Looking at Verizon's (NYSE: VZ) 2012 annual report, the carrier had a decent year for FiOS, adding 607,000 Internet subscribers and 553,000 video subscribers to its net total. It's sticking to its plan to build those subscription numbers in the areas where it already has deployed FiOS. But Verizon, which halted new deployments of its fiber product last year, needs to bite the bullet and restart its rollout.
That's crazy talk, some might say. Verizon isn't going to push out its FiOS network any further, and that's that. Well, let's look at some reasons why Verizon could start building again--if not soon, then in the next couple of years.
1. It's well-positioned to do so
Verizon is one of the two biggest Tier 1 carriers in the United States, making up one-half of the telecom duopoly that is shared by AT&T (NYSE: T). Its consolidated revenues in 2012 were in the range of $115 billion. That's with a "B."
It's true that, even though $115 billion sounds like quite a bit of money, profits were off significantly compared to 2010 and 2011. Shareholders saw EPS of just 31 cents last year, compared to 85 cents and 90 cents in the two years previous. But the reason for that falloff was due to unexpected losses in Verizon's legacy networks, specifically in the New York metro area during and after Hurricane Sandy. Salt water pouring into the carrier's Manhattan COs (central offices) caused millions of dollars in damage and practically destroyed the copper lines running under and around the island.
The damage done in Manhattan led Verizon to make the decision to replace its legacy infrastructure with fiber in New York City. It was an unplanned cost, but the carrier was able to bite the bullet and absorb it, while pointing out to investors the benefits of fiber infrastructure in such a crucial communications nexus.
Let's now look beyond the raw costs and the annual reports. Verizon has extensive infrastructure throughout the country and a presence in many major cities.
2. Legacy networks are on their last legs
The effects of Sandy notwithstanding, Verizon's old copper networks, over which it still runs DSL in many areas, are approaching end of life. AT&T is facing the same issue. They can only boost speeds so much. Of course, I have to keep walking back statements like that every year thanks to continual technology improvements, like the addition of vectoring to VDSL. But while the copper line has proven incredibly resilient and adaptable, and has the advantage of already being in place, it's increasingly difficult to maintain.
Fiber is very expensive to deploy, but its maintenance and repair is less costly in the long run. That's where providers have always hoped to recoup their investment in the technology. It's the biggest reason Verizon cited when it halted its FiOS rollout. The carrier wants to increase subscriber numbers in deployed areas to cover the costs of installation and maintenance it has already incurred. It's also continuing to invest in its existing network areas, both for FiOS and its legacy infrastructure.
Fair enough. But time is not on their side. Maintaining legacy lines is costly and, like with other carriers, has a constant negative impact on Verizon's earnings statements as subscriptions decline and maintenance costs increase. In the meantime, demand for higher-speed broadband and encroaching competition in some areas ups the ante on the gamble Verizon is taking in not expanding FiOS.
3. Demand for FiOS is high
Last week, residents of North Baltimore attending a meeting about improving broadband services to their city specifically directed their questions to the Verizon executive in attendance, Tad Bishop. Their question was not, "How do we get better broadband?" it was, "Why hasn't Verizon brought FiOS into our community?"
It's a refrain heard in several municipalities along the eastern seaboard, which either believed or were told they would eventually be getting the service, only to see the carrier halt its rollout short of their city limits. Medford, Mass., officials managed to convince Verizon to complete its deployment in their community. But there was no joy in North Baltimore.
Many unserved and underserved areas of the country see FiOS deployment as an easier option for them than pursuing municipal broadband initiatives or waiting for their local cable franchise to invest in DOCSIS 3.0 technology that would up broadband speeds to at least minimally acceptable standards. Verizon's experience in the more difficult details of the buildout process, from funding it to negotiating rights of way and more, means it could get high-speed broadband to communities faster and more effectively than other alternatives.
Furthermore, bringing FiOS into communities that are served by only one other provider will have the benefit--to consumers at least--of creating price competition where before there was none. Investors don't like to hear about competition, which is why large providers, like AT&T, Comcast (Nasdaq: CMCSA) and Time Warner Cable (NYSE: TWC), often work very hard to keep other providers out of their service areas, citing franchise agreements (see Boston) or supporting anti-municipal broadband regulation (see North Carolina).
In the next few months, attention will be focused on the effect the wide-scale launch of Google's fiber network in Kansas City, Mo., and Kansas City, Kan., will have on other providers operating in that region, such as Time Warner Cable. DSL Reports already is speculating that a recent subscription offer in the area by TWC was prompted by Google Fiber's pricing tiers. We likely will get a firsthand look at the effect competition will have on overall broadband pricing in Kansas City.
4. Innovation in the IP space is constant
Competition is a threatening word to investors and providers alike, but why are executives chewing their nails so much over it? In the IP space, competition has driven innovation across segments. In the past few years we've seen constant changes in the direction and tone of next-generation networks. Increased demand for wireless broadband services has driven the growth of wholesale fiber to the tower (FTTT) services by wireline providers. Constant demand for cost-effective fiber installation and maintenance has driven innovation like Clearfield's modular platforms.
In communities where there is no competition, we will not see improvements in service. This has held true throughout the growth of the IP communications segment, and it's why many cities are challenging regulations that make it tough for them to install and run their own networks.
5. Other providers are taking the risk
Even as Verizon waits for its FiOS profit margins to climb, AT&T and other carriers are moving forward with their NGN installations. Granted, AT&T's hybrid fiber-copper approach is somewhat less risky, but that model enables the carrier to push its rollout into areas FiOS won't touch.
If Verizon doesn't use its considerable heft to take the initiative and restart its FiOS rollout soon, there's a good chance it won't be able to get into the communities it's currently ignoring. They will have found another high-speed option.--Sam