Verizon and cable set for costly battle in New York

By Yinka Adegoke and Ritsuko Ando - Analysis

NEW YORK (Reuters) - Verizon Communications Inc's (VZ.N: Quote, Profile, Research, Stock Buzz) launch of its FiOS TV service in New York City will challenge cable operators' control of a large and affluent market, and the battle is likely to be long and costly for both sides.

New York City's Public Service Commission on Wednesday granted the No. 2 U.S. phone company a license to sell video services that compete with cable. Verizon said it will launch FiOS TV there in the coming weeks.

As the new kid on the block, Verizon faces the tougher challenge to grab a share of the city's 3 million-plus households from cable incumbents Time Warner Cable Inc (TWC.N: Quote, Profile, Research, Stock Buzz) and Cablevision Systems Corp (CVC.N: Quote, Profile, Research, Stock Buzz).

New York, with its many skyscrapers, poses challenges for Verizon: the phone company has to obtain approval from landlords and co-op boards to run cable through buildings, including prewar structures with strict aesthetic standards.

That means extra expenses on top of New York's high labor costs. Verizon has already said it would spend $22.9 billion from 2004 through 2010 to connect the all-fiber FiOS network to 18 million U.S. households.

Analysts say it will take several years for Verizon to see any significant returns on investment. Bernstein Research analyst Craig Moffett said returns may never materialize in the New York market.

"My fear is that Verizon investors may be under-estimating the complexity of operating in New York City and therefore over-estimating just how quickly a franchise in New York can make a difference," said Moffett.

Analysts estimate that Verizon spends around $2,000 to $4,000 per FiOS subscriber nationwide. The company says New York's population density means cost per user will be the same or less than in the suburbs, but Moffett said the city's challenges could outweigh such benefits.