Verizon Communications is getting close to rolling out its fledgling FiOS TV service in big cities, where the phone company stands to reap bigger rewards, but its marketing battles with cable rivals could intensify.

Verizon (NYSE:VZ) had 717,000 TV customers as of Sept. 30 and ended 2007 near the million mark, analysts say. Verizon sells fiber-optic service TV in parts of 13 states, mostly on the East Coast -- but also in Texas and, as of December, Oregon.

Verizon so far has focused on suburban areas. And its entry into the pay TV market has hurt cable TV operators, whose third-quarter results fell below expectations.

The cable industry, though, hasn't had to face FiOS in large cities such as New York, Philadelphia, Washington, D.C., Baltimore or Boston. Verizon still lacks licenses from those cities to sell TV services.

But in 2008, Verizon expects to get at least a couple of big city licenses. That is an opportunity, but also will pose challenges for Verizon.

Unlike suburbs lined mostly with one- or two-story single-family homes, big cities have large residential buildings. Verizon faces hurdles connecting the FiOS network to so many more customers, analysts say.

And the stakes will go up in more densely populated areas, with dozens or even hundreds of customers at stake in each residential building. Such buildings are prized in the telecom and cable fields as MDUs, for multiple dwelling units.

"One of our strategies for '08 is clearly to focus more on the MDU market and some of the bigger cities," said Virginia Ruesterholz, president of Verizon Telecom and head of the FiOS project.

"We're in negotiations to acquire franchises with several cities, like New York and Washington," she said. "We're starting with some in Pennsylvania. I think we're on the right track to get (licenses) in some of the big metropolitan areas. Our goal is clearly to be in at least a couple of them, at least by the end of 2008."

The touchy part in Verizon's talks with local governments is whether the phone company will offer FiOS throughout cities or only in parts of them. Verizon prefers to focus on higher-income areas, analysts say.

$23 Billion Project

Verizon is still building its new fiber-optic network to deliver FiOS TV and superfast Internet services. The multiyear project is expected to reach 18 million homes and cost $23 billion through 2010.

Verizon recently was awarded its 1,000th local license to sell FiOS TV. Those licenses cover about 12.6 million households. The biggest city now getting FiOS TV is Virginia Beach, Va., the nation's 42nd largest city.

The FiOS TV service is available to about 4.7 million homes. Verizon's reach will jump as it gains big city licenses and markets FiOS to big MDUs.

To Wall Street, the upside is that Verizon's FiOS project will seem more cost-effective on a per-home basis and hurt earnings less, says David Barden, a Bank of America analyst. It now costs Verizon about $700 per home to roll out FiOS video and Internet services.

The per-home installation cost should fall as Verizon markets to residential buildings in major cities, says John Hodulik, a UBS analyst.

"It should cut per-home costs and it could really help them ramp up subscriber growth," Hodulik said. "But first they need to get the franchise rights, which is a hurdle."

Verizon has already built out the FiOS network in cities where it expects to get licenses. Verizon also needs the OK of MDU building owners to sell FiOS services.

Wall Street has warmed up to the FiOS project despite its high cost. Analysts give Verizon high marks for signing up about 15% of potential customers where FiOS is available. But analysts say it will be a challenge for Verizon to repeat that 15% sign-up rate in big city markets. Bernstein Research analyst Craig Moffett says Verizon may find it hard to replicate its door-to-door sales approach, which has worked well in suburban markets, in big cities. That approach requires a lot of salespeople, he says.

Verizon's marketing battle with cable rivals has grown more intense as it has added FiOS customers. Cable firms have responded to Verizon's gains with special price offers to win back suburban customers.

And Verizon has ratcheted up promotions. In October, it began offering new FiOS customers a free 19-inch, high-definition flat-panel screen if they sign two-year contracts.

To get the TV, customers must order a package of TV, Internet and phone services, for $95 a month. Analysts say the TV, a Sharp model, retails for about $450, though Verizon's wholesale cost is much lower, perhaps $250.

High-Def Trend Will Help

The marketing battle will stay fierce as Verizon moves to big cities, Hodulik says. He estimates that Verizon will add at least 1.2 million FiOS TV customers in 2008. Verizon should get a lift from "a big HD push," which is tied to the free TV offer, he says.

By the end of 2008, Verizon plans to provide TV customers with 150 channels in supersharp high-definition format, a fivefold increase from the 30 such channels it now offers. Cable and satellite TV firms also plan to beef up high-def programming, but Verizon says it'll have the most channels.

Verizon says its FiOS project will be operating income positive in 2009, net income positive in 2010.

Ruesterholz says FiOS and wireless services are the keys to the carrier's long-term growth, says Verizon's Ruesterholz. Verizon plans to hike FiOS TV prices 11% on Jan. 20, but new customers will still get discounts if they buy multiple services.

"We're focused on growing consumer revenue and revenue per customer," she said. "FiOS has been a big help in both areas for the last three quarters. This product is really helping to drive our top line."