 1988; Greenberg, Heeter, D’Alessio & Sipes 1988). Subscribers
to premium channels where found to have higher income, better education than basic
cable subscribers who were found to have higher incomes and better education than non-
subscribers (Krugman 1985; Wirth & Bloch 1990).

However, such variable as income or education applies more to some product
categories than others and the absence of a generalized innovator still holds as the overall
conclusion. A Link Resources study (1992) showed that high income is correlated to
adoption of answering machines, personal computer, fax machines and CD player, but is
less correlated to adoption of VCRS and video-game console.

Demographic ﬁndings related to diffusion of innovations vary from research to
research and are likely to have changed in relation to the rise in media offerings. Indeed,
recent research contradicts Rogers’ type of upscale proﬁle and diminishes the role of
demographics. Reagan showed that early adopter's proﬁle is not valid for all technologies
(1987) and suggested differences among technology adopters (1991). Jeffres and Atkin
(1996) showed that education and income are negatively related to use of technology for
consumer purposes.

These ﬁndings demonstrate that conventional demographics and socio-economics

variables are not enough to measure the adoption rate of users and get a proﬁle of users of

12

information technologies. Other subjective measures Should be included, as well as an

analysis of the particular product and its potential demand.

1.1.4) Will tere be a demand for broadband video services?

The success of RBOCs broadband video business will be determined by consumer
demand for interactive video services. Unless the demand for switched video is strong,
households will continue to be served separately by cable TV networks and twisted pair
telephony networks (Johnson & Reed 1992). New technologies introduced by RBOCS
will be successful only if they are embedded into easy-to-use and understandable
applications that are perceived useful by households (Samuelsson 1996). In 1991,
consumer purchase of entertainment services (basic cable, video rental, movies) was
estimated at $45 billion, or $475 per household, per year (Bilotti, Hanson, Mac Donald
1993). Will RBOCS video services increase the overall market or simply take market
Shares from existing markets, such as Video rental and premium cable channels?
According to Dholakia and Mundorf (1996), different indications such as consumer
interest, willingness to pay and early trials‘ results are either in favor or skeptical about an

existing demand.

1.1.4. 1) Consumer Interest
Bell Atlantic’s Ray Smith expects to see customers attracted by Video On
Demand (VOD), interactive games and home shopping. Movies on demand will compete
with the $12-$15 billion video rental business, interactive games with the $6 billion in-

home video games business and home shopping will compete with incumbent networks

13

like home shopping network or QVC which achieved $2.5 billion in 1993. A survey
conducted by CBS/New York Times ( 1993) Showed that 77% of respondents would like
to have ready access to replays of past shows, a form of video—on-demand (Dholakia &
Mundorf). A Deloitte & Touche report (1996) estimates a ﬁgure of 94% popularity rating
for Movies On Demand. Moreover, a study done by PacTel (PacTel’S press releases:
“New research could spur entertainment industry to digitize more movies” 1995) reveals
that consumers prefer MPEG digital video and sound compared to VHS.

However, research by Bryant and Love (1996) indicated limited consumer interest
in advanced technologies. The sensationalistic way the media often have handled the
“information superhighway” might discourage consumers use of advanced interactive
technologies and generate a lack of conﬁdence from the public. Becoming used to the
new technologies is often perceived as an inconvenience. Public opinion polls conducted
by Gozenbach and McCord (1994) showed that fewer than 40% of the respondents saw
themselves as being regular users of interactive movies or television. A survey conducted
by MCI reported that only 24% found great appeal in the 500 channels environment and
35% reported that they have “very little” appeal. A nationwide poll of 1,000 respondents
by Clinton Research Services (1996) found that only 18% were extremely or very
interested in interactive media and 38% showed no interest whatsoever. Such lack of
conﬁdence and interest can be a barrier to the adoption and use of broadband video
services. These surveys reveal an apparent gap between marketers' forecasts and general
consumer interest. Moreover, it has been shown that the source of proﬁts in video rentals
comes from late fees that do not exist in VOD. Therefore, VOD providers will need to

raise their prices to gain proﬁts. That may be another factor that affects demand.

l4

Dholakia (1996) showed that the appeal for new broadband video services is highest
among consumers who currently view movies at home and have invested in technologies
that allow viewing movies at home. To succeed broadband video services will have to

appeal to selected market segments.

1.1.4.2) Willingness to pay?

The ﬁgures above demonstrate that certain consumers are spending money on
interactive games, home shopping services and VOD. Households' expenditures for
media entertainment have risen steadily from 7.71% in 1993 to 9.43% in 1994 (The
Entertainment Economy 1994).

However, many writers in the trade magazines have expressed concerns about the
possible lack of demand for broadband video services. Research by CBS/New York
Times (in Dholakia & Mundorf 1996) showed that consumers are not willing to pay very
much for interactive TV: only 47 % will spend between $5 and $10 per month and 48%
will spend more than $10 a month.

Carey (1992) asserted that media expenditures are relatively constant. Therefore,
given this constancy of budgeting for information and communication, new services will
have to offer added-value in order to substitute expenditures from other parts of the

household's budget.

1.1.4.3) Early trials consumer behavior results
In the mid 19908, movies have become the prime form of video entertainment--

whether through basic, premium cable, VCR, theater-- (Dholakia 1996) with 85% of the

15

movies consumed by households inside their homes. Consequently, telephone companies
have been interested in getting a share of this market. In July 1992, AT&T, TCI and US
West began a test of VOD and Near Video On Demand (NVOD) in Littleton, CO. Two
and a half movies were rented per month (versus 2.6 PPV per year estimated by Paul
Kagan Associates), or 12 times more. Consumers were paying $0.99 to $3.99 per movie
and payment per month averaged between $6.00 and $7.00. About 70% of the households
used these services per month versus 20% for PPV. A Similar trial conducted by Bell
Atlantic showed that the buy rate for NVOD in its Fairfax, VA trial was twelve times
more than the average buy rate of PPV (Bell Atlantic press releases, www.ba.com 1996).
Moreover, the Fairfax households average of 3.3 videos purchased per month is higher
than 3.2 videos rented per month by households with a VCR (Bell Atlantic press releases,
www.ba.com 1996).

Even though the results from video-on-demand trials Showed that consumer usage
is likely to be greater than pay-per-view, it is unlikely that the VCR will be thrown out
soon. As Mundorf and Dholakia (1996) pointed out, video on demand will not yet be a
great threat to traditional video because consumers do not have the need to watch a movie
instantaneously without having to go and rent this movie.

Forecasts for information and communication technologies products are optimistic
for two main reasons. First, technology generates interest; second, it is in the interest of
those who forecast these ﬁgures to have positive results for the Information Technologies
(IT) ﬁrms that are paying them. However, these forecasts are made before a single

customer has purchased the product and, according to Carey and Elton (1996), around

16

one out of 10 product launches is successful. That is why forecasting demand and use of

new products do not always reﬂect reality and need to be interpreted cautiously.

1.1.5) Analytical framework

1. 1.5.1) Research Questions

Adoption of new services studies can provide proﬁles of those who are relatively
early in using RBOCS video services. Entry strategies can provide several kinds of
strategies to penetrate the markets composed by these targeted people.

In fact, RBOCs are offering two main categories of products. First are enhanced
cable services that cannot be considered innovations but improved services. This type of
service can be theoretically offered to any market, but has actually been offered by
RBOCS in carefully selected areas. Second are interactive services that can be considered
as innovation regarding their quality and new features. These services have also been
offered to selected regions. The type of entry strategy used for these two types of services
will be examined.

In the light of the literature reviewed above, the study will address two research
questions. Each question has an intermediate research question.

First, how do video strategies between RBOCs diﬁer? The intermediate research
question is: what strategies were used to enter the market, diﬂerentiate its oﬁer and
attract customers?

The second research question is what factors inﬂuence the RBOCS communities
selection process? Four demographic and socio-economic variables will be tested: age,

population concentration, MHI and education level of the area targeted.

17

The intermediate research question is therefore: on what demographic and socio-

economic basis did the RBOCs enter the video market?

1. 1.5.2) Criteria relevancy
1.1.5.2.1) Age

This criterion has been selected to test if age has inﬂuenced the RBOCS’
communities selection process. The literature showed that older people spend much more
time than younger people at home and thus might entertain with TV more than others.
Moreover, Papazian (1993) showed that for regular TV use, older consumers watch more
TV than younger consumers (according to the Census bureau, elderly people are over 65).

However, Kerschner & Chelsvig (1981) and Zeithmal & Gilly (1987) pointed out
that older adults are generally more reluctant to use emerging technologies than younger
people. Further, the fact that RBOCS are new competitors providing new interactive
services might jeopardize the desire of a stability and routine among old people. This
desire might make older people less likely than others to change providers and adopt new
services. Research conducted at Bellcore (in Baldwin, Mc Voy, Steinﬁeld 1996) Showed
that greater consumption of video media is associated with younger families. An Arbitron
study (Inter@ctive week November 25, 1996) revealed that old people show below-
average comfort with technology and change. Papazian (1993) showed that when video
use is expanded to include premium channels, Pay Per View (PPV) channels and VCR,
heavier video users are mostly middle-aged. Therefore, the question that will be
examined is Whether RBOCS are targeting elderly people because they might be heavy

TV viewers or younger people because they are more likely to adopt their new services.

18

l . 1.5.2.2) Area population concentration
The question of whether RBOCS have decided to build enhanced networks,
upgrade their existing networks or provide video services within or next to populous
areas (like metropolitan areas) or in rural areas will be studied. If population
concentration matters to them or if it is not related to their selection process will be put
under scrutiny. Indeed, area population concentration might not intervene in the process
of selecting the trial areas, but can be of strategic importance if the RBOC has in mind a

long term network deployment plan to important markets like metro areas.

1.1.5.2.3) Median Household Income

“The MHI is the amount which divides the household income distribution into
two equals groups, half having incomes above the median, half having incomes below the
median” (US Census bureau).

On one Side, this criterion is crucial Since RBOCS want to maximize their profits
and prosperous communities are likely to provide the best return on investment.
Moreover, afﬂuent places do have important spending habits and therefore might be early
adopters of new expensive services. Finally the full service network might be given its
best chance to succeed when the test area is a high-income place as pointed out in the
review of some diffusion theory authors.

On the other side, the RBOCS know that they are not going to make Signiﬁcant
proﬁts in the ﬁrst few years, so why not pick locations that would defuse the threat that

someone could accuse them of cherry-picking and avoid time and money consuming law

19

suits. According to Backer Spielvogel Bates agency (1993), Americans are unlikely to
spend signiﬁcantly more for entertainment because the MHI is down by $2,000 from its
1989 high (Backer Spielvogel Bates agency: “future effects of new consumer and
commercial communication technologies” 1993). Afﬂuent households are therefore an
attractive target market, but is also the group that seems to have the least leisure time. The
issue therefore is to see whether there is a relationship between income and locations

where trials have been set up.

1. 1.5.2.4) Educational attainment

The literature above showed that high education level is associated with greater
use of new services, an ability to change supplier if it provides better services and a
likeliness to buy innovative services. Indeed a high education level might be associated
with more receptivity to new technologies and new services.

A study conducted by Reagan (1987) showed that high education is correlated
with VCR ownership. However, another study by Atkin and Jeffres (1996) revealed that
television and movies viewing are inversely correlated with income and education level.
Indeed, well-educated people Spend more time at work and have other sources of
entertainment, like reading books. Typically, penetration of cable services is greater in
areas that are not at the top of the income and educational attainment scale. The issue

therefore is to see whether there is a relationship between education level and the areas

where trials have been set up.

20

The research question that relates to these four criteria is:

To what extent are age, population concentration, MHI and education inﬂuencing the
RBOCs communities' selection process?

According to the literature cited above, four hypotheses will be tested in
answering this research question. First, younger people are a privileged RBOCS video
services target. Second, the most attractive opportunities for RBOCS video services are
found in high-concentration of people, residential areas. Third, video trials are held in
high-income communities to insure the best return on investment. Finally, fourth, better
educated households are more likely to be targeted by RBOCS because they are more

likely to use new technologies.

21

1.1.5.3) Entry Strategy model

The analysis will examine the entry Strategy of RBOCs in video according to
different aspects. The target market and its demographic and socio-economic
characteristics are the subject of the empirical study. Figure 1 examines the causal factors
that affect performance. However, only the context, mainly the regulatory and
technological changes, the sources of advantages and motivations to enter video will be
thoroughly examined. This study is solely concerned with what have affected the
formulation of RBOCS strategies. Finally, the focus will be on RBOCs video strategies at
both the video business unit and at the corporate level.

Figure 1. Analytical framework for studying RBOCS entry strategies in video services

   

CONTEXT _> ENTRY STRATEGY b PERFORMANCE

22

1.1.6) Limitations of the study

This research has some speciﬁc limitations. First, it does not attempt to predict the
failure or success of any of the strategies adopted by RBOCS. Indeed, it will not measure
the performance related to RBOCS entry into video simply because RBOCS are just
starting in this new business, and there are no available data over a period of time that
allow the measurement of success or failure. This research is solely concerned with the
characteristics of RBOCS selected markets, the services they are offering and how these
relate to their video business units strategies.

Second, several studies Show that intention to use new technologies for consumer
purposes is strongly related to media use or at least to the adoption of another technology
(Reagan 1989). Movie consumption, ownership of camcorder, VCR or any other video
device and more generally investment in video technologies and services are related to
adoption of new video services. However, the empirical part of the study is based on
statistical data that describe the main demographic and socioeconomic characteristics of
the areas where RBOCS are doing video trials. It is not a research using a sample of
persons and asking them about these characteristics or about their consumption and
interests in video services and related information technologies products. Not having this
kind of data at the level of all the cities where RBOCS are launching their video services
is one of the weakness of this study.

Third, using the relevant state demographics and socio-economic data as a means
of comparison with the data for each targeted city might be problematic. Indeed, the state

data are not totally independent from the cities data since data from the cities has been

23

used to obtain the state data. However, the main goal of this study is to look at RBOCS
strategic selection process. Therefore, the data of the states will be used as a means of
comparison with cities, because the goal is to see in terms of strategies what
demographics and socio-economic criteria have inﬂuenced the RBOCS choices.

Finally, the data collected have been extracted from the 1990 Census and are
aggregated. For example if an RBOC is doing a trial in a precise part of the city of
Boston, the 1990 US Census does not provide demographic and socio—economic data for
this particular area but for the whole city of Boston. That could obviously lead to some

misinterpretations concerning these particular areas.

Chapter II

RBOCS VIDEO TRIALS DEMOGRAPHIC ANALYSIS

2.1) Introduction

The aim of this empirical analysis is to look at the demographic, geographical and
economic speciﬁcs of areas where the RBOCS are doing their video trials.

This analysis will look at the characteristics of each target and try to see if they are
related to the strategies adopted by each RBOC to penetrate the video services market.

It is believed that all RBOCS video trials have been included in this study, at least
those that have been publicly announced. Therefore, to current knowledge, this is the

census not a sample that is being used.

2.2) Methodology

2.2.1) Introduction
The universe chosen is the households in each of the target areas. Indeed
consumption of video services (cable TV, VCR, video games...) occurs at the household

level. Each household has one cable subscription, one VCR and so on.

25

Four sets of consumer variables have been used to deﬁne the proﬁle of the
households targeted by the RBOCS. How age, population concentration, MHI and
educational attainments of the target households differ from the average households at the
state level will be analyzed. In fact, by households it is the householder, his/her age, MHI,
educational attainment and the population concentration of the area he/She is living in that
are designated. The analysis will consist on ﬁnding out whether the RBOCS target areas
do have in common a certain amount of these criteria.

Age, population concentration, MHI and educational attainment that have been

chosen will be measured now.

2.2.2) Criteria measurement

For each of the RBOC trial areas, the age of the households represented by the age
of the householder has been classiﬁed in six categories: between 15 and 24, 25 and 34, 35
and 44, 45 and 54, 55 and 64, and 65 and over.

The population concentration criterion has been measured by two types of
information: ﬁrst, the actual number of households in the trial area and second whether
this area is next to or within a large metro area. The US census bureau deﬁnes
metropolitan areas as large population nucleus with more than 50,000 inhabitants.

The MHI has been measured for each one the RBOCS trials locations and
compared to the MHI of the relevant state.

Measure of education is the percentage of people who went to college, including

people who went to college but did not get a degree, people who got either an associate

26

degree, a bachelor’s degree or a graduate degree have been ranked in the “high education

level” category. The data have been collected from the US 1990 census (Appendix 1).

2.2.3) Excluded locations

Several types of trials and market tests of full service networks are in progress
now. Baldwin, McVoy and Steinﬁeld (1996) pointed out that “market tests range from
forecasting the demand for a narrow aspect of service or evaluate the technology that has
been used, all the way to performing a fully operational integrated broadband network
with interactive services, management software and customer premises equipment,
simultaneously doing a technical trial and market test.” Technical trials are usually
performed in schools or company employees homes. Since these types of trials are not
commercial, their motivations are not the same as if they would have involve real
customers. Therefore, technical trials, called also internal or limited ﬁeld, will not be
taken into account in the analysis.

This study will only consider the market trials that have been directly initiated by
the RBOCs inside or outside of their local telephone provision area. Indeed, many
RBOCS have chosen to implement a market trial in “convenient” locations after acquiring
a company that has assets in these locations. These “convenient” locations should not be
included in the analysis Since they have not been directly chosen by the RBOC using the
same range of criteria that would have been applied for any location. “Convenient”
locations have been chosen because they require fewer investments and are a means to
immediately penetrate the market. Since the purpose of this research is to look at RBOCs

motivations to enter a certain proﬁle area, cable or wireless acquired company

27

“convenient” locations will not be included in the analysis. Those are the result Of another
type of business decision. For example, US West has acquired Continental Cable in 1996
but has not directly chosen Continental’s cable provision locations. That was
Continental’s own past business decisions. Therefore, these locations can not be included
because they are not the choice of US West video policy-makers, even though the two
companies have merged.

All the locations that have been chosen before the acquisitions have not been
included in the analysis. However, the locations that have been selected after the merger
will be considered. Therefore, the analysis will focus on direct (as opposed to through
acquisition) market or technical trials of a commercial nature (as Opposed to internal).

Ameritech is doing 25 basic cable trials. Bell Atlantic is common carrier in three
locations, has six interactive broadband trials and is using interim technologies in ﬁve
locations. US West has one interactive broadband trial and eight basic cable trials. PacTel
uses interim technologies in three locations and has four interactive trials. SBC has one
interactive trial, two interim and two in basic cable. Bell South has ﬁve interactive, one

interim and six basic cable trials. Finally, Nynex has two interactive and one interim trial.

28

2.3)Empirical ﬁndings analysis

The analysis of the data collected for each of the RBOCS trials locations has
revealed a certain number of common features between the test areas, directly related to
the selected criteria. Those similarities will provide a foundation to establish a proﬁle of
the typical targeted region.

It is important to acknowledge that not all the target areas match the profile.
Indeed, a few locations do not correspond to the established proﬁle on at least one of the
criteria described above. The characteristics of these locations and why they do not ﬁt to
the proﬁle will be examined carefully. New criteria will be included in order to

understand the RBOCS motivations in these particular locations.

2.3.1) Broadband networere built within eaﬂi RBOC telephone service a_r§_a_

It has been noticed that each RBOC has been trying to provide video services in
its telephone service area, ﬁrst. Since they are building broadband networks that require
ﬁnancial and human investments, RBOCs would rather do it within their operating
regions. Indeed, in their regions, they do have facilities as well as an enhanced network. It
is important to notice that the RBOCS operate in their respective States, but never in GTE
or other independent carriers telephone service areas within their service areas.

Two RBOCS, US West and SBC are providing cable services outside of their
regions, in addition to the services they are currently testing in their telephone service

areas. It is interesting to point out that both companies are providing basic cable services

29

through the acquisition of cable companies. US West has acquired MediaOne and
operates in suburbs of Atlanta whereas SBC provides cable in communities in Virginia
and Maryland as a result of the Hauser Communications acquisition. These are US West
and SBC direct investment decisions to acquire these companies and to choose new
locations for cable provision.

Other RBOCS have also acquired companies that deliver video. Bell Atlantic and
Nynex have jointly acquired CAI Wireless that operates Multichannel Multipoint
Distribution System (MMDS) cable systems in New York, Pennsylvania, Virginia and
Washington, DC. PacTel has acquired Cross Country Wireless that has properties in
Riverside and Orange county CA, Seattle and Spokane, WA, Greenville, SC and Tampa,
FL. PacTel did also acquire Wireless Holdings and Videotron Bay Area Wireless cable
systems.

Outside of their territories, the RBOCS have commercial activities. They are
providing basic cable services through existing technologies while upgrading their
networks. Until now coaxial cable is used by US West in suburbs of Atlanta and by SBC
in Maryland and Virginia. PacTel is using MMDS in Cross Country territories
(Washington, South Carolina and Florida) as do Nynex and Bell Atlantic in CA1 Wireless
territories (Cleveland, OH, Stockton and Bakersﬁeld, CA). They are targeting other
regions than their traditional ones and that is a means to gain experience in a new ﬁeld for
them, video, and to have access to other RBOCS’ customers.

However, when it comes to broadband, RBOCS mainly favor their own operating
regions in the provision of new services and the deployment of an advanced network.

Indeed, Bell Atlantic for example has ﬁrst tested its Switched Digital Video (SDV)

30

network with a range of new services in Dover Township, NJ, in the heart of its operating
region. US West started the largest trials in terms of households covered, in Omaha, NE,
using Hybrid Fiber Coax (HFC) and providing interactive services. PacTel has begun
trials in the San Francisco bay area using HFC and providing VOD and a range of other
new services. SBC has implemented SDV in Richardson, TX and Bell South is testing an
HFC network in Florida, Chamblee, GA, Daniel Island, SC, Alabama and Tennessee.
Finally, Nynex has started providing interactive video services to three buildings in
Manhattan using an HFC network. It is also testing SDV in Somerville, MA.

It is understandable that RBOCs are favoring the construction of new broadband
networks and the delivery of new types of services in their telephony provision regions
because of their existing facilities, the convenience of implementation and because of
customer awareness of their brand. Customers will be more likely to rely on their existing
phone providers than on others. Finally, a major reason why RBOCS are doing their trials
in their own regions is that they want to become full service providers and offer their
customers a package of services, video and telephony included (Bell Atlantic’s,
Ameritech’s, Pactel’s and Nynex’s CEOS letters to Shareowners, Annual Reports 1995;

US West’s CEO in Communacopia conference 1993).

2.3.2) Trials are mited within or next to metro areas

RBOCS are doing their trials either within the most important metro areas of their
telephone service regions or in the suburbs of these metro areas. Ameritech has, for
instance, several trials within or around the cities of Chicago, Milwaukee, Cleveland,

Columbus and Detroit. Bell Atlantic has started trials in the suburbs of Newark, NJ and

31

the suburbs of Washington DC. It also has trials in Baltimore, Philadelphia and
Pittsburgh. US West has chosen the cities of Denver, Portland, Minneapolis, Saint Paul,
Salt Lake City, Boise and Omaha. It also has properties in suburbs of Atlanta. PacTel is
focusing on California where is has entered the major metropolitan areas, San Francisco,
Los Angeles, San Diego and their suburbs. SBC is targeting suburbs of Dallas, Enid, OK,
and Little Rock, AR. It also has properties in the suburbs of Washington DC. Bell South
has begun trials in several Florida’s major cities, New Orleans, Suburbs of Atlanta,
Birmingham and Memphis. Finally Nynex has trials in New York City, Boston and
Providence, RI.

However, two trials are being held in isolated areas. Toms River, NJ for Bell
Atlantic and Dekalb county, GA for Bell South. These two exceptions and why their
respective RBOC have selected these regions will be studied in section 2.5.

RBOCS are implementing their trials within or in the suburbs of their telephone
services areas most important cities. They are seeking residential areas proximate to
important cities. RBOCS might have considered that if they start in these areas, it will be
easier to proceed in the future to an eventual deployment of broadband networks into all
these metro areas. These cities have potential customers because of the importance of the
market in terms of population but also because cable penetration is, in certain cases,
lower than in rural areas where over the air signals are weak. Cable penetration might be
an important factor that is inﬂuencing RBOCS strategic decisions to begin trials in certain
regions (see 2.5 below). The introduction of new services and an appropriate marketing
strategy might persuade non cable subscribers to try the RBOCS systems, and the cable

subscribers to switch to the RBOC video services.

32

2.3.3) Egpﬂuion concemﬁon

A close look at the distribution between suburbs of large cities and cities
themselves shows that in overall the RBOCS have targeted 25 cities and 57 suburbs
among 84 locations (Toms River and Dekalb county have not been included).
Ameritech has entered Chicago’s south side and Columbus. Bell Atlantic has focused on
Hampton Roads, VA, Baltimore, Philadelphia, Pittsburgh and Washington DC, US West
on Denver, Portland, Minneapolis, Saint Paul, Salt Lake City, Boise and Omaha, PacTel
on San Francisco, Los Angeles and San Diego, SBC on Enid, OK and Little Rock, AR,
Bell South on Orlando, Tampa, West Palm Beach, New Orleans and Memphis, and
ﬁnally Nynex on New York City. In overall, suburbs are a preferred target for RBOCS
video trials. In particular, Ameritech is targeting 23 suburbs among 25 locations, Bell
Atlantic nine among 15, and PacTel ﬁve among eight. Other RBOCS did not target as
many suburbs as Ameritech, Bell Atlantic and PacTel. Bell South for instance has six
trials among 11 in suburbs of large cities and Nynex has two among four. US West has
targeted the main cities of its telephone services area. However in Georgia, MediaOne has
entered only suburbs of Atlanta. SBC has targeted suburbs of DC outside of its territory,
and a suburb of Dallas among three locations inside of its territory.

The criterion of high-concentration of people can be applied to the cities
mentioned above. RBOCS want to insure a large number of potential customers for their

long term network deployment strategies.

33

2.3.4) Afﬂuent suburbs

When considering the ﬁgures (e. g. Appendix 1), it seems that the main incentive
for RBOCS picking up suburbs of large cities is their afﬂuence. Indeed, apart some
exceptions (see 2.5 below), RBOCS are targeting prosperous communities. Several points

related to the RBOCS focus on high income communities should be emphasized.

2.3.4.1) High-income communities are particularly targeted each time an

RBOC is providing cable TV or is a common carrier for a cable TV company.

RBOCs cable TV providers are Ameritech, US West, SBC and Bell South. Bell
Atlantic is a common carrier for Sammons Communications in New Jersey.
Ameritech is building a network for its video services separate from its telephone
network inside its ﬁve states region. With a couple of exceptions, Ameritech’s cable
markets have MHIS that exceed the MHI of the relevant state, in some cases by a little bit
but in the majority of cases by a lot. In certain areas like Naperville, H., that ranks sixth
MHI nationally, Upper Arlington, OH, Troy and Northville Township, MI, it is nearly
two times more. Twelve locations among the 25 selected by Ameritech have their MHI
superior to $40,000, 11 between $30,000 and $40,000 and only Chicago south Side and
Columbus have MHI that are below $30,000. Median household income ﬁgures tend to
understate the relative wealth of a community because family median income ﬁgures tend
to be even higher according to the US census bureau. In Michigan, only Lincoln Park has
an MHI that falls below the state level and just slightly. In Ohio, Ameritech has seven
franchises and all but one--Columbus-- have MHIS that exceed the state’s MHI level. The

Ohio Cable Telecommunications Association even argued that in Columbus, although

34

Ameritech has the franchise for the entire city, where they are signing up customers right
now, is the most afﬂuent area of town (Multichannel News, September 30, 1996). The
last area in which MHI falls below the state level for Ameritech, is the south side of
Chicago. Ameritech has decided lately to build a cable system in this area, “represented
by Rep. Bobby Rusch (D—Ill), an African American lawmaker whose house district takes
in part of the Chicago’s predominantly African-American south-Side” (Multichannel
News, “We don’t redline”, Sept 30, 1996). Ameritech has submitted a franchise proposal
to Chicago regulators. The reason why Ameritech has chosen this low-income area in the
city of Chicago will be explained (see 2.5 below). It is important to notice that Ameritech
agreed to serve Rush’s district only after he accused the telco of bypassing minority
communities. A ﬁnal remark concerns Ameritech’s distribution of trials locations within
its ﬁve states. In Indiana there are no trials. Indiana is the lowest income and lowest
concentration of people of the ﬁve states composing Ameritech telephone services area.
Ameritech is, therefore, the most obvious example of RBOC providing cable services
inside its territory to afﬂuent suburbs of metro areas.

US West provides basic cable TV services to communities in suburbs of Atlanta.
The examination of the MHIS of these communities shows clearly that they all have a
signiﬁcantly higher MHIS than the state of Georgia’s. All MHIS are well above $29,000
(Georgia’s MHI), in Fulton, Dekalb, Clayton, Cobb, Douglas, Fayette, Gwinnett and
Rockdale counties. As well SBC is providing cable services in Arlington county, VA and
Montgomery county, MD. These two cable markets have MHI that are much higher than
the relevant states, respectively $44,600 and $54,089 compare to $33,328 and $39,386.

Finally, Bell South provides cable services in several locations in Florida.

35

These places have either higher or Similar MHIS than Florida’s average. Therefore, as
basic cable services providers outside of their telephone services areas, US West, SBC
and Bell South do target high income suburbs.

Bell Atlantic is a common carrier for Sammons cable in New Jersey, more
precisely in Morris County, Madison, Florham Park and Chatham Borough. All these
communities have MHIS that exceed New Jersey MHI ($40,927) by a lot, respectively
$56,273, $56,478, $68,450 and $62,129. Therefore as a common carrier, Bell Atlantic

does target high income suburbs in its own telephone services area.

2.3.4.2) Trials that involve new services and new Ems of broadband
networks are always held in the RBOCS’ top mgkets (Income is not releva_n1)_.

When it comes to new technology, the technical test is fundamental. Therefore,
RBOCS have to give the new services as well as the new network their best chance. It is
natural to start these new experiments in their own telephone services area, for
convenience reasons. SBC is offering VOD, games and other interactive services in
Richardson, TX using an SDV broadband network. The MHI of Richardson ($50,240) is
much higher than the average MHI for Texas ($27,016). Bell Atlantic has begun to
deploy an SDV broadband network in Dover Township and Toms River in New Jersey.
Otherwise, it has tested an HFC network in Morris County, Madison, Florham Park and
Chatham Borough, NJ as well as in Baltimore, Philadelphia, Delaware county, PA and
Pittsburgh. In terms of MHI, the areas where Bell Atlantic is building SDV networks are
not wealthier than the relevant state, even though they are not far behind. Dover, NJ has

an MHI of $38,822 and Toms River, NJ, an MHI of $35,464 compared to New Jersey

36

MHI of $40,927. However, New Jersey’s I-IFC networks are being built in higher income
areas than the state’s income. Baltimore, Philadelphia and Pittsburgh have their MHIS
lower than the relevant states MHIS. Therefore, income is not a relevant criterion for Bell
Atlantic’s broadband networks deployment.

US West is doing a large commercial trial involving a whole range of new
interactive services using an HFC network in Omaha, NE. Besides being a large metro
area in Nebraska, Omaha’s MHI ($26,927) is pretty much the same as Nebraska’s MHI
($26,016). Therefore, income has not been a major reason to select this city.

PacTel has invested important amounts of money to deploy a broadband HFC
network in the San Francisco Bay area. Besides the criterion of high-concentration of
people, the San Francisco area is very wealthy. San Jose where PacTel has held its ﬁrst
HFC trial has an MHI of $46,206 compare to California’s $35,798. However, Oakland
has a lower MHI than both San Francisco’s and California’s. Therefore, the choice of the
San Francisco, as well as the LA and San Diego’s areas does not seem as an immediate
consequence of the examination of incomes but rather a common sense decision Since
these three markets are among the top markets in the country and are located within
PacTel’s telephone service area.

Bell South has chosen to upgrade its network in selected areas using HFC, except
in New Orleans. The examination of Bell South target areas MHIS reveals that Bell South
has not developed a homogeneous strategy of targeting wealthy places. To the contrary, in
every State, Bell South has chosen communities that have an MHI above and below the
relevant state’s MHI. For example in Florida, all the selected areas MHIS are about the

same as Florida’s MHI. Chamblee, GA, has an MHI ($27,157) that is a little below

37

Georgia’s MHI ($29,021). Daniel Island, SC and Memphis, TN have the same
characteristic with MHIS of respectively $25,153 compared to South Carolina’s $26,256
and $22,674 compared to Tennessee’s $24,807.

Finally, Nynex is testing an SDV network in Somerville and an I-IFC network in
Manhattan. Somerville has a lower MHI than Massachusetts whereas Manhattan is very
afﬂuent. Like Bell South, Nynex did not choose these locations primarily because of
income. Manhattan is at the heart of NYC, Nynex’s top market and ranked ﬁrst
nationwide in terms of cable subscribers number, and Somerville is located near Boston,
its video second top market.

RBOCS know that they will not make a lot of money in the ﬁrst years of trials.
Their main concern is to upgrade their network progressively in strategic areas, mainly in
their top telephony market, with a minimum cost.

In conclusion, when it comes to new broadband networks, all of the RBOCS are
doing their trials within their territory, in top markets, to give the network the greatest

chance to succeed in terms of infrastructure and maintenance.

2.3.4.3) Interim technologies --ADSL, MMDS, DBS-- are n_ot
systematically deployed in the most afﬂuent places
Five out of ten interim trials have been held in communities which MHI is lower
than the relevant state MHI. It is interesting to notice that interim technologies trials that
have been intended, among other reasons, to generate cash in order to sustain the effort to
build the broadband networks (www.vipconsult.com 1996) are not held in particularly

wealthy areas. That all of the RBOCS except PacTel-- that already invested a lot in

38

MMDS-- want to limit the cost of these trials because of their short life will be kept in
mind. Bell Atlantic has started Asymmetrical Digital Subscriber Line (ADSL) trials in
Fairfax, Reston and Hampton Roads, VA. Whereas, the ﬁrst two areas have MHIS
(respectively $50,913 and $56,884) that are well above Virginia’s MHI ($33,328), the last
one has an MHI of $30,144. Income is therefore not a factor. One reason might be linked
to marketing. Indeed ADSL is interactive and Bell Atlantic might want to test the
consumer preferences of all the income segments that could be potential users. MMDS is
also being tested by Bell Atlantic in Norfolk, VA which has a low MHI of $23,563.

PacTel is a heavy user of MMDS. It has concentrated its effort in Riverside,
Orange county and the Los Angeles area (the Riverside area has been chosen by Cross
Country Wireless (CCW) before its acquisition by PacTel since it is the location of CCW
headquarters, and will therefore not be taken into account). Los Angeles has a high
population concentration and is one of PacTel’s top markets (ranked second in the nation
by cable TV households, Broadcasting & Cable yearbook 1993). Finally, Orange county
has a much higher MHI than California’s MHI. MMDS has also been deployed in San
Diego, the third top market of PacTel (18th in the country by cable TV subscribers) and
ADSL has been deployed in San Ramon a very wealthy community which MHI’S
($63,607) is almost the double of California’s.

SBC is reselling DBS in Enid, and Little Rock. These areas have an average MHI
compare to their relevant states. Income is not the main reason that led to the choice of
these two areas. Bell South is testing MMDS in New Orleans which is one of its top

market (36th in the country by cable TV households) but has a very low MHI.

39

Finally, Nynex is testing both MMDS in communities around Boston and in
Providence, and ADSL in Boston. Providence is not a high-income area. Concerning the
Boston area, that income is not involved in the choice of these areas can not be concluded
since we only have the aggregate MHI of Boston and not the MHI of each of the

communities targeted within Boston.

2.3.5) Conclusion

Technology and type of services are determinants in the RBOCs selection process
Indeed, if RBOCS choose to deploy new broadband technologies and services, they do it
in their top markets, but not necessarily in high-income places. On the other hand, if they
decide to provide basic cable services or to be a common carrier with an enhanced
network, they more likely target the most afﬂuent suburbs of metro areas. Finally, interim
technologies trials are not particularly held in afﬂuent places but rather in less costly,
convenient areas close to top markets.

Table one Shows that RBOCS are targeting different income areas depending on

the nature of the services they want to offer in these communities.

40

Table 1: Classiﬁcation of trials relatively to Median Household Income

and nature of services

 

Median Household Income" Basic cable Interim services Interactive

services (ADSL, MMDS, DBS) broadband services

 

Percentage of trials which MHIS are 78% 12% 10%
above or equal to the relevant State

MHI

 

Percentage of trials which MHIS are 23% 27% 50%

below the relevant state MHI

 

 

 

 

 

 

*: The MHIS of the video trials locations picked up by the RBOCS have been compared to the relevant state
MHI. If the MHI of the location is above its relevant state MHI, this location has been counted as being
Above the relevant state MHI. If not it has been counted in the Below category. The total number of
trials=75

**: Washington DC has been compared to the US average MHI.

"*1 Manhattan, NY, Northville, MI and Warwick, RI have not been included because of missing data.

2.4) Non consistent criteria

2.4.1) High level of education

Even though a study conducted by Backer, Spielvogel Bates agency (1993)
showed that people who went to college do have 19% higher interest in interactive TV
than the average, it does not seem that this criterion has been a major one in the RBOCS
communities selection process, all services included. Based on the ﬁgures found for
Ameritech, it is essential to point out that afﬂuent locations are in most of the cases well

educated. Almost all their target locations are well educated. However, that does not

41

mean that education played a primary role in the selection process even though it is
common to believe that high educated people will be more likely to accept and test a new
generation of services than less educated people. The point is that Ameritech is providing
existing cable services that do not require in theory a speciﬁc proﬁle of potential
adopters. Cable is available through other providers for the segments of the population
where Ameritech is doing its trials. That is why the education criterion has been
dismissed in the case of Ameritech’s trials.

In big cities the average education level is pretty low because of the diversity of
people. Since the locations within big cities where RBOCS started their trials are not
known, the education factor for big cities cannot be analyzed. Now the focus is on low-
concentration of people areas with medium or low income. The analysis consists on
seeing if education has been a factor that inﬂuenced the RBOCS locations choices.

In Bell Atlantic’s Dover Township, NJ and Toms River, NJ respectively 32% and 43%
people went to college which is below New Jersey’s percentage of 46%. Norfolk, VA has
40% of people who went to college compares to Virginia’s 48%, and Hampton Roads has
a little more than 48%. US West, Pactel’s and SBC’S trials have only been held in top,
high-concentration of people markets or high income areas. Bell South’s Chamblee has a
39% level of education compare to Georgia’s 41%. Dekalb county’s 24% is also much
lower than Alabama’s 38%. Finally Nynex’s Providence has a level of education of 36%
which is lower than Rhode Island level of 44%.

Table two shows that the assumption that there is no relationship between nature
of services and educational level is true. Education has not been taken into account by

RBOCS in the provision of different type of services to selected communities.

 

42

Table 2: Classiﬁcation of trials relatively to Educational level and nature of services

 

Educational level" Basic cable Interim services Interactive

services (ADSL, MMDS, DBS) broadband services

 

Percentage Of trials which educational 64% 16% 20%
levels are above or equal

to the relevant state level

 

Percentage of trials which educational 45% 20% 35%

levels are below the relevant state level

 

 

 

 

 

 

*: The educational levels of the video trials locations picked up by the RBOCS have been compared to the
relevant state level. If the location educational level is above its relevant state’s, this location has been
counted as being Above the relevant state educational level. If not it has been counted in the Below
category. The total number of trials=75

**: Washington DC has been compared to the US average educational level.

***: Manhattan, NY, Northville, MI and Warwick, RI have not been included because of missing data.

2.4.2) Ag;

Old people have not been targeted by Ameritech. Indeed, a look at the proportion
of old people (over 65) in the regions selected by the RBOC gives almost an equal
number of communities that are above and below the relevant state percentage. In
Michigan, eight communities among the 13 selected, which is more than half, have fewer
people over 65 than Michigan’s average. Older age is not consistent with the implantation
strategy of Ameritech. Bell Atlantic has the same characteristic: age is not a relevant
criterion and older people are not speciﬁcally targeted. In New Jersey, three communities
among the six selected, have a higher percentage of old people than New Jersey

percentage: age is not consistent with the long term strategy adopted by Bell Atlantic.

 

43

However age might be consistent with the level of interactivity involved in the trials.
Indeed, whereas the ADSL trials Fairfax, Hampton Roads and Reston are held in younger
communities (respectively 30%,33% and 31% compared to Virginia’s 29% people
between 18-34 and 16%, 17%, eight percent compared to Virginia’s 18% people over
65), the MMDS trial is held in older communities (Norfolk has 20% of people over 65).

In California, PacTel is providing MMDS to areas that are younger than
California’s average (LA, Orange county and San Diego have respectively 18%, 16% and
17% of people over 65 whereas California’s average is 19%). Old age is therefore not a
criterion for PacTel. However, the only ADSL trial in addition for being held in an
extremely wealthy community, target a young community, San Ramon (7% of people
over 65 compared to California’s 19%). In its HFC trials, PacTel did not take into
account age Since some areas have a greater old people percentage and some others have
less older people than California’s average.

It does not seem that age intervened in the selection process of US West either.
Indeed, Omaha, as well as all the other markets that US West has chosen and then
withdrawn, are its top markets.

SBC has also chosen to enter with DBS in Enid and Little Rock. In Enid the
proportion of people over 65 is three percent more than the average of the state but that
does not mean that SBC is focusing on older people. Indeed, Little Rock is younger than
the average of Arkansas (20% of over 65 compared to an average of 26%). Bell South’s
case is interesting and might be the most valuable to test if this RBOC has focused on the
older segment of the population or not. Indeed, Florida is the state with the greater

proportion of old people in the US. However, the data collected about the trials location

44

shows that in no one of the areas chosen by Bell South, the percentage of people over 65
is higher than Florida’s average. For MMDS in New Orleans, it is right that this city has
greater percentage of old people than the relevant state but that’s not sufﬁcient to prove
that Bell South is targeting old people. Also, the data collected for both Nynex’s short
term and long-term technologies are not consistent with the criterion of old age. Indeed,
MMDS has been tested in both older areas and younger areas relatively to the relevant
state and there is until now only one single SDV trial, so nothing can be concluded.

It seems that neither older nor younger people have been a common factor of
segmentation for all the RBOCS in their early trials. Age has not been a critical criterion
for the RBOCS communities selection process.

Table three Shows that the assumption that there is no relationship between
nature of services and age is true. The percentage Of people over 55 in each trial has been
compared to the relevant state percentage. Age has not been taken into account by

RBOCS in the provision of different type of services to selected communities.

 

 

45

Table 3: Classiﬁcation of trials relatively to Age and nature of services

 

 

 

percentage of people over 55 are
below the relevant state level

percentage

 

 

 

 

Age“ Basic cable Interim services Interactive
services (ADSL, MMDS, DBS) broadband services

Percentage of trials for which 50% 17% 33%

percentages of people over 55 are

above or equal to the relevant state

level percentage

Percentage of trials for which 64% 18% 18%

 

*: The percentage of people over 55 of the video trials locations picked up by the RBOCS has been
compared to the relevant state percentage. If the location percentage is above its relevant state’s, this
location has been counted as being Above the relevant state. If not it has been counted in the Below

category. The total number of trials=75

"2 Washington DC has been compared to the US average percentage of people over 55.
"*z Manhattan, NY, Northville, MI and Warwick, RI have not been included because of missing data.

According to table one, two and three the income’s range of targeted households differs

according to the nature of services offered. High-income communities are targeted when

basic cable is offered and low income are more likely to be targeted when interactive

services are tested. Education does not look like a Signiﬁcant criterion since the

percentage of trials above and below the relevant states percentage are slightly the same

for each type of services. For the same reasons, age is not a relevant criterion.

 

46

2.5) Why a few trial areas do not ﬁt with the proﬁle?

This part will focus on the target areas that do not match with the proﬁle of
communities described above. The study will explain why some places do not correspond
to the proﬁles?

In fact, as implied above, the four factors initially selected do not always intervene
in the process of communities' selection. Age and educational attainment have been
dismissed. However, income and area population concentration play a primary role in the
RBOCS decisions. It is obvious that income plays a signiﬁcant role. As for area
population concentration, the criterion is probably best described by “top-market”
because that is really where the RBOCS are beginning their ﬁrst moves in the video ﬁeld.
Other factors may have inﬂuenced RBOCS decision when it was not related to one of the
last two criteria: suitability, high cable penetration, competitive response and avoiding the

charges of redlining.

2.5.1) Suitability

This criterion has been selected because RBOCs are trying to limit the cost of
their networks. The criterion of “convenient” locations covers acquired companies,
existing markets, suitable geographical areas or existing RBOCS facilities. In fact, most of
the RBOCS that have used acquisitions as a means to their short-term entry in the video
ﬁeld, have chosen to increase service quality and upgrade the network in existing
acquired companies’ markets. These companies have already the license rights, installed

base and transmission towers in these particular places. Bell Atlantic and Nynex have

 

47

respectively focused on Norfolk and Providence for the provision of MMDS services,
through CAI wireless acquisition and PacTel has chosen to continue targeting Riverside
and Orange counties, CA, which are CCW main markets.

A second aspect of suitability relates to topography: MMDS is line-of—sight and
requires, therefore, a ﬂat topography or where the antennas can be positioned in hills to
have the most efﬁcient coverage. Southern California is perfectly adapted to this
technology and that is one of the reasons why PacTel has chosen to deploy MMDS in
speciﬁc ﬂat areas like LA, San Diego and Orange county (PacTel’s press releases 1996).
Bell South has also used MMDS in New Orleans because of its very ﬂat topography (Bell
South Press releases 1996) and Nynex did so in Providence (Nynex’s press releases
1996).

A third aspect relates to existing facilities. Bell Atlantic has its digital video
production center in Norfolk, VA and it has launch an MMDS trial there. Nynex has an
important technical facility in Needham, MA, in the suburbs of Boston and has launched
trials in 14 communities around Boston. Finally, Bell South is building an HFC network
in Chamblee, GA, very close to the headquarters of its video group
(www.vipconsult.com).

Finally, a fourth aspect relates to rehabilitation of the telephone network. In
certain locations, the telephone service quality is getting bad because of the low quality of
twisted pair. RBOCS that have decided to build a network that will combine the provision
of telephony and video services might have chosen to construct the video network and
rehabilitate the cooper telephone network «which is due anyhow-- at the same time. A

signiﬁcant example is Bell Atlantic’s building of an SDV network in Dover Township.

 

48

Bell Atlantic had to build a new telephone network because twisted pairs have been
damaged by the salt air (Bell Atlantic communication services 1996). Therefore it has
chosen to kill two birds with one stone and build a ﬁber-to-the-curb network that will
both be a superior alternative to copper and would result in longer life and lower

maintenance, and will provide interactive video services.

2.5.2) High cable penetgrtion

 

Bell Atlantic’s Ray Smith pointed out in his interview to Vipconsult (1996) that
his company wants to compete from the beginning in “tough” markets where cable
penetration is high. Indeed, that has been materialized into two trials in Virginia using
short-term technologies, MMDS in Norfolk, and ADSL in Hampton Roads. These two
cities are very close geographically, they are only separated by a bridge, and they are one
of Cox Communications largest system. Cable penetration in 1989 was 68.5% (38th in
the top 50 cable markets ranked by penetration). Bell Atlantic is therefore experiencing a
market dominated by Cox with a relatively high cable penetration
(www.cox.com/Services.html). As Ray Smith implied, that is the best way to get
invaluable marketing and packaging insights on how to make Cox customers switch to
Bell Atlantic’s services. As well, PacTel has adopted the same strategy in San Diego.
Besides being one of its top market (San Diego’s cable penetration rate is 79.3%, ranked
8th in the country by cable penetration in 1989), this city is mainly dominated by Cox.
PacTel by deploying both an HFC network and MMDS towers wants to rapidly gain
market shares from this top cable market. The same analysis can be applied to Orlando

and West Palm Beach that had respective cable penetration rates of 71.1% (29th in the

 

49

country by cable penetration) and 76.5% (16th in the country by cable penetration) in
1989. Bell South is entering these markets with basic cable television and is enhancing its
network from analog/coax to HFC in order to compete with the incumbent, Time Warner.
MMDS and ADSL have been deployed by Nynex in communities around Boston exactly
for the same purposes as Bell Atlantic: early marketing and packaging knowledge. The
cable penetration in Boston is 71.5% (ranked 26th in the country by cable penetration).
Finally, Nynex launched MMDS services in East providence where the cable penetration
is 70% (ranked 35th in the nation by cable penetration). Therefore, these RBOCS have
deployed their short-term technologies in high cable penetration markets in order to gain
both experience and potential clients among a large number of CATV subscribers.
However, these high-cable penetration areas are also populous and correspond to
top markets for the relevant RBOC. It is coincidental that selected top-markets like San
Diego (ranked #8), Pittsburgh (ranked #19), Philadelphia (ranked #30), Boston (ranked
#26), Orlando (ranked #29) and Greenville, SC (ranked #31) only to cite these ones are
both high-cable penetration and populous areas (Broadcasting & Cable yearbook 1993).
Therefore, the question is which of population concentration or high-cable penetration
factors have inﬂuenced the RBOCS to begin their trials in top-markets? The two non-top
markets areas where RBOCS started a video trial, Toms River, NJ and Dekalb County,
GA do not have high-cable penetration and can not be used as a means of comparison.
High-cable penetration areas in medium cities as well as large cities with low-
cable penetration Should be used to see what criterion has most likely affected RBOCs
decisions to held their ﬁrst trials in top-markets. For example Palm Springs and Santa

Barbara, CA have cable penetrations of respectively 86.8% and 83.8% (1993) and are

 

50

ranked #1 and #3 in the nation (Broadcasting & Cable yearbook 1993). However, they
have not been picked up by PacTel. Instead PacTel focused on its most populous top-
markets, Los Angeles, San Francisco and San Diego. Likewise, Nynex focused on Boston
and New York even though Hartford, CT and Springﬁeld, MA for example have
respective cable penetration rates of 82.9% and 78.1% and are ranked #4 and #12 in the
nation. Bell Atlantic did not choose Johnstown, PA (ranked #14 with 76.9%) or Wilkes
Barre, PA (ranked #18 with 75.8%) but instead Philadelphia and Pittsburgh. SBC could
have picked up Laredo, TX (ranked #13 with 78.0%) instead of suburbs Dallas and ﬁnally
Bell South did not focused on Tuscaloosa, AL (ranked #5 with 80.8%) but instead it
entered suburbs of Birmingham. However, Bell South’s chosen areas in Florida combined
both high-cable penetration and high-concentration of people: Orlando is ranked #29 with
71.1%, West Palm Beach is ranked #16 with 76.5% and Tampa has a rate of 66.2%.

US West focused on its main telephone service area’s cities. Some of these cities
have particularly low cable penetration rates: Minneapolis/Saint Paul is ranked #5 lowest
percentage of cable penetration with 46.1% and Boise, ID is ranked # 15 lowest
percentage Of cable penetration with 50.0%. Both have been however picked up by US
West. Likewise, Ameritech focused on suburbs of its main cities or the cities themselves:
Milwaukee and Chicago have very low rates Of cable penetration respectively 51.9% and
54.1% but have been picked up. SBC picked up Dallas, TX even though its cable
penetration is as low as 47.1%.

It seems that high-cable penetration is not the major, but a complementary factor
of RBOCS selection of top-markets. Large metropolitan areas are primarily selected

because of the large potential number of customers.

 

51

2.5.3) Compatitive resppnse

Locations that did not match one of the proﬁles previously described might have
been chosen because a cable company entered telephony services in an RBOC territory.
Therefore, as a counter-attack this RBOC will enter one of the cable company main
operating regions no matter what its proﬁle target areas are. Cable companies' entry in the
telephony ﬁeld and the locations they targeted have been searched. However, since these
trials were really small scale technical experiments, RBOCS did not launch trials in the
relevant cable company markets as a competitive response. The markets that do not
belong to the proﬁles are not any cable company top markets or main Operating regions.
For example, Cox launched a full-service trial in Omaha, in the heart of US West territory
and also in the location of US West’s most important video trial (Cox press releases,
www.cox.com 1995). However, US West did not deploy until now its video network in
any of Cox’s top markets. Time Warner aggressively entered the telephony market in
Orlando right in the heart of Bell South’s territory but there is not until now a competitive
response (Time Warner press releases 1995).

Two locations can be seen as the result of competitive response actually between
two RBOCs, Bell South and US West. MediaOne a unit of US West Media Group
operates in Dekalb and has immediately been followed by Bell South even though this
county does not correspond at all to the typical community proﬁle targeted by RBOCS.

Bell South also recently purchased a wireless system in Atlanta to compete with

MediaOne.

 

52

It seems that neither actors, Multiple Systems Operators (MSOS) nor RBOCS, are
willing to start head-to-head video wars. That is why the criterion of competitive response
has been dismissed regarding to the small scale trials that both RBOCS and MSOS are
doing in each other original business. Competition has not reach an important level yet,

and each of the actors is carefully choosing their targets.

2.5.4) RBOCs: “We are not redlining”

RBOCS are very inﬂuential in the choice of their original video trials sites. Unlike
fully commercial business, regulated businesses are subject to commentary and scrutiny
from many outside parties. Minority rights groups, public interest groups, the National
Cable and Television Association (NCTA), several state cable and telecommunications
associations are following RBOCS entry in video very carefully and are complaining to
the Federal Communications Commission (FCC) and even intending lawsuits against
large appetite RBOCs (Multichannel News: “PUC alleges more telcos violations”
September 30, 1996). That is why RBOCS are continually trying to prove that they are not
redlining, that is, they are not deploying communications plant that bypasses
disadvantaged communities. Therefore, the RBOCS spent an inordinate amount of time,
picking locations that could not be derailed by claims of redlining. Aside from being the
socially responsible thing to do, it is good business. None of the RBOCS is going to make
a load of money in the ﬁrst few years, so why not pick up locations that will defuse the
threat that someone could accuse them of cherry-picking.

Ameritech already has a bad record relating to cherry-picking. The Ohio Cable

and Telecommunications Association accused Ameritech of favoritism in Ohio

53

(Multichannel News, November 11, 1996). The Illinois cable operators say the RBOC is
“predominantly focused on up-market townships.” Gary Maher, president of the Cable
TV and Communications Association of Illinois said he is “concerned that Ameritech, a
regulated monopoly with $13.4 billion in revenue, is acting in a predatory fashion by
entering communities with high hedges and high incomes. They do not want to compete,
they want to put us out of business.” Ameritech ofﬁcials say they select communities
based on various factors generated by survey ﬁrms and not median incomes alone.
However, the best RBOCS defense is to pick up communities that are not afﬂuent. That is
precisely what Ameritech did in Chicago’s south side and Columbus. Besides, being
high-population concentration areas, these “disadvantaged communities” places provide a
tool for Ameritech to dismiss redlining accusations (Multichannel News, We don’t
redline”, Sept 30, 1996).

The same principles applied to the other RBOCS even though the empirical results
showed that among the RBOCS, Ameritech had redlined the most. Bell Atlantic picked
Dover, NJ and Toms River, NJ to avoid challenges of redlining. Moreover, they made
signiﬁcant commitments to the New Jersey utility commission and had to do something
in this state (www.vipconsult.com 1996). Bell South has also chosen to provide video in

Dekalb county which is a rural area for the same reasons (www.vipconsult.com 1996).

 

54

2.6) Summary of empirical ﬁndings

The main Research Question is: What factors inﬂuence the RBOCs communities'
selection process? The intermediary Research Question is: To what extent are the
following factors, age, area population concentration, MHI and education inﬂuencing
the RBOCs communities selection process?

The summary of the ﬁndings for the intermediate question ﬁrst relatively to each
one of the criteria is as follow:

0 Age: neither older nor younger people have been a speciﬁc target of RBOCS in

their early video trials

0 Education: “well educated” people have not been a speciﬁc target of RBOCS.

0 Population concentration: suburbs of Top markets (generally high-population

concentration metro areas) as well as large cities are targeted

0 Income: afﬂuent communities are particularly targeted when the RBOC provides

basic cable services or is a common carrier.
It does not make sense intuitively that broadband trials are more likely to be tested in low-
income areas. Basic cable should have been offered in low or medium income areas
whereas broadband Should have been tested in high well educated areas that can afford its

price.

55

Table 4: Original and relevant criteria

 

Criteria originally chosen in the hypothesis

Relevant criteria found

 

Age

Not found

 

Population concentration

Top-markets in terms of population (large cities)

 

Median Household Income

Yes for basic cable services and common carriage

 

 

 

 

 

 

Education level Not found
Additional criteria

Cable penetration Not found
Avoid challenges of redlining Yes
Suitability Yes

 

 

 

The most attractive opportunities for video services provision are found in large, high-

income, high-population concentration residential areas where the RBOC is the local

telephony provider. However, both technology and the type of services that will be

provided play an important role in the selection process. The typical targeted community

proﬁle for RBOCS video trials strongly relates to technology and services:

Table 5: Community proﬁle by technology and services

 

 

 

 

 

 

 

 

 

 

Technology Analog/coax Interim technologies, Long-term
networks being digital MMDS and technologies
ungded ADSL

Type of Basic cable Digital cable services, Interactive and

services provision, common VOD, NVOD broadband video
carriagL services

CRITERIA
Income Deployed in the most Not deployed in the most High-income areas
afﬂuent places afﬂuent places in general
Geographical Inside and outside of Inside and outside of the Only inside of the
location the RBOC telephone RBOC telephone service RBOC telephone
service area area regard to service area
acquisitions topography,
existing
facilities, rehabilitation of
telephone network
Population Within and suburbs of Within and suburbs of Within and suburbs
concentration Top markets with high Top markets with high of top markets
cable penetration cable penetration rates

 

 

 

Chapter HI

RBOCS VIDEO STRATEGIES

3.1) Introduction

The analytical framework developed in Chapter I discussed several factors that
will control how quickly and how well telcos will enter the video market. Their prior
experience, their market positions, their resources, the technology, regulation and market
characteristics are important factors. An analysis of each one of these factors will provide
an understanding of the context within which RBOCS have to deﬁne their video
strategies.

The RBOCS video trials empirical analysis showed that RBOCs targeted different
area proﬁles according to the type of services offered and the type of technology used.

The objective of this part is to compare RBOCS strategies in function of their
experiences, their motivations and the context. Then, the results of the empirical analysis
(part II) that addresses the question who is targeted?, will be compared with the results of
the qualitative study (part III) that addresses the questions what are RBOCS goals and

how will they be reached (in terms of services offered and technologies used)?

56

57

A historical review of RBOCS entry in video, as well as an analysis of the
evolution of technology, regulation and the market structure will be provided ﬁrst.
Then, the focus will be on RBOCS video strategies characteristics by taking into account

RBOCS strengths, and by analyzing their mix and their key differentiating factors.

3.2) Historical involvement of RBOCS in video services provision

Since the break-up of AT&T, RBOCS have shown different kinds and levels of
interest in entering the video services market. Each one has developed its own strategy for
dealing with the cable-telco cross-ownership prohibition (section 613 of the 1984 cable
Act), the 1992 Video DialTone (VDT) order and lately the Telecommunication Act 1996.
As a result of regulation changes, each RBOC has established a distinct identity through
different strategies. RBOCS started paying closer attention to the video market in the
beginning of the 908 as a consequence of the evolution of technologies, regulation and a
need to diversify their sources of revenues.

In the beginning of the 908, two main tendencies appeared. Some RBOCS focused
on developing and upgrading their network while others went international to gain
experience in services in deregulated markets. Bell South adopted, in the beginning of the
903, a strategy focusing on the development of an advanced network capable of handling
video services (NAB report on RBOCS video diversiﬁcation 1990). Five trials of ﬁber-to-
the-home networks had been implemented within Bell South’s territory around 1990 for
the purpose of being a carrier for other video providers. However Bell South had little

engagement in acquisitions of cable TV companies (mostly in Ireland). To the contrary,

58

PacTel was pursuing a strategy of cable TV company acquisitions in the UK deregulated
market. PacTel focused on operating a cable system more rather than on developing a
broadband network. Its UK presence was a joint venture with Jones Intercable. In the US,
it has aggressively made efforts to acquire cable TV franchises and properties in Chicago
and California (NAB report 1990). PacTel was considered by the NAB as “by far the lead
RBOC in preparing itself for entry into the video market” (NAB report 1990). Nynex’s
video activities were primarily services focused and have been directed to meet large
business-users needs. There was no indication of an entry strategy for the video-services
market (NAB report 1990). AS of early 1990, Nynex has not participated in any
international cable TV venture. The company failed to gain US regulators consent to enter
a partemship with Cable & Wireless to create a trans-Atlantic ﬁber optic cable system.

US West and SBC deﬁned a hybrid strategy of building an enhanced network and
at the same time acquiring experience in provision of services. US West had a service-
centered strategy in international markets where it positioned itself in the UK, France and
Hong Kong. It had a network-centered strategy in the US where rather than engaging in
direct competition with MSOS, it made provision of video transport the central purpose of
its video strategy. US West had no plans to be involved in programming. Likewise SBC
acquired an equity position in a UK cable TV group and was involved in the Israeli cable
TV system in terms of marketing, ﬁnance and management. In the US, its efforts had
been concentrated in developing its network and support video services operated by other
providers.

Finally, according to the 1990 NAB report on the potential impact of RBOCS’

video diversiﬁcation on the broadcasting industry, Bell Atlantic and Ameritech had

59

indicated little interest in entering the video services market in the early 903. These
companies have not been involved in any kind of international opportunities in cable and
their efforts were limited to an eventual provision of transport for content providers. Bell
Atlantic had limited domestic activities in video ﬁber trials even though its management
stated in Annual Reports of 1988 and 1989 its interest in video services. In the early 90s,
Bell Atlantic was not involved in international deregulated video markets. This indicates
that its priorities lay elsewhere. Ameritech showed some interest as a future vehicle of
video transport. The strongest indication of its distance from the video market is the
absence of competitive reaction in response to PacTel’S acquisition of a local cable
company in the Chicago area. In the early 90$, Ameritech stayed close to its core
competency in telephony within its ﬁve states territory.

In the early 908, PacTel and at a lower level US West and SBC, were the RBOCS
that focused on the content and service aspect of video provision. Their intentions were to
develop the system from scratch and bring the experience and expertise acquired overseas
into the US market. The second element of this strategy involves US West’s and SBC’S
domestic plans regarding the development of a broadband network. Bell South had been
the most active RBOC in this domain by doing aggressive video transport
experimentation.

In the early 90$, RBOCS strategies have been characterized as conservative in

terms of entering situations involving high business risk.

 

60

3.3) Contextual changes

3.3.1) Introduction

This part will take a close look at how the telecommunications market
environment has change because of major changes in technology, regulation and market
structure. It will provide a review of the context surrounding RBOCS entry into the video
services market. It will start by examining how regulation and market structure have
affected RBOCS, particularly the effects of the VDT order and the recent Open Video

Systems (OVS) regulation.

3.3.2) Evolution ofgtble regulation Met structure: impact on RBOCS
3.3.2.1) Introduction

Barriers preventing RBOCS from entering the video services market have been
falling after 1984. The 1984 Cable Act established a set of rules that prohibited RBOCS
from providing any sort of programming in their local service areas, directly or indirectly
through an afﬁliate. The FCC was concerned that telcos would engage in cross-
Subsidization and hinder the development of cable services (www.fcc. gov 1996).
This Act essentially deregulated cable television allowing it to grow at a rapid pace.
However, subscriber rates rose and the quality of services declined. Therefore, in 1987,
the FCC started re-investigating these rules because of a changing context in the cable TV
industry. Indeed, this industry has moved from several small independent providers trying
to create a new business to a few powerful players. The industry structure is an Oligopoly

but most of the cities grant the right to provide cable services just to one single MSO.

61

There was no point to grant them local monopolies anymore. Consequently, for several
years, the FCC has evaluated the costs and beneﬁts of continued video monopolies. In
1992, It allowed telcos to Offer video over their networks. It created Video DialTone
Regulations. According to D. Smith (www.vipconsult.com 1997), these regulations were
not based on true market economies, they were not ﬁnalized and the review process was
unattractive, but at the time its was very attractive to the telcos because they had no other
in-region entree into the video marketplace. In February 1996, the President signed the
new legislation which eliminated many of the artiﬁcial barriers that prevented telcos from

getting into the cable business. The VDT order has been replaced by the OVS laws.

3.3.2.2) Regulatory changes
3.3.2.2.1) The 1992 VDT, the 1996 OVS
The key points in the VDT order were that telcos were allowed to provide a
common carrier video transmission service in their telephone service areas, as a non-
discriminatory comrnon carrier service but were prohibited to select and Offer
programming. Telcos were not required to pay franchise fees to local municipalities for
the right to provide VDT in these communities, and were not free to engage in market
pricing. However court decisions have permitted the RBOCS to offer programming in
their service areas, Bell Atlantic in Dover Township, US West in Omaha and Bell South
in suburbs of Atlanta (www.fcc. gov 1996). In fact, many of the video DialTone systems
set up prior to the 1996 Act are waiting to be converted either to cable systems or to OVS

(e.g. Appendix 1).

62

The Telecommunication Act 1996 stated that if an OVS operator charges “fair”
rates to unafﬁliated content providers for caniage on its network, that operator will be
subject to “less” regulation. In other words, in exchange for two-third of its platform, the
OVS operator is relieved of many of the requirements of the franchise process that cable
goes through. Must carry rules and Public Educational Governmental (PEG) requirements
did not apply to VDT operators but are part of OVS. However, OVS operators do not
have to submit section 214 of the 1934 Communications Act which outlines a review
process for obtaining permission to begin construction. That means a signiﬁcant gain of
time and money. Additionally, they are permitted to provide video services on their own
in-region platforms, using up to one third of all available channels where there is demand
for all channels. This raises the question of whether the FCC will allow one unafﬁliated
programmer to get two-thirds of the OVS platform. Indeed, OVS are prohibited from
discriminating among video programming providers. Therefore the regulation allows a
programmer to get the two-third channel's capacity, in which case the original intention of
the Act of having the most diverse programming will fail. The exact term in the Act is
“unjust or unreasonable discrimination.” The difﬁculty is to deﬁne what constitutes a just
and reasonable rate in the FCC certiﬁcation process. This means that OVS operators must
offer access on equal terms to all content providers. They can, however, offer discounts to
Video Information Providers (VIP) that purchase large blocks of transport, but they
cannot change the price of carriage because a VIP is either large or small or because they
approve or disapprove the proposed programming. Bell Atlantic (“OVS and the media
market place” in www.ba.com 1996) argued that “just and reasonable has to get away

from all of the baggage that came with Title II” and that “the market will set just and

63

reasonable rates.” The Alliance for Community Media wonders if the price to get on the
system is too high, the OVS operator could take all the programming for itself and
become nothing more than a cable Operator without a whole set of statutory protections
and regulations that apply to cable. That is why cable operators are drawing the FCC’S
attention to avoid unfair competition between an unregulated and a regulated cable
operator. The problem for public-interest groups is that in the long run cable operators are
likely to get into OVS to avoid time-consuming regulations and even if the FCC regulates

that they can not, they will create their own phone companies and bypass the regulation.

3.3.2.2.2) Concerns of RBOCS towards OVS

The fact that RBOCS, if they opt for OVS will have to give two-thirds of their
platforms to VIPs raises major issues What if an RBOC overbuilds a cable operator, and
that operator wants to take up the capacity on the platform? Can the OVS RBOC treat its
cable competitors differently from other programming providers? The question is
ultimately what kind of control do RBOCS have over their own network if they become
OVS operators? One of OVS advantages over VDT is more programming control but to
what extent? The fact that the FCC is taking a lot of time to rule for OVS may lead eager

RBOCS to choose other regulatory options.

3.3.2.2.3) Alternatives to OVS
The 1996 Telecommunication Act has declared that RBOCS can provide video
programming in their own territories. Therefore, in addition to Open Video Systems,

RBOCS are now pursuing video distribution over wireless cable, DBS, and wired cable.

64

The 1996 Act offers telephone companies four options for entering video. First,
providing video programming through radio communications like MMDS or DBS, under
Title III of the Communications Act. Second, transmitting video programming on a
common carrier basis under Title H of the Communication Act. Third, providing video
programming as a cable system under Title VI of the Communication Act, and ﬁnally,
fourth, providing video programming by means of an Open Video System under new
section 653 of the Communications Act (Telecommunication Act 1996, www.fcc. gov).
Except Ameritech that opted to offer video under cable regulations in order to be the
primary programmer on its systems, the other RBOCS are waiting for the OVS
regulations speciﬁcations (channel capacity, PEG, franchise requirements, rates) to move
from their old VDT systems to one of the four available choices. Uncertainity is
surrounding these speciﬁcations that were supposed to be available on August but have
been postponed ﬁrst to November 1996 and then to February 1997. However, wireless,
DBS and common carrier systems have already been tied to the matching regulations (e. g

Appendix 1).

3.3.3) Evolution of video technologies and their impact on RBOCS

3.3.3.1) Introduction
Telecommunications technologies are evolving at such pace that makes the most
contemporary systems obsolete. The positive results of this change have been slow down
in the late 80 and early 905 by government policies that were meant to regulate a different

time and a less complex telecommunications ﬁeld.

65

Although each network will be different according to each Strategy, there are
common technologies used by all the RBOCS. All the systems are designed to receive a
signal from the content provider, then encode and send the signal through a high-capacity
network to a set-top box in the home. Wired systems like ADSL, HFC or SDV have the
advantage of allowing interactivity, in the form of viewers selecting from on-screen
options. The network will be either the existing one for ADSL or a new one composed by
ﬁber optics and coaxial cable. SDV brings ﬁbers closer to the home than HFC. Video-
switching equipment, set-top decoder boxes and a computerized video gateway that will
offer on-screen options and will interpret subscribers responses, will constitute the other
parts of the network (FAQ, www.vipconsult.com 1996). Wireless and satellite systems
like MMDS and DBS have limited interactivity but are far less expensive. RBOCS that
have invested in these technologies plan to establish a market presence while their
wireline systems are being built. It also gives them more ﬂexibility in service offerings

once the wired network is complete.

3.3.3.2) Regulation and technology
While OVS is clearly more attractive to RBOCS than VDT, the question that
many scholars are raising is will it be attractive enough to engender their entry in the
video services market under this new regulatory framework? (E. Noam, On-Line debate
on OVS, Columbia University 1996). In fact, that will depend on the technology each
RBOC chooses and on the number of channels that this technology enables.
OVS, VDT and title VI are not technologies, they are framework because they are

subject to FCC regulations. However, the networks required to meet the OVS regulation

66

limit the practical technologies for wide distribution to either SDV or HFC. Indeed, with
the one—third limit imposed by regulation, RBOCS that will opt for OVS will have to get a
large overall number of channels to have a sufﬁcient number for their own programming.
OVS is not attractive if an RBOC plans, like Ameritech, to offer around 80 channels of
analog video. If there is demand for channels from outside content providers, OVS could
limit the telco to one-third of the non-PEG channels or about 25 channels. It would not be
worth investing huge amount of money in building two-way cable systems and have only
25 channels to control. However, if the RBOC is planning to build an SDV network like
Bell Atlantic, Nynex and SBC, OVS can be very attractive. In this case with a 100%
demand for channels, the RBOCS will get one third of approximately 385 channels which
means more than 125 channels. That is why many RBOCS are planning on deploying
broadband networks to have enough control of the content. OVS would then allow
RBOCs to sell their extra-capacity to other content providers. It would allow them to have
wide latitude in determining what rates to charge for carriage. It would also allow them to
Share the cost of an integrated network with the telephony side. Additionally if they
deploy in a large region, they can apply for a single OVS certiﬁcation rather than
negotiate multiple franchise agreements. Bell Atlantic is, to this date, the only RBOC that
has applied and gotten approval to become an OVS operator in Dover Township, NJ.

In the beginning of the 905, RBOCS remained skeptical about entering video
because of regulation, cost and uncertainty of demand. RBOCS had limited video
activities and mainly stayed in their core services not only because of the telcos cable
cross ownership ban but also because they did not want to take risks. In the mid 908,

however, things have evolved. Regulation changes, new technologies and the market

67

made the RBOCS acknowledge the necessity of entering this ﬁeld. RBOCS are split about
the best technology to deploy today and the best regulation to adopt according to this

technology. That is indeed reﬂected in their strategies.

3.4) A new RBOCs video orientation

The purpose of this part is to assess the main characteristics of RBOCS video
strategies in the light of the new Telecom Act 96 and the availability of several different

technologies that can be used to provide video services.

3.4.1) ﬂme objective, different strategies

Following the Telecom Act of 1996 , RBOCS want to directly compete with cable
companies in the video provision business, on a large scale, as soon as possible. An
overall examination of their recent actions shows that the RBOCS are developing
individual strategies to deal with both the technological and regulatory aspects evoked in
the previous part.

Each RBOC has a different approach to enter this market. However, some RBOCS
have aspects of their Strategies that are alike. For example, Ameritech and Bell South
have decided respectively to build CATV systems and to convert their VDT system to
cable because OVS requires that two-third of the platform be reserved for unafﬁliated

programmers. Ameritech and Bell South do not want to see themselves left with a small

68

number of channels because they have only a few and they want to have signiﬁcant
control over the content.

Bell Atlantic has decided to experiment with SDV technology after having
wondered for three years whether it will use HFC (Bell Atlantic’s Annual Report 1995).
Nynex is testing at the same time different ways of delivery in different locations: MMDS
in CA1 wireless locations, SDV in Somerville, MA, HFC in Manhattan and ADSL around
Boston (Nynex press releases 1996). PacTel is focusing on wireless cable systems to
deliver video in Southern California and wired systems in Northern California (“Wired in
the Bay, wireless in LA in Multichannel News, October 1996). SBC is testing SDV in
Richardson, TX and is delivering video through DBS in Enid, OK and Little Rock,
Arkansas (SBC’S press releases 1996). Finally, US West is waiting for its HFC test
results in Omaha to decide whether it is worth deploying the same type of network
elsewhere (US West Annual Report 1995).

The diversity of possibilities offered to RBOCs makes it hard to forecast their
future plans. Furthermore, each RBOC has its constraints, its corporate philosophy, its
structure and several other speciﬁcity that makes it impossible to have two exactly alike
video strategies. Even though they are in the same business, each RBOC has its own
distinctive personality and its own priorities. Therefore, ﬁnancial, regulatory,
technological and economic factors as well as personal corporate philosophies proper to

each RBOC, make it incoherent to talk about one single RBOCS video strategy.

69

3.4.2) Changing strategies

Technology and prices change so rapidly that last month’s strategy is probably
being reconsidered today. RBOCs have been modifying their video plans along with
market changes to move to more economically realistic deployments. For example,
PacTel has decided in September 1996 to change its California exclusive HFC strategy.
Instead, it kept both MMDS and HFC in the San Francisco Bay area, and left only
MMDS in Southern California after having acquired three wireless cable companies. In
November 1996, PacTel decided to abandon its MMDS plans in San Francisco (“PacTel
scraps MMDS deal for the Bay area," Multichannel News November 1996), shortly
before the beginning of a commercial launch, and to stop the deal with Wireless Holdings
and Videotron citing “lack of equipment from its suppliers.” PacTel still plans to provide
wireless cable in the LA area using the existing facilities of Cross Country Wireless.

Bell South is approaching video provision with a “mosaic strategy” of wired and
wireless. It is testing different technologies to deliver video with technological decision
made on a market-by market basis. By evaluating the results of these trials, it wants to
determine the key success factors in video so it can drop commercially outdated
technologies.

In May 1995, Bell Atlantic withdrew its VDT trials in seven cities to reconsider
the technology to deliver broadband and ﬁnally adopted the SDV model (Bell Atlantic’s
press releases 1995). Moreover, ADSL that several months ago was a dying technology is

being heralded today by Bell Atlantic as the interim solution before broadband.

70

Ameritech withdrew its VDT trials in early 95 and started building and operating
Stand-alone cable TV systems. Ameritech is competing with other cable operators as a
cable provider itself under the same regulation as cable companies (title VI).

In May 1995, US West has suspended all its HFC trials waiting the Omaha trial
results (US West Investment report 1995). In late November, US West concluded that
overbuilding the incumbent cable company is not a money-maker, and that the company
is “not willing to do it on a wholesale basis” (Interview with US West CEO,
Multichannel News, December 2, 1996). However, shortly after the new Act was signed,
US West acquired Continental Cable to have, among other reasons, a quicker access and
provide full services in other RBOCs areas.

After the failed merger with Cox, SBC is entering progressively into its own
telephone service area market with video services and an experience in video acquired
both abroad and outside its territory in the US. SBC is testing an SDV broadband
network, cable networks and DBS. However, compared to the other RBOCS, SBC is
lagging behind in the video services market and has not make yet signiﬁcant moves
neither to a future broadband technology nor to an interim one.

Finally, Nynex that was until 1996 favoring HFC (Nynex Press releases 1995) has
switched to SDV and MMDS (probably as a result of its acquisition by Bell Atlantic).

What RBOCS are doing is selecting markets where they want to do either
technical or commercial trials. According to Ray Smith (Interview to Vipconsult 1996),
the RBOCS make shorter term decisions in some areas and longer terms decisions in
others. Then they establish very speciﬁc dates on which they will review their decisions

again. In other words they are doing “dynamic budgeting.” If a technology, a type of

71

services or a deal with a partner is successful it is given more money. If not, it is replaced

or canceled.

3.4.3) RBOCS video strategies demnd on their other businesses

As Ray Smith pointed out, the RBOCS video strategies are tied to every other
business they are currently in, and in many they are just evaluating. First, that is true in
terms of money distribution. Indeed, if an RBOC decides to heavily enter the long
distance market, Personal Communication Services (PCS) or the intemet business, it will
allocate less money for video. It is important to keep in mind that after the Telecom Act
96, possible attractive opportunities for RBOCS are overwhelming and full of promises:
cellular, PCS, high speed intemet access, international, publishing, paging,
manufacturing, information services, second line POTS and literally dozens more. Even
within the video ﬁeld, the ADSL, HFC, SDV and MMDS supporters (only to cite these
ones) in RBOCS compete against each other. As Ray Smith, CEO of Bell Atlantic,
pointed out (Interview to Vipconsult 1996), “the ADSL guy knows that he can make
money because of the tremendous demand for the intemet. The broadband guy wants
capital dollars so he can deploy faster. The Plain Old Telephone Services (POTS) guy is
selling all kinds of new services over his existing lines. So he needs more money for
marketing. The long distance guy is after money to enter as many markets as he can. The
dilemma within the RBOC is that all are strategic businesses.”

Second, in terms of regulation, the RBOCS do have in the new Telecom Act, a 14
points checklist requirement to enter the long-distance market. One of these requirements

is to Sign interconnection agreements with competing companies and allow them to use

72

the RBOC network in the location where the agreement has been signed to enhance
competition. Bell South already Signed a nine states agreement with Teleport
communications group (Bell South press releases 1996). SBC signed with MFS, a co-
carrier interconnection deal covering Texas and Missouri (SBC report on its video
activities, www.sbc.com 1995). PacTel and Cox signed an interconnection agreement that
allows Cox to provide telephony in residential markets --in partnership with Sprint-- in
Southern California (in www.cox.com 1996). Ameritech is working on an
interconnection deal with Time Warner (“Time Wamer-Ameritech” in Multichannel
News, July 22, 1996) and the remaining RBOCS, Bell Atlantic, Nynex and US West have
not yet announced any agreement. It is interesting to note that the companies that are
strongly involved in video (except for Nynex)-- Bell Atlantic, US West, Ameritech and
PacTel-- are the last one to Sign these agreements whereas the ones that did not show a
strong interest in video until now--Bell South and SBC-- are the ﬁrst ones. This fact
suggests that Bell South and SBC are favoring their entry in the long distance business
over video.

The quest by RBOCS to deliver video services is being Shaped not only by cost,
regulatory and time-to market issues but also by the many other business opportunities

they are now allowed to seize.

73

3.5) Short-termand long-term strategies

3.5.1) Introduction

AS a consequence of the Telecom Act 96, all RBOCS have made signiﬁcant
revisions to their VDT plans. Not only do they have to switch their VDT systems to either
OVS or traditional cable by the early months of 1997, but they also have to operate
strategic changes due to ﬁnancial, technical, regulatory and market considerations.
RBOCS have adopted new strategies to get into the market as soon as the early months of
1996, via wireless cable (MMDS mainly), DBS and ADSL. This will give them both the
“ﬂavor” of the video market and the time needed to perfect their HFC and SDV

broadband networks, which they plan to implement as long range solutions.

74

3.5.2) Short term and log term video strategies at the corporate level

3.5.2.1) Description of RBOCS technical systems and services

Table six provides a summary of the technologies adopted by the RBOCS and the

strategies that are related to these technical solutions.

Table 6: RBOCS short-term and long-term technical systems

 

 

 

 

 

 

 

 

 

RBOC Short Term Long Term
Ameritech Franchised stand-alone cable TV systems Separate network from telephony
upgraded with ﬁber (HFC)
Bell Atlantic Wireless cable through CAI (MMDS) Strategic switch from HFC to SDV
Common carrier for Sammons cable (HFC)
ADSL trials in Virginia
US West Cable TV systems in suburbs Atlanta HFC
Continental properties upgrade Continental properties
PacTel Wireless cable through Cross Country (MMDS) HFC
ADSL in San Ramon
SBC DBS SDV
Cable TV systems in Virginia and Maryland
Bell South Cable TV services in Florida Same network (as opposed to Ameritech)
MMDS in New Orleans upgraded with ﬁber (HFC)
Nynex Wireless cable through CAI (MMDS) From HFC to SDV

 

ADSL in Boston

 

 

Source: RBOCS annual reports and press releases 1996

 

75

RBOCS short term provision of video services will consist on offering “value-
added” basic cable services. In broadband trials, they will also include VOD, NVOD,
games and transactional services like home shopping and home banking (VIP consulting,
www.vipconsult.com 1996).

In order to gain market Shares, one strategy is to offer enhanced and better
services than their current competitors in the target market. That is why both content and
the interactive nature of the services are two crucial key success factors. Americast is the
content provider of Ameritech, Bell South and Southwestern Bell. Bell Atlantic content is
provided by both FutureVision and TELE-TV, US West by Telechoice and Time Warner,

PacTel by TELE-TV and Nynex by TELE-TV and Time Warner.

3.5.2.2) Architecture strategies

As Table six Shows, each RBOC is testing different technologies, and is
establishing both a Short term strategy and a long term strategy. The aim of the Short term
strategy is to be in contact with the customers, understand the demand, operate video
systems and become accustomed to the management of a new type of business. The long
term strategy is a multi-services strategy. It means that in the future, RBOCs are not
thinking about the provision of separate services to separate customers anymore, but are
rather seeing themselves as full interactive services providers. Therefore, they are

building a consequent enhanced network to be a one stop telecommunication services

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providers. Only Ameritech has chosen to build a Video network that is separate from its
telephone network.

The technological solutions are different depending on what will be called initial
conditions: how much ﬁber is the ground, what the regulatory situation is, what the
competitors are doing in a given market.

Basically, all RBOCS need video capable networks. They are adapting their
networks for video as fast as the markets and the technology permit, just as they did for
direct dialing in the 605 or for distributed intelligence and digital switching in the 803 and
early 905. The question is how to make the smart investments to get into the marketplace
fast while migrating to the ultimate network solution. What are RBOCS doing in the
meantime?

Short term technologies that have been mostly adopted by RBOCS are digital
wireless cable and ADSL besides traditional cable and DBS. Digital wireless cable uses
line-of-sight digital transmission (i.e. microwave) to a rooftop receiver. The Customer
Premises Equipment (CPE) consists on a digital set-top converter. Services include
digital TV transmissions with superior picture and sound. Unlike analog wireless cable
that is currently in use with a limited channels capacity of about 30 channels, RBOCS will
offer with digital MMDS, 80 to 100 channels with a wide variety of programming.
Digital MMDS will include NVOD, limited interactivity and local programming which is
the main advantage compared to DBS.

ADSL uses existing twisted pair lines with a breakthrough signal processing

technology. It provides digital video only, therefore requires a set-top box.

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Two long term technologies will constitute the future broadband network.

In Switched Digital Video, telephone and digital video are sent over a single-paired ﬁber
cable. Then a Network Interface Unit on customer’s house splits the Signal to be carried
into the house via existing coax or cooper wires. It requires a set-top box since video
signals are digital. Potential services include interactive multimedia, voice and high speed
data. Advantages include much of the system’s intelligence residing in the network rather
than in set-tops or server.

A Hybrid Fiber-Coax is also a switched network. However, unlike SDV it runs
ﬁber only until neighborhood nodes, each serving approximately 500 customers. Coaxial
cable then runs to Network Interface Units on customers' houses. From there, the process
is the same as SDV, except that set—top boxes are not needed if only analog video is used.
The system is capable of Video On Demand with VCR-like features pause, rewind, with
digital pictures and CD quality sound. It will also have enough upstream bandwidth to
accommodate video telephony; otherwise its interactive capabilities are limited compared
to SDV.

Which of these architectures will “win” depends on a number of factors, including
how fast the cost of their respective technologies comes down, and the amount of
consumer demand for large scale interactive services. Thus market considerations have a
great impact on the RBOCS technical decisions. The RBOCs will probably jump to other
strategies if they perceive that one technology is becoming much cheaper to provide, or if
consumer demand exceeds or fails to meet their expectations. A signiﬁcant example has

been provided by Bell Atlantic when it moved from HFC to SDV.

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In its July 28, 1995 edition the Wall Street Journal denounced some RBOCS for
“scaling back plans to build interactive networks.” If RBOCS are not going to build the
super-advanced highway that everybody is talking about and overhyping, then should they
just do nothing at all? It seems clear that each change in strategy that moves an RBOC
closer to economically realistic video deployment is a Sign that more hard thought is
being given to actually constructing these networks. Paciﬁc Telesis, for example, by
altering its strategy so that it does not Simultaneously build competing wireless and
wireline networks in the same market, is showing that it is moving and starting to look at

video networks as a business.

3.5.2.3) Alliances, acquisitions and mergers strategies

In terms of infrastructures, know—how (distribution, marketing, R&D) and cost
sharing, acquisitions or mergers are the easiest and quickest way to enter a new business
and access new markets. Most of the RBOCS have adopted this type of strategies as both
short and long term decisions in order to gain experience in this new ﬁeld. Moreover, as
was pointed out in the historical review of RBOCS entry in video, many went
international to gain proﬁts as well as knowledge, and be prepared for the day they will be
able to provide video services in the US. The RBOCS have been classiﬁed according to
their level of involvement in alliances, mergers or acquisitions with companies operating

in the video ﬁeld nationally and internationally.

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3.5.2.3.1) Small scale involvement RBOCs:

Ameritech and Bell South are the RBOCS that did not adopt either an international
or a national video strategy of alliances. Ameritech’s CEO said “we are not going to make
a deal where our shareowners or our customers have to bear the burden of paying an
excessive premium for an acquisition” (Ameritech 1994 Annual Report). Ameritech is
concentrating its effort in building its network whereas Bell South is putting HFC in
certain areas within its territory. Bell South has purchased the use of a wireless CATV
license in New Orleans by auction for $12 million. It has recently purchased another
MMDS system in Atlanta in a move to competitively respond to US West’s Atlanta-
based cable provider MediaOne (“Bell South buys Atlanta wireless system”, Broadcasting
& Cable, November 4, 1996). Both Ameritech and Bell South rely on their own
knowledge to put ﬁber in their network and do not seem to need external assistance
neither for the network nor for the cost or above all, the experience in video. However,
both developed in partnership with Disney, SBC, GTE and SNET, a content provider
called Americast that will develop interactive video programming. Moreover, in 1991
Ameritech purchased with Bell Atlantic, TCI and Time Warner, the ﬁrst PPV TV station
in New Zealand, Sky Network TV Ltd (Ameritech’s Annual Report 1994). Other than
these deals, Ameritech has not been involved in any type Of alliance or merger related to
video. That is the second distinctive feature of Ameritech compared to the other RBOCS,
in addition to its Stand-alone cable network. Bell South has focused more on the content
by signing a deal with QVC Inc. to deliver entertainment and information.

Bell South and Ameritech did not develop heavy alliances or international

strategies. They rather focused on existing technologies upgraded with ﬁber to provide

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existing cable services and compete against incumbent cable providers in their telephone
service areas.
3.5.2.3.2) Intermediate scale involvement RBOCS

PacTel and SBC did employ a moderate strategy of alliances and acquisitions,
mainly at the national level. Cross Country Wireless (CCW) has been acquired by PacTel
through stock transaction in 1995 for $175 million. In a transaction that has been dropped
lately , PacTel has tried to acquire the wireless Spectrum assets of Videowave television
(V*TV) for $160 million (“PacTel scraps MMDS plans” 1996). Through two entities—-
Wireless Holdings Inc. and Videotron Bay area-- V*TV holds licenses and rights to
provide wireless video services in the San Francisco Bay area, San Diego, Victorville and
in San Bemardino, CA. Besides this strong involvement in wireless video, PacTel has
created, in cooperation with Nynex and Bell Atlantic, a content provider, TELE-TV
which is in charge of providing programming and Customer Premises Equipment.

SBC has a record of alliances after its Cox communications merger failed in 1993.
At the international level, SBC Media ventures is a subsidiary of Southwestern Bell and
is operating and maintaining CATV systems overseas in the UK, France, Chile and Israel.
SBC Cable Comms is the ﬁfth largest cable provider in the UK (SBC’S press releases
1995). In 1993, SBC upgraded its cable network to provide telephony and installed the
ﬁrst cable/telephone network in the world. In June 1995, SBC announced its intention to
merge its United Kingdom operations, jointly owned with Cox conrrnunications, with
TeleWest the number one cable provider in the UK which is jointly owned by TCI and
US West. In Chile, SBC purchased in February 1995, 40% of VTRI a private telecom

holding that operates in 18 cities and has a potential customer base of 1.3 million

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households (SBC’S Annual Report 1995). At the national level, SBC is involved in the
Americast content deal that has been signed in April 18, 1995. Moreover it has merged

with PacTel creating the third largest telephony company in the US.

3.5.2.3.3) Heavily involved RBOCS in alliances, acquisitions or
mergers nationally and internationally.

This category of RBOCS gathers those who have combined alliances with content
providers, with technology providers and with companies that operate outside of their
original telephone service area. Three RBOCs belong to this category: Bell Atlantic,
Nynex and US West.

At the national level, in terms of delivery of content, Nynex and Bell Atlantic
made a joint investment of $100 million in CA1 Wireless cable company in March 1995
to speed delivery of video entertainment in the Northeast and Mid Atlantic States
(www.vipconsult.com 1995).

Bell Atlantic has already a record in video alliances with its failed merger with
TCI in 1993. In terms of content itself, Nynex and Bell Atlantic have created in
cooperation with PacTel TELE-TV. Moreover, Bell Atlantic Video Services intends to
acquire certain assets of Future Vision, a division of digital broadband applications Corp.
that is providing programming to 5300 households in Dover Township, NJ (Bell
Atlantic’s press releases 1996).

Nynex invested $1.2 billion in Viacom, which controls some of the country’s
most valuable entertainment brands. However N ynex is reconsidering this agreement

since there is no collaboration between Viacom and TELE-TV (Nynex’s press releases

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1996). In term of advanced broadband trials, Nynex cooperates with Liberty cable as well
as Time Warner communications in Manhattan. At the international level, Nynex Cable
Comms has been designing and constructing a broadband network that has delivered
telecom and CATV services since 1994 in the UK as well as in Thailand.

Finally, Nynex and Bell Atlantic have merged creating the second largest telephone
company in the US after AT&T.

AS for US West, this RBOC is probably the one that has used an alliance centered
strategy the most. US West Media Group has acquired in February 1996 Continental
Cable that serves 16.2 million customers mainly outside of US West 14 states region (The
Wall Street Journal, Feb 28, 1996). The bulk of Continental’s properties clustered in ﬁve
large markets: New England, California, Chicago, Michigan/Ohio and Florida. US West
became the nation’s third largest cable company managing 16.3 million domestic cable
customers and 13.9 million homes abroad. Moreover, three operations- MediaOne in
Atlanta, the Time Warner entertainment properties and TeleWest in the UK, gave US
West one of the best cable-telephony positions in the world. US West Media Group
purchased the Atlanta properties in 1994 from Wometco cable and Georgia cable
television for $1.2 billion (US West investor report 1995). Through its 25 % ownership of
Time Warner Entertainment (TWE), US West has established a national presence capable
of providing cable-telephony services, information services and entertainment in 29
markets across the US, and has therefore, the opportunity to compete against other
RBOCs in their territories. By 1997, TeleWest, the venture with TCI (made in July 1992)
and the world’s largest provider of cable telephony services plans to pass 80% of the 4.1

million homes it is franchised to serve in the UK, Norway, Sweden and Hungary (US

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West’s press releases 1996). US West Media Group also operates cable telephony
ventures in the Netherlands, Japan, the Czech Republic, Italy, Spain, France and
Malaysia. Finally in terms of content, in addition to TWE, US West media group has 25%
ownership of Warner Brothers Studio/HBO which are respectively the world’s largest
distributor of theatrical and television entertainment and the largest pay television

programmer in the world.

3.5.2.4) RBOC strategy, a combination of strategies

To the end of providing new services, the RBOCS are building broadband
networks in their own telephone service areas only, and buying or building less enhanced
networks in terms of provision of services, either in the US or internationally. Indeed,
broadband networks involve a lot more money than interim solutions like wireless cable,
ADSL or DBS and therefore are tested in RBOCS own territory where they face less
competition and are able to use their own facilities. However, buying a cable operator or
operating a wireless system, which is far less expensive, can be done outside of their
territories in carefully selected places.

Ameritech has a slightly different approach. Its subsidiary Ameritech New Media
Services has been aggressively pursuing its plans as a cable overbuilder, building second
cable systems in 30 communities in its region. Bell South has chosen also to provide
cable services under “Title VI” regulation. Like Ameritech, Bell South has been ﬁling for
franchises to provide cable services to residents of its territory, especially in Florida

where it has its largest cable venture in Orange and Seminole counties.

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However, unlike Ameritech, Bell South is approaching video delivery with a “mosaic
strategy” of wired and wireless services.

SBC Communications Inc. may share common interests with Paciﬁc Telesis
Group, the company it has acquired. But video strategies do not appear to be among them.
SBC has a reputation for going slowly into video delivery, while PacTel has been quicker.
PacTel likes digital wireless cable while SBC prefers DBS. SBC is experimenting with
SDV in Texas, while PacTel is building HFC networks in Northern California. SBC’s
programming alliance is Americast whereas PacTel is in TELE-TV. However, both
companies are venturing into broadband carefully, testing technologies and consumer
demand and making sure they offer customers something they want and something
economically viable. Moreover, executives Of both Americast and TELE-TV are having
discussions about possibly combining the two ventures, and SBC’S buyout of PacTel
could make a merger more likely (Interview with Steve Weiswasser, video information
providers newsletter, November 1996).. TELE-TV appears to be further along than
Americast, having built a digital production studio and having signed a $1 billion contract
for wireless cable digital set-top converters. TELE-TV’S CEO has estimated for example
that his consortium will spend $120 million this year as compared to $5 million by
Americast (Interview with Howard Stringer, video information providers newsletter,
September 1996). However, Americast has the advantage of having the partner that’s the
buyer in this buyout, and SBC gave them an indication that it will remain a part of
Americast (Interview with Steven Weiswasser, Vipconsult 1996). However, TELE-TV
and Americast will have problems working together if their telcos plan to invade each

other’s video markets. Even so, none of the Americast or TELE-TV phone companies

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have announced plans to target another’s territory to sell video services. Many of the
RBOCS will enter long distance and that may create tensions between them. Moreover, an
Americast/TELE-TV merger might threaten the diversity of programming.

Unlike the SBC/PacTel merger, Bell Atlantic and Nynex seem to be on the same
brain wave. They are both testing ADSL and MMDS as interim technologies in order to
gain experience in packaging and marketing video services, to get additional subscribers
and engender customer loyalty. Indeed, they want to know consumer preferences with
interactive TV in VOD market trials using ADSL for Nynex in Boston and for Bell
Atlantic in Fairfax, VA. Nynex and Bell Atlantic will ﬁrst enter the video market in late
1996 using wireless technology to deliver a TELE-TV branded digital service from CAI
wireless infrastructures. They are both, in the long term, equipping themselves with SDV
to offer the full market-basket of services packaged by TELE-TV: interactive Video-On-
Demand capabilities presented via a navigator, full VCR functionality, electronic program
guide in order to challenge Pay-Per-View and video tape rental. In fact, both of these
RBOCS have a network—centered strategy. They started using a variety of technology from
ISDN, ADSL, wireless cable to HFC and SDV until they ﬁnally chose ADSL, MMDS
and SDV. In fact, Nynex has been inﬂuenced by Bell Atlantic’s decision to convert all its
broadband systems from HFC to SDV. In Manhattan, Nynex has been testing video
services through an HFC network and was unlikely to change broadband technology until
it has merged with Bell Atlantic. Bell Atlantic is using an “align and conquer” strategy in
order to penetrate the North (N ynex territory) and Mid (Bell Atlantic territory) east coast
of the US with the same technology and the same range of services. That will allow the

new Bell Atlantic (after the merger) to achieve signiﬁcant economies of scale and

86

establish a brand name (“Nynex takes GI’s next level for switched ﬁber network”,
Multichannel News, October 21, 1996). Bell Atlantic’s and Nynex’s long term Strategy is
to focus on the development of interactive multimedia TV in order to offer an alternative
to CATV (“Bell Atlantic and Nynex: together at last”, Yankee Group 1996). Neither of
these companies have bought a cable TV company, but they want to provide video
through more advanced networks for the same targets as cable companies.

Unlike all the other RBOCS, US West has acquired cable companies as a tool to
its services-centered Strategy. US West’s short term strategy is also to compete with cable
but with CATV systems through acquisition of cable TV companies that are mainly
operating outside of its territory (W ometco, Georgia cable and Continental).

US West has chosen , to use its international experience in operating cable TV systems
and its alliance in content with TWE, to provide immediately cable services in proﬁtable
markets (Atlanta and Continental properties). US West has also announced its plan to
deploy commercial ADSL services in late 1996. As a long term strategy, US West
adopted HFC to be its network architecture of the future. It has already used this type of
network in the UK. AS US West CEO, Richard McCormick pointed out “US West is now
both a telephone company in the cable business and a cable TV company in the telephone
business” (US West 1995 Investors report). Indeed, US West’ Media One has a
subsidiary called Southern Multimedia Communication Inc. in Atlanta, that is in charge
of upgrading its system to Offer local telephone services. In terms of provision of services,

US West is in advance compare to its Bell cousins.

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3.5.2.5) RBOCS motivations to adopt their current strategy

This part intends to explain the changes in RBOCs Video strategies.

Ameritech’s cable model reﬂects an abrupt departure from their earlier Video DialTone
strategy. In its 1994 Annual Report, Ameritech also emphasized that it will invest in the
content Since it believes that programming will be the key to success in a future video
competitive environment. However, VDT regulations contain a non-discriminatory access
clause. This means that the RBOC is the carrier and has the obligation to make channel
capacity available to every content provider and must ensure that no single programmer
dominates the available capacity. Ameritech did not want to be only a common carrier.
That is why it has moved from a position of carrier to an active involvement in the cable
TV business. Ameritech created Ameritech New Media Services, a subsidiary that will
offer CATV as a cable franchise, under the cable regulation and thus without being
obliged to share its network with other content providers. Indeed, under cable rules, the
company does not have to make channel capacity available to independent video
information providers and can program the majority of the available channels (the rest are
PEG channels).

Why is controlling the content so important? Probably because Ameritech felt that
to be able to gain market shares, it will have to differentiate its offering from traditional
cable TV programming by adopting a strategy of localism and offering more diverse
programs (“T elcos talking to TV stations for content”, Multichannel News September 16,
1996). That is one of the reasons why Ameritech has canceled its VDT plans and planned

to invest $4.4 billion in building an HFC video network separate from its cable network

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in early 1995. Why did they build a separate network? That indeed makes a lot of experts
confused. The economics behind Ameritech’s business model (build State-of-the-art,
hybrid ﬁber coax, Stand-alone, non-integrated, overbuild cable systems where there will
be almost no cost Sharing) seems to be uncertain. The telco appears to have taken the
most expensive route to providing video in its region. In fact, Ameritech did separate the
two networks for two reasons: ﬁrst, to avoid regulatory uncertainty over the FCC’S VDT
rules in early 1995. Indeed, in 1995 all other RBOCS were waiting the outcome of the
new regulation before they decide whether to offer video services under title VI, under
title 11 or under OVS. Second, with a stand-alone network, Ameritech has been able to
build its video network in certain carefully selected areas that will probably insure the
best return on investment. It has been able to select suitable areas where the demand is
strong. It has been able to “cherry-pick” the best areas.

Southwestern Bell could not stand the uncertainty that was surrounding Video
DialTone regulations (www.sbc.com), and has started trials in proﬁtable regions outside
of its territory in the DC area, under the Title VI cable regulations, as US West did in
suburbs of Atlanta.

Why are SBC and US West entering a new business outside of their territories? In
fact, there are two main reasons. First, SBC and US West are using their assets--
respectively, cellular properties in Rochester, NY and between Albany and Buffalo, and
cable alliances» to make an entrance into the local markets. Second, these RBOCS are
entering their Bell cousins’ territories where they want to offer a package of services,
including telephony to gain market shares in the incumbent RBOC’S territory. SBC has

clear plans to eventually integrate telephony and video on the same network.

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Indeed, in the SDV trial in Richardson, TX, customers have a combined delivery of
telephone and cable services, in addition to VOD and games that are provided by
Americast. This trial has been intended to learn consumer behavior and gain experience
in pricing, packaging and marketing in the heart of SBC territory and its largest market,
Texas. SBC is also reselling DBS services in its region, beginning in September 1995
with programming delivered by Direct TV. Clearly SBC’S entry into the video business is
slow and very careful. The issue is how will this strategy evolve now that SBC acquired
PacTel which has been actively working on its entrance into video. Moreover, will these
two companies manage their differences in style, in technologies and in the content that
have been used to deliver video? Analysts generally believe that SBC will proceed into
broadband in its core service area, where it faces less competition, but that it will sustain
PacTel’s video investment because of stiffer competition in California (Multichannel
News, April 4, 1996). However, cable operators do not agree. They predict that SBC will
rethink PacTel’s video strategy because PacTel’S plans are very ambitious and a factor
behind its ﬁnancial difﬁculties. PacTel has always maintained that their wireless plans are
“both a strategic and economic imperative to us” in the words of PacTel’s CEO Phil
Quigley (PacTel’s 1995 Annual Report). It believes that it is the fastest way to the market,
and that it will be able to offer a superior, digital, combined national and local broadcast
network to its customers and establish a brand name. Moreover, from a capital
perspective, beyond initial investment in licenses, capital costs for wireless digital TV
will be low compared to other Video delivery systems. Most costs will be variable based
on subscriber levels. The service involves relatively few network components--

transmission tower sites, head-end equipment and digital encoding devices» and does not

 

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require digging trenches, installing cable or other construction. PacTel anticipates that the
initial network investment will total around $60 million to install head-end and network
components in their California markets. Other costs cover equipment at the subscriber’s
end of the network, which will decrease as demand rises. Initial costs for converter
equipment are expected to be around $125. However, what suits hilly Southern California
(MMDS) would not necessary play in Texas where the topography of the terrain is
different. Because wireless digital TV operates on a light-of-sight basis, buildings, trees,
hills and other topographic features may interfere with transmission, reducing the number
of homes some towers can serve. The majority of PacTel’s acquired territories--hills,
mountains and valleys with modest tree coverage» are well suited to MMDS. By placing
transmission towers on mountain peaks, enabling a higher angle of elevation, PacTel will
be able to bypass foliage and reach more customers. This issue of DBS versus MMDS
also has economic aspects. Indeed, MMDS offers local programming which is crucial
from a marketing standpoint but DBS offers a large coverage with the same audio and
video quality as digital MMDS.

In wireline networks, analysts expect PacTel to operate a “rnidcourse correction”
and to join the SDV camp that has been chosen by SBC (www.vipconsult.com 1996).
Michael Fitzpatrick, CEO of Paciﬁc Telesis Enterprise Group pointed out, “Pactel’s
strategy is to focus wireline construction where the most intense competition is expected-
-in the San Francisco area from TCI--and to pursue a complementary wireless video
approach in other areas” (PacTel’s 1995 Investors Report). It is important to note that
PacTel’s CEO used the word complementary instead of interim. Indeed, until now PacTel

has Spend $525 million dollars on the wireless set-tops and the spectrum alone.

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This ﬁgure does not include the cost of digital head-ends, content acquisition, marketing,
installation and customer management. When all the costs are ﬁgured, PacTel has passed
the point where wireless can be considered an interim strategy. Eventually --that is valid
for all the RBOCS that has developed in parallel a short-term and long-term technology--
in areas where both networks operate, customers will be able to choose the level of
interactivity, services, prices and technology that best meet their needs.

AS PacTel did, Bell Atlantic and Nynex both have chosen wireless cable as an
interim technology for practically the same reasons as PacTel except the topographical
one: reasonable coverage, reasonably quickly, local programming and immediate access
to customers with better quality cable services. In parallel they are testing ADSL
originally not intended for video but for high-speed internet access. ADSL allows testing
video on demand services even if it is not with the best quality. It allows both of the
RBOCS to understand consumer behavior towards VOD and to adapt their offerings
according to the results of the ADSL tests. One enormous advantage of ADSL for the
RBOCS is that they can roll out ADSL household by household as each new subscriber
asks for the service (“Will ADSL beat cable”, Internet World, October 1996).

As for wired long-term systems, Bell Atlantic decided in May 1995 to withdraw
its VDT trials from seven cities to reconsider different technologies to deliver broadband
services. Bell Atlantic decided to adopt SDV as its broadband technology in order to
bring ﬁber much closer to the home and be able to deliver more and better interactive
services. Another particular feature of Bell Atlantic video strategy is its status of common
carrier in Morris County, NJ. Bell Atlantic is planning to build a ﬁber network to

transport video programming for the current cable company, Sammons Communication

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that will use less than 50% of the capacity. The remaining capacity will be leased to other
video information providers. It appears that Bell Atlantic believes that it can generate
immediate revenues by simply leasing capacity to unafﬁliated programmers on a common
carrier basis.

As a long term strategy, Nynex wanted originally --before its merger with Bell
Atlantic—- to provide cable services in the Northeast part of the US in continuation of
what it was doing overseas with the same type of broadband network. The knowledge it
has acquired overseas is crucial for Nynex even after its merger with Bell Atlantic and the
change in broadband technology from HFC to SDV.

US West stopped its HFC trials except in Omaha, NE, to do more investigation on
different wireline architectures (US West’s Annual Report 1995). In fact, different press
articles report that even the Omaha broadband trial is a ﬁnancial failure because US West
invested too much money and the retum on investment was much less than expected
(Interview with US West’s CEO, Multichannel News December 2, 1996- Cox
Communication press releases, “Cable Telco execs clash” in Multichannel News,
September 1996). US West obviously does not want to lose money in Similar trials as
Omaha. That is why they stopped the other trials and are examining other opportunities to
offer video in the long term. AS a Short term strategy, they are strongly involved in cable
TV in Atlanta as well as in content partnership and alliances. The Continental acquisition
was the fastest way to gain access to other RBOC customers Since Continental is mainly
operating outside of US West territories and provides them both video and telephony
services. Moreover, Continental’s experience in video and cable TV will be invaluable

for US West. Finally, this acquisition will probably allow US West to extricate itself from

93

its agreement with TWE. Since early 1995, when Time Warner raised the idea of
restructuring US West’s investment in TWE, US West’s CEO, Chuck Lillis said the
companies have tried numerous times to reach a mutually acceptable agreement before
eventually going to court. “Unfortunately, we have not," he said, “and I do not think a
near-term resolution is likely” (1995 US West’s Investors Report). Recently, the pressure
rose when US West wanted to block Turner’s acquisition by TWE that ﬁnally occurred in
October 1996. In terms of network architecture, US West has chosen without any
hesitation HFC. This type of architecture has already been tested by TeleWest in the UK
to deliver bundled communications services over a single network. Moreover, US West
engineers argued that HFC networks capacity will meet near-term market demands even
with 100% voice and data penetration, and can be easily and cost-effectively expanded
(US West Investors report 1995).

The RBOCS that are not thinking about cable, Bell Atlantic, Nynex and Paciﬁc
Telesis are committed in the short term to providing MMDS wireless cable service. All
the Bells are committed therefore to providing a video service other than under the OVS
regulation, either a cable system or a wireless cable system.

Bell South is unique among the Bells because it has chosen to test both traditional
cable and wireless cable services. Following the lead of Ameritech, Bell South is
increasingly gravitating toward the cable system model as the best way to penetrate video
markets. It is planning to convert its VDT systems to cable system as quickly as they get a
franchise from their target markets cities (“Bell South in franchise talks”, Multichannel

News October 28, 1996).

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3.6) How will RBOngain market shares in the competitive video market:

business unit snﬁgies

3.6.1) Gain expprience and know the cu_stomer best

When asked about his company’s investment strategy, Chuck Dolan of
CableVision reduced to this simple proposition: “if somebody else is operating a
competing network in your territory, he is going to take part of your subscriber base. We
need to do everything this plant is capable of doing to amortize its cost, including video,
PC hookups and telephony” (Conference CATV administration and marketing society
1995). This statement applies equally to telcos as it does to cable companies and any
other companies that decide to enter the telecommunications market. According to Ray
Smith, CEO of Bell Atlantic (Conference CATV administration and marketing society
1995), the immutable fact is that both telcos and cable operators want to offer their
customers a full package of voice, data and video services, because competition will.
They have to offer the broadest possible array of services because competition will. The
question is who will provide it ﬁrst and gain market shares in both the telephony and
cable markets. Both telcos and cable companies have to ﬁnd the best way to get
customers early and keep them. AS Ray Smith pointed out “if the ultimate technology
solution is not economically feasible at the moment, ﬁnd another avenue into the
marketplace and bring your customers along as the technology evolves” (Ray Smith

speech in Cable Television and marketing society September 19, 1995).

95

In video, RBOCs are the new kids on the block, coming in against competitors
with an established identity and customer base. RBOCS have to offer customers a reason
to switch to their new services and to stay with them over the long-term, meaning that
they need to enter the market with a differentiated product line at a competitive price.
And they have to do all this in a way that makes economic sense. That is why RBOCS
believed it is so important to enter the video market early, with technical trials, market
tests and development activities, all of which are critical to the development of a
commercially viable video product and business structure. These trials, whether they have
occurred within the US or outside the US in deregulated markets, improved RBOCS video
market intelligence, got them an early insight into customer programming and packaging
choices and enhanced their technical expertise. Ray Smith pointed out how Bell
Atlantic’s broadband trials “are bringing invaluable experience” to his company. US
West‘s CEO argued that without its experience in the UK, US West would not have
neither been able to manage its MediaOne properties nor its activities with TWE and
lately Continental (US West’s Investor Report 1995). Indeed, not only, are RBOCS
working on mastering the technical Side of the digital video business --the interfaces, the
encoding, the operating systems, the server technology, and so forth» but they are
learning about the economics of ﬁber networks, whether HFC or SDV, and how to
operate a cable system. RBOCS that have been heavily involved in international
operations in video, US West, SBC, and Nynex are able to transfer skills and learning to
their video operation inside the US.

All RBOCS, except Ameritech, want to apply what Dolan said: they are loading as

many services on a common investment base as possible. Above all, they are learning

 

96

about consumer preferences for interactive services, what customers like, and more
important, what they will pay for. Almost every RBOC is experiencing at least one VOD
trial. Bell Atlantic in Northern Virginia, US West in Omaha, PacTel in the San Francisco
Bay area, SBC in Richardson, TX, Bell South in Chamblee, GA and Nynex in
Massachusetts. In the words of Bell Atlantic CEO “what we are learning is that the depth
and breadth of a true, differentiated VOD product drives signiﬁcant buy-rates and attracts

high quality programmers” (www.vipconsult.com 1996).

3.6.2) Join forces to create content

To be a force in video requires more than mastering technical systems and the
demand. As purely local players, RBOCS understood that they would be at permanent
disadvantage in obtaining the kind of programnring their customers want at favorable
rates, if they operate separately. That is why Bell Atlantic, PacTel and Nynex formed
TELE-TV, US West acquired 25% of TWE, and Bell South, Ameritech and SBC among
others created Americast. Developing and owning content becomes a key success factor
because that is the way an RBOC can differentiate its product, gain market shares and
avoid paying a retail price. It is generally considered that the holder of the content is the
holder of the control: “whoever can control what goes on the lines, will control what is
done with that information” (Carlson 1996). For example a customer might change
service providers if his or her favorite program iS not carried by a service provider. These
alliances were formed to establish the kind of scale that will attract high-quality content,
create brand awareness and allow RBOCS to have a competitive advantage over cable.

Together these companies have the kind of volume purchasing power that will drive

97

lower prices for digital television programming. For example, PacTel, N ynex and Bell
Atlantic proved the power of economies of scale when analysts were talking about a $700
MMDS set-top, and these companies, 6 months later, had a contract to manufacture set-
top boxes for less than half that number.

These alliances in content provide the RBOCS brand names. These brand names
whether TELE-TV, Americast or US West/MediaOne (“Continental ponders change to
MediaOne”, Multichannel News, July 22, 1996) are critical to the RBOCS strategies

because they are necessary to the trust of the customers.

3.6.3) RBOCS Kev Differenﬁating argpments

The main competitors of the RBOCs in the video services arena are the
“traditional” cable companies and at a lower level, DBS providers. PacTel, for example,
has the Strategic objective to get 15-20% of the cable company’s customers. By cutting
the cable companies’ cash ﬂow, the RBOCS hope to reduce cable’s capital investment
abilities, thus allowing them to be ﬁrst with interactive broadband. RBOCS operating
expenses in providing cable services could be slightly lower due to economies of scale
and advanced billing/customer service operations.

In terms of marketing mix, the RBOCs plan to compete with cable companies on
the following basis:

3.6.3.1) Price

Since wireless and ADSL are relatively cheap, the RBOCs can underprice cable

to some degree, at least in the short term. But they will still need to raise revenue to

ﬁnance their long range plans. In terms of CPE, the customer’s initial investment for

98

equipment will be less costly for MMDS than it is for DBS. Concerning content, Bell
Atlantic for example is offering its movies at a price of $0.49 to $4.49 per movie --in
addition to a $7.50 month connection fee». Depending on the movie, it can be cheaper or
more expensive than traditional PPV that is offered in cable today ($3.99 to $4.95 in
average per movie for TCI). Bell Atlantic’s basic monthly service rate in Dover is $14.95,
and that obliged the incumbent, Adelphia, to cut its own rates from $25.28 to $18.95
(Bell Atlantic’s video activities 1996). In Michigan, Ameritech is offering substantially
similar video services as Continental, a package of 59 basic channels plus premium
channels --Showtime network, the golf channel» at non-premium prices for $29.95
whereas the cable operator price is around $40 (Ameritech’s press releases 1996). In
Chamblee, GA, Bell South is offering a package of 64 basic channels for $23.95 a month,
VOD at $3.95 per video and NVOD at $2.95 per movie. PacTel’s customers are proposed
a $28.95 package which competes head-to-head with TCI’s expanded basic offering
priced at $30.64. In addition, customers can select from four premium channel families
(HBO, Cinemax, Showtime and STARZ!) in which multiple premium channels are
offered for the price of one. For example for the price of HBO subscribers also receive
HBOZ and HBO3 (PacTel’ internet releases: “Paciﬁc Bell video services launches
commercial cable TV service in San Jose”, August 30, 1996).

However, this price war is only as RBOCs are entering the market, so they can
attract customers by the low-cost. As Dave Onak, Ameritech New Media emphasized
(Broadcasting&Cable, October 21, 1996): “Our prices would be competitive and they
would stabilize at some point. RBOCS are not going to be the Wal-Mart of the cable

industry and be the lowest priced.”

99

3.6.3.2) Product
3.6.3.2.1) Diversity of programming, more choices

RBOCS are determined to provide something more than what consumers can get
from a cable system. People who think they are paying too much for cable in exchange
for poor content are potential customers for RBOCS. For example, in Bell Atlantic’s SDV
trial in Dover Township, NJ, 384 channels are being offered. The content is extremely
varied, entertainment, children’s programming, learning, lifestyles, marketplace and
distance learning applications. In order to cruise all these programs and not get lost
among such variety, TELE-TV and Americast are developing a user-friendly network
navigator that will help customers select the programs they want to watch. Also, on-
screen ordering and instant previews have been already developed. Those are key
elements of differentiation that make the customer’s life easier. One challenge facing the
RBOCS is to package and deliver video and entertainment services so they are “incredibly
easy to use” as Richard McCormick pointed out (Communicopia conference November
1993). Indeed, RBOCs already experienced this type of challenges with caller ID. They
found that people do not memorize phone numbers. That is why they have included the
name that goes with the number in the display.

However, trade magazines reported that original programming is not on the
RBOCS’ initial agenda for their early video launches. New programming that would have
set RBOCS apart from their cable and satellite TV rivals has not materialized yet. Instead,
in locations where RBOCS are going head-to-head with cable operators, their
programming differences tend to be only to offer certain channels in basic instead of as

premium channels. RBOCS tend to have a “best of cable plus best of satellite kind of

 

100

combination.” However, changes are expected soon, especially the electronic program
guides and the local programming for which Americast and TELE-TV are looking for
alliances with local broadcasters (Multichannel News January 27, 1997).

Dr. Ron Rizzuto, professor of ﬁnance at the University of Denver is wondering if
RBOCS video services have not already missed their market window with the number of
heavy-spending customers who have shifted to DBS (“The coming of digital”,
Cablevision, October 21, 1996). However, analysts doubt that DBS will take a huge
market Share of the cable TV business because of lack of cash, the important number of
companies competing and because DBS services offer much the same fare (“Falling stars,
in Fortune, March 1997). In fact, RBOCs expectations were not to get these customers
shift to their own version of enhanced cable services, but to attract them by other
arguments. That is why easiness of use, for example, is fundamental.

PacTel, Bell Atlantic and Nynex have invested in digital MMDS to offer local
programming which is a critical advantage over DBS systems. These companies, along
with Ameritech, are negotiating with TV Stations to obtain local programming such as
news for the markets where they plan to offer video services.

Finally, most of the RBOCS will offer, at launch, incentives like some premium
channels for free, or free PPV, sports, music or events in order to get the interest of
customers. Basically, wherever it enters, the RBOC has to meet or exceed all “extra-

services” of the incumbent cable provider.

 

101

3.6.3.2.2) Bundling

One aspect of the 1996 Act is that it removes most of the baniers to the bundling
of telecommunication services. The “full service network” is usually used to describe this
technology. In fact, as Ray Smith pointed out, “It is really a marketing strategy--the
attempt to put together the right basket of products for the right market niche, at a price a
customer will pay and for value he can not get elsewhere. The more arrows in the quiver,
the better the package you deliver to the customer.” Since the RBOCS do have a range of
other services than video, they are able to combine and make attractive global offers for
their customers. For example, if you buy cable services, you get a wireless phone, if you
subscribe to the phone service, you get free VOD programs and so forth. Nynex wants to
introduce its digital video services through MMDS in Boston in February 1997 as part of
a package (wired and cellular telephony, data, internet) with a competitive price. SBC
applied for local exchange authority in the Chicago metropolitan area. It plans to build on
its existing cellular base to create a package of local, cellular, video and long-distance.
Other RBOCS are, however, focusing on video as a stand-alone product. Ameritech
because of the stand-alone nature of its network, but also PacTel that will provide
different packages of video through digital MMDS.

Telcos are the only operators in the market right now that are able to put together
their services. Cable operators do not have large penetration rates in telephony essentially
because coaxial cable is a tree architecture and is one-way, which makes upgrading very

expensive.

 

102

The practice of bundling should be very careful. A December 1996 IDC survey
(Multichannel News December 2, 1996) showed that bundling is not appealing to all the
customers in the same way. For example, “entertainment households” that have children
and consume lot of multichannel TV might be interested in changing long distance
carriers if they are offered a premium channel free but they are non attracted if they are
offered a pager or cellular services. Therefore, even though the RBOCS are well
positioned to provide bundle services they have to make sure to bundle the right things
for the right people. RBOCS have to carefully package their products. An Arbitron study
(“Interactive services require careful packaging” Inter@ctive week, November 25, 1996).
indicates that “companies that want to provide interactive services into the home must
very carefully target the packaging of those services in order to assure market success”.
Indeed, eight different consumer segments have been found in this study. RBOCS have to
differentiate therefore their emphasis for each segment.

RBOCS want to provide full services but to targeted segments. They will
deﬁnitely need more than marketing and packaging schemes to set their services apart

from cable and DBS. They need original programming too.

3.6.3.3) Distribution: Quality and Reliability

Digital pictures and CD quality sound will be more appealing than analog cable.
Reliability of RBOCS broadband networks as well as their current ways to deliver video
are main advantages. These networks will offer considerable improvements over today’s

standard cable or DBS services, and even over the wireless MMDS and ADSL systems.

 

103

Advanced broadband communication network will offer levels of interactivity--video on
demand, electronic home shopping and interactive, multiplayer video games» that are not

available over today’s cable television, wireless digital TV or DBS systems.

3.6.3.4) Communication
3.6.3.4.1) Advertising

Communication is about emphasizing the value of the product/service to the eyes
of consumers. RBOCs’ communication efforts are based on maximizing the value of their
services for customers and developing their brand name through advertising. Advertising
is crucial to develop and maintain the appeal of the brand and make the targeted
communities people acknowledge that their local telephone provider is offering cable TV
services that have more value than the incumbent. RBOCS main arguments are their clear
picture, quality programming, free pay-per-view and their customer care in services,
billing, installation and repair.

A survey of 500 residential customers conducted by O] research (1995) found
that customers would seriously consider changing carrier if they could get all their bills
and troubleshooting from a Single source. Similarly, a TeleSight survey of 1000 cable TV
customers found that customers place a high premium on hassle-free quality service but
are according far less importance to the programming and the availability of pay-per-
view. The message of these surveys to RBOCS video units management is clear: ﬁnd out
what customers value the most because it might be very different from what they are

promoting (i.e. pay-per-view, quality of programming and picture ).

 

104

3.6.3.4.2) Trust

RBOCS have offered in the past superior and more reliable customer service
image than cable operators: according to a Telechoice/Bullet poll survey (1995), only 3%
of consumers surveyed would purchase phone services from a CATV company if
identical service were available from a Local Exchange Carrier (LEC), Inter eXchange
Carrier (IXC) or cellular provider. 53% of consumers would buy phone services from the
local telco and 32% from the long-distance carrier.

In that same survey, 47% of consumers surveyed thought that local telco would be
the most reliable provider and are willing to buy CATV service from their telco.
Only 3% of consumers surveyed thought that CATV would be the most reliable provider
of phone service. PacTel’S CEO, Michael Fitzpatrick pointed out : “if cable goes out, you
are annoyed; if phones go out people could die.” RBOCs have a critical advantage in that
they have strong brand names. People trust their local phone providers more than their
cable providers. That is critical because no one will rely on unknown and untested
providers for something central in the lives of people: their phone services or their TV

services. That is why RBOCs’ brands are critical.

3.6.3.4.3) Customer loyalty
Getting a customer is only half the battle. Keeping him is much more difﬁcult in a
competitive world where people are continually surﬁng for a better deal or the latest
promotion. The real winners in a converged market place will be the companies that can

offer consumers an attractive global deal: a full range of services, with high reliability and

105

a lot of choice, convenience and control that competitors can not match RBOCS want this
type of “faithful” customers but everybody in the market wants them too. That is why
RBOCS have to ﬁght with everything they have to win these customers' loyalties. RBOCS
main advantage, as local carriers, is the experience they have acquired in their daily
interaction with customers.

The future of RBOCS in this environment of convergence will depend not only on
the quality of their services/networks or their customer care capabilities but above all on
their ability to understand and respond to customer behavior as uniquely as economically

feasible.

3.7) HowJare RBOC having sufﬁcient ﬁnancial resources to sustain their video activities

Even though they are considered as deep pocket companies, RBOCS have to
capitalize a lot of money to build their video networks. They have to make huge
investments to build their broadband networks and sustain their short term deployment
strategies. A study done at the University of Colorado (1996) estimated the RBOCS
revenues in 1998, at $12,332 million with a 45% market penetration for broadband and
$5,481 million for interim technologies like ADSL or wireless with a 20% market
penetration rate. Deploying interim technologies could provide a quick ﬁnancial
playback, but will that be enough? For Switched Digital Video, a study done by Reed
(1992) found that the cost for LECS will be $1,222 per home passed and around $2,000
per subscriber if 60% of the homes passed sign-up. The assumption that 60% of homes

will sign up to the new provider appears to be optimistic. Research by Marianne Barrett

 

106

(1995) has Shown that the incumbent provider will retain around 50% of the market with
the new provider getting 38%-45% of the market, and the remainder going to DBS and
satellite. Therefore the cost per subscriber will rise to $1,222/.45=$2175 and
$1,222/.38=$3215 per subscriber. It is right that SDV might be the most expensive
solution. However, according to a Mercer Management study (1995), broadband solutions
will cost at least $1,000 to $1,600 per location depending on time, population
concentration and other factors. Ovum Ltd. estimates per line costs of $1,050 for ﬁber to
the curb and $2,050 for ﬁber to the home at production volumes of at least a million lines
(OECD report: alternative local loop technologies).

Acquisitions are also very expensive: for example, US West paid over $2,000 per
subscriber for its acquisition of Continental which is a lot of money. Why build
broadband networks then if the ﬁnancial prospects are so poor? The reason is that
competing cable and telcos know that “they will lose money if they upgrade but they will
lose more money if they do not upgrade and their competitor does” as Bane, Christer and
Fox pointed out (“The broadband revolution” 1995). Basically RBOCS, as well as other
actors in the telecom industry, have to upgrade or die. How will RBOCS generate the cash
necessary to build and commercialize these networks? As previously pointed out, RBOCS
operating expenses in providing cable services could be slightly lower due to econonries
of scale and advanced billing/customer services operations. Also, alliances in content like
TELE-TV, Americast, US West/TWE/Continental allow economies of scale and scope.
This scale and scope help spread costs over a large customer base and provide new

marketing and distribution opportunities. However, RBOCS have determined that they

107

are not going to spend hundreds of millions of dollars in content creation because they
know it will not pay off for years to come.

An important issue raised by cable operators as well as the NCTA is cross-
subsidization. Indeed, RBOCS are still local monopolies in the local telephony market.
None of the other major actors, long-distance companies and cable operators have set up
a large local telephony trial that will be a threat in the short-term. Therefore, some cable
companies are accusing RBOCS of subsidizing their video activities by increasing local
telephony rates and making telephone customers pay for video services. Ameritech in
particular is accused by its ﬁve states region Public Utilities Commissions (PUCS) of
transferring investments into their cable TV business. The other RBOCS are building a
combined telephone/video network and it is difﬁcult to discover how much money is
allocated to telephone and how much to video since the costs are shared. The FCC has
been conducting a cost-allocation rule making for telco provision of voice and video over
an integrated facility and has not come up with a ﬁnal decision yet. Obviously, all the
RBOCs are strongly denying these charges. They are arguing that State laws make it
impossible to do what they are accused of. Commerce commission rules prevent them
from transferring non-telephone related expenses into its phone rates. (Ameritech’s
release: “cable companies lawsuits attack consumers freedom to choose," October 23,
1995). RBOCS are maintaining high capital spending but they are changing the
distribution of capital to favor investments in new ﬁelds like video. In fact, all the
RBOCS will invest billions to build new interactive video networks during the next 15
years. The strategy is to spread the cost of the network over this period of time.

Ameritech, for example, has decided to reduce investments in its other networks in order

 

108

to sustain the construction of its stand-alone video network (Ameritech’s Annual Report
1994, questions to the CEO). Since almost all of the States are under price caps, which is
to say RBOCS cannot raise rates to fund their entry in video, the general trend will be that

RBOCS will cut the expenses and use shareholders money.

To be successful in entering the video services market, the RBOCS should:

Find out what the customers value the most

0 Enter the market with a differentiated product line at a competitive price

 

0 Provide easy-to-use and understandable applications
0 Make attractive global offers to their customers

0 Gain experience in operating video systems and developing content

CONCLUSION

The aim of this conclusion will be twofold. First is discussing how empirical
ﬁndings relate to RBOCS strategies. Second is discussing the validity of the frameworks

within which RBOCS targeted areas and video strategies have been studied.

All RBOCs are selecting closely their markets with a particular focus on either
income or/and top-markets. Strategies depend particularly on the context (market,
regulation, technologies) and above all on the nature of services.

From part III (RBOCS video strategies) and part II (Empirical ﬁndings), RBOCS
can be classiﬁed in two categories (in terms of focus), within which their approaches to
video (in terms of target) will be compared.

First is a service-centered strategy that includes RBOCS that have acquired cable
or wireless companies and have focused primarily on services.

Second is a network-centered strategy that includes RBOCS that have chosen to
fOCIJS more on developing advanced network capabilities and test different new
tﬁChnologieS.

Table seven summarizes the empirical ﬁndings and compares them to RBOCS

Video Strategies.

109

 

110

Table 7: Summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services-centered strategy Network-centered strategy
Ameritech is following the cable model, and a
stand alone network being built in
Strategy areas that will insure the best return
_ on investment.
Empirical findings Show that Ameritech is the RBOC
that has targeted the most afﬂuent
places.
Bell Atlantic Is trying many technologies (ADSL,
MMDS. SDV) and a new range of
Strategy interactive services to test demand.
Empirical findings Show that Bell Atlantic is focusing on
affluent and middle-income places.
top-markets and is using a lot of
suitable areas.
US West Uses the companies it has
acquired/make a deal with
Strategy (Continental, MediaOne, TWE) as well
as its international experience
Empirical ﬁndings Show that US West, like Ameritech, is
offering its basic cable services to
affluent suburbs of Atlanta.
PacTel Focuses on digital wireless cable
complementary to its HFC advanced
Strategy network.
Empirical findings Show that PacTeI target its top
markets and not really high-income
people or high-cable penetration
areas.
SBC Uses its cellular assets to enter video.
is testing SDV and DBS.
Strategy
Empirical findings Show that SBC has chosen two
affluent locations to provide cable
services. Like Bell Atlantic, it has
chosen to select communities next to
its existing facilities. However. those
go outside of SBC territory
Bell South Adopted the cable model. like
Ameritech,and wants to provide both
Strategy telephony and video over the same
enhanced HFC network like US West.
Like Bell Atlantic. it is aggregating
multiple technologies into more
concrete plans on a market by market
basis
Empirical findings Show that Bell South entered among
the most affluent communities and top
markets in Florida.
Nynex Is testing several technologies:
MMDS, SDV and HFC in different
Strategy markets to test the demand.
Empirical findings Focused on its top markets (NYC and

Boston respectively #1 and #5 by
cable TV households) like Bell Atlantic
and Bell South.

 

 

 

111

It is acknowledge that this study has examined empirically, only one aspect of
RBOCS entry strategy in the video services market, the proﬁles of targeted segments.

It has not been proven empirically but inferred that there is a causal link between
the context (technology, regulation, market characteristics, RBOCS prior experience) and
the entry strategies. This research did not attempt to predict the failure or success of any
of the strategies adopted by RBOCS. Its purpose was to examine the characteristics of
RBOCS selected markets, the services they are offering and how these relate to their
video business units strategies. The analytical framework discussed in Part I has been
used to Show that several factors, outside the immediate control of management, will
inﬂuence the adoption of the entry strategy: prior experience, resources, the market, the
technologies and the regulation. Among these factors, the empirical study Showed that
technology and nature of services offered are determinants in the RBOCS communities
selection process.

In the empirical study itself, it is acknowledged that the areas analyzed could
match coincidentally with several of the criteria selected. For example, some areas can be
at the same time, populous, high-educated, high income and might be also high-cable
penetration areas. The problem is to ﬁgure out which one of these criteria has been the
major cause of RBOCs picking up this area and what are the complementary factors.

The study examined this problem and tried to weight and select the most appropriate
criteria. It compared the RBOC targeted area with other areas that have not been picked
up and have the same characteristics but the one that has to be tested. For example, to

determine whether metro areas have been chosen because of high-cable penetration or

 

112

high population, RBOCS targeted areas have been compared to both areas with high
population and low-cable penetration or low population and high-cable penetration.

However, concerning income in metro areas for example, it has not been possible
to do that because the precise targeted areas within the metro areas are not known. When
the metro area’s income is higher than the relevant State’s income, it has been considered
that the metro area ﬁt with the proﬁle which is not correct. Indeed, it has been argued that
if the metro area’s income is lower than the relevant State, nothing can be concluded
because of the lack of information concerning where precisely the trial has been held.
Therefore, in higher income metro areas, RBOCS could have picked up lower income
places than the metro area’s average and the state average income which therefore lead to
the conclusion that this area doe not ﬁt with the proﬁle. Aggregated information have

been truly, the main weakness of this study.

The message conveyed in this paper to RBOCS video units management is simple.
They have to ﬁnd out what customers value the most. The questions that they have to face
are the following. Are they sure that they are providing the customers with the type of
services they are looking for? Are they after the one-Single bill and the hassle-free quality
service the customers are envisioning? RBOCS are promoting the “ﬁve hundreds
channels environment," better image and sound quality, all of these are clever strategic

advantages but perhaps they are not what the customers feel they need.

 

113

It is not clear or certain yet whether RBOCS will fully involve themselves in the
ﬁeld of video. Indeed, video is not an immediate generator of cash ﬂow and is difﬁcult to
manage for new entrants.

Sanford Bernstein & Co. (1997) argued that the RBOCS have turned away from
cable because they want to concentrate all their efforts in the long-distance market that is
closer to their core competencies and where they have good chances to win market shares
quickly, increase their proﬁtability and at the same time diversifying their revenues
(Multichannel News February 3, 1997).

However a converging marketplace where image will be predominant will

probably convince sooner or later the RBOCS to be full actors in video.

APPENDIX 1

EMPIRICAL STUDY OF RBOCS VIDEO TARGETED AREAS

 

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x0952

APPENDIX 2

LIST OF ACRONYMS

127

ADSL: Asymmetric Digital Subscriber Line.

Technology that allows the transmission of a one-way 1.5 megabits per second (Mbps) digital signal
capable of delivering compressed digital video programming. ADSL transmits encoded video signals over
existing copper facilities on an integrated basis with traditional voice and data services.

CATV: Co-Axial Television.
So called because the wire used is a copper-based co-axial cable. Also referred to as Cable TV

CPE: Customer Premises Equipment.
Telecommunications- communications equipment located in a user's premises.

DBS: Direct Broadcast Systems.
These systems are typically satellite-delivered TV. They compete with "over-the-air" and Cable TV. They
are not typically very interactive, but provide many channels, typically about 100.

HFC: Hybrid Fiber-Coax Architecture.

The hybrid ﬁber-coax broadband architecture provides signal transport of both broadband and narrowband
telephony services from a video distribution central ofﬁce to an end-user subscriber's residence or business.
The hybrid ﬁber-coax architecture supports a wide range of services, including analog and digital video
broadcast, pay per view, and video on demand.

ISDN: Integrated Services Digital Network.
An emerging international standard that deﬁnes interfaces for simultaneous voice and data transmission
through a single channel over the public network.

IT: Information Technology.

IVS: Interactive Video Services.

Interactive video services are services that are generally provided through the use of digital servers.
Potential interactive services to be offered include: Movies on Demand or Video on Demand, arcade type
video games enhanced shopping capabilities, banking services, audio programming selection, interactive
learning functions, information access, and other advanced applications.

MHI: Median Household Income.
It is the amount which divides the household income distribution into two equals groups, half having
incomes above the median, half having incomes below the median.

MMDS: Multichannel Multipoint Distribution Systems.

Wireless transmission at very high frequency to deliver telecommunications services, including TV
distribution, between two points. It is dependent on line of sight.

MPEG: Motion Picture Expert Group.
This is the international standard for digital video compression.

 

128

M80: Multiple Systems Operators.
Multiple System Operators in the Cable Business.

NAB: National Association of Broadcasters.
NCTA: National Cable and Television Association.

NVOD: Near Video On Demand.

Provides a one-way broadcast video channel with functionality similar to Video On Demand. The basic
conﬁguration of this service provides linear broadcast of a particular program on a regular interval basis -
typically every 15 minutes - over multiple channels rather than on a scheduled event basis like PPV.

OVS: Open Video Systems.
New regulation (T elecom Act 1996) that replaces the Video Dial Tone regulations.

PEG: Public, Education, Government

Public Interest Access channels are channels which originate within a community. Typically these channels
cover events such as County or City. Council Meetings, educational programming originating from local
community: colleges, entertainment programs of local interest, charity events...

POTS: Plain Old Telephone System.
Refers to the telephone wiring.

PPV: Pay Per View.

A special event promoted by a programmer-customer. The programmer-customer loads its PPV event
schedule and deﬁnitions in network via an on-line interface. The programmer-customer broadcasts the event
per the schedule they deﬁned in the network using the channel and speciﬁed bandwidth that was purchased.
End-user subscribers select to purchase the event using an on-line procedure.

PUC: Public Utilities Commission.
A government agency that approves tariffs to regulate the telephone companies within state or local
boundaries.

RBOC: Regional Bell Operating Companies.
Former Operating Telephone Companies which existed before the breakup of the Bell system.

SDV: Switched Digital Video- F iber-to-the Curb Architecture.
This system consists of ﬁber optic transport facilities and copper and coaxial cables used for the ﬁnal link to
the end-user subscriber, The ﬁber-to-the curb system offers broadcast and narrowcast service channels.

VDT: Video Dial Tone Service.
The services provided by the Telephone Company for the delivery of video and other information
programming services offered by programmer-customers to end-user subscribers.

VIP: Video Information Provider.
Also known as the programmer customer, the provider of programming to an end-user subscriber who
transmits video and other information programming services over the network.

VOD: Video on Demand or Movies on Demand.

One of the initial services that will be available from programmer-customers is Video on Demand or
Movies on Demand. This service allows the end-user subscriber to select movies they wish to view from a
large selection of titles and categories. This service may also provide VCR functionality, (stop, pause, fast

forward, rewind, play) which allows the end-user subscriber to control the "play back" of the server from
the remote control,

 

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