How will Comcast 'beat the brains' out of Verizon FiOS?

Tools

I perked up while watching the Comcast (Nasdaq: CMCSA)-Verizon (NYSE: VZ) antitrust hearing yesterday when Comcast EVP David Cohen told Sen. Al Franken (D.-Minn.) that there was nothing in Verizon's deals with Comcast and other cable MSOs "that will stop us from trying to beat the brains out of FiOS."

Critics of the spectrum and marketing deals that Verizon struck late last year with Comcast, Time Warner Cable (NYSE: TWC), Bright House Networks and Cox Communications have been wondering how Comcast and its biggest cable rivals would compete for pay TV subscribers. But the example Cohen cited--Comcast's new Streampix online video product, which he said will compete against the streaming video venture Verizon has formed with Redbox--was disappointing.

Streampix is a fairly weak online and mobile video product that Comcast unveiled last month that lets its triple-play subscribers watch videos from its own NBCUniversal networks, along with content from Disney, Sony Pictures and Warner Bros. Streampix lacks programming from several top cable programmers, including Viacom (NYSE: VIA), Turner Broadcasting and Discovery Communications (Nasdaq: DISCA).

Streampix isn't a product that Comcast could use to beat FiOS, Netflix (Nasdaq: NFLX) or any other rival. Cohen may have had a better shot at appeasing critics by giving an example of a market where Comcast freezing its cable rates on its programming packages in an effort to lure Verizon subscribers, as Cablevision (NYSE: CVC) is doing in the New York area.

Verizon general counsel Randal Milch also could have won more support for the deal if he were able to give examples of cities where Verizon plans to expand its FiOS network to challenge Comcast, Time Warner Cable and other cable incumbents. But he couldn't, since Verizon announced two years ago that it would halt construction on its FiOS network. That means cities ranging from Boston to Buffalo, N.Y., where Verizon offers DSL service, will never have access to FiOS. The broadband choices for Verizon subscribers in many cities without FiOS are to either keep its inferior DSL product or pick up a cable modem from Comcast, Time Warner Cable or another one of Verizon's cable partners.

It was pretty striking to watch Wednesday's hearing, and see executives from Verizon and Comcast sitting side by side to defend the same deal. I began writing about the cable industry in 1996, soon after Congress passed the Telecommunications Act. For cable operators, telcos have always been the enemy. It doesn't seem plausible that a major cable MSO could market products with a telco, and form a joint venture focused on innovation, as Verizon and its cable partners have done.

You could sense some disappointment from Kohl, the 77-year-old senator who will retire after his term expires later this year. But while Kohl and other members of Congress that passed the Telecommunications Act may not have expected that one of the largest telcos would be partnering years later with major cable MSOs, that doesn't mean the FCC and DOJ won't approve the spectrum and marketing deals.

As Cohen noted, the key measure in DOJ's review is determining if the deals will harm consumers. Verizon and the cable MSOs argue that since Verizon has already stopped construction on its FiOS network, the deal won't cause harm. The companies will maintain that Verizon's FiOS construction plans aren't related to this deal. Verizon and the MSOs also argue that the deals will actually benefit consumers since it will supply them with spectrum needed to support smartphones, tablets and other devices.

"We're making the case that there is no consumer harm, and there is consumer benefit," Cohen said. "We're at least assuming that this is not going to be a problem under the antitrust laws," Cohen said.

So the Verizon-cable deals may not be pretty, but they also may not be illegal.--Steve