Verizon (NYSE: VZ) may be reaching the upper limit of penetration for fiber to the home (FTTH), but its move to provide symmetric speeds across all of its service offerings shows its desire once again to beat cable with fiber--particularly in the upstream direction.
Cable operators such as Comcast (NASDAQ: CMCSA), Cox and Time Warner Cable (NYSE: TWC) may have increased their downstream capabilities to 50 and 100 Mbps speeds, but their existing hybrid fiber coax (HFC) networks remain constrained in the upstream direction until they start deploying next-gen DOCSIS 3.1 technology.
"With DOCSIS 3.0, cable operators can advertise cable modem downstream speed levels of over 100 Mbps but they are much more limited for upstream capacity," wrote Matt Davis, director, Consumer & SMB Telecom Services at IDC, in a research report. "Verizon's upstream strategy is to legitimately tap into the rapidly growing demand for upstream capacity and offer a truly differentiated service or, if the requirement for upstream bandwidth does not emerge organically, to put marketing dollars behind raising the visibility and importance of upstream speeds."
However, one element that could become a potential sore spot for Verizon is it's not immediately upgrading its 15 Mbps customers to the 25 Mbps tier. Existing 15 Mbps customers would have to pay $10 extra to get the 25 Mbps tier.
"The downside might be disappointing existing clients savvy enough to realize they are left paying the same rate for 15/15 as new customers receiving 25/25 – but this is a measured bet and the free upstream upgrade will likely be enough to appease any disappointment," wrote Davis. "If not, I would expect Verizon to convert all its baseline customers to 25/25 if there is any significant customer push back."
Perhaps not surprisingly, the service provider said the reason for introducing the symmetric speeds is to address the fact that more consumers are uploading more of their gaming, video and photo content online.
One segment where the symmetrical speeds will likely resonate is the millennial generation that's happy to just get a broadband pipe to view video services, conduct gaming and access social media.
According to a Verizon survey of 800 millennials and 200 non-millennials, millennials are three times more likely than non-millennials to watch television online, for example. However, 41 percent of this segment values high-quality viewing with minimal pauses and interference.
"What we saw was the majority of this segment selected the highest speed they could get and didn't really care about how many TV stations they got because most of them are consuming their video via the Internet," said Fran Shammo, CFO and EVP of Verizon, during the second-quarter earnings call. "This is another position for us on why we have gone to symmetry within our broadband offers, which is another strategy we think is important for that generation that really wants the highest speed they can get and want the symmetry in that speed."
The introduction of the symmetric speeds comes at a key time in the FiOS lifecycle. Despite seeing sequential gains in both FiOS broadband and FiOS TV, overall subscriber growth is waning as it saturates existing markets.
Shammo told investors in March that the telco won't expand into any new markets outside of those where it has current or pending franchise agreements until he feels "that FiOS has returned its cost of capital."
During the second quarter, Verizon reported that it added 139,000 new FiOS broadband subscribers, down from 161,000 a year earlier. Due to these additions, Verizon now has 6.3 million FiOS Internet subscribers and 9.1 million overall broadband subscribers.
Regardless of the longer-term growth rates, Verizon's symmetrical fiber-based speeds will give Verizon the upper hand in its existing markets--particularly in large markets like New York where the telco has been aggressively expanding fiber-based broadband into multi-dwelling units. While there has been no noise from any of the cable operators yet on the telco's new capabilities, they eventually will have to respond with similar offerings.--Sean