FiOS: Verizon's shining wireline gem

Even though Verizon Communications had a challenging second quarter in terms of overall financial earnings, its bet on Fiber to the Home via its FiOS product continues to pay off. During the second quarter, the ILEC added 300,000 net TV customers and 303,000 Internet subscribers. Fierce Telecom caught up with Ben Piper, Director of the Strategy Analytics Multiplay Market, to shed some light on the performance of FiOS in Q2 2009.

Fierce Telecom: Ben, Strategy Analytics in a recent research note forecast that Verizon Communications would add about 240,000 to 300,000 new FiOS subscribers in Q2 2009. What do you think is driving that growth?

Piper: We generally expect the second quarter to be the weakest for U.S. broadband service providers, and our estimate actually represents a 20 percent sequential decline in net adds compared to Q1 2009.  Still, when compared to what we saw a year ago, things are looking pretty good. There are a couple of factors, both supply-side and demand-side, driving the growth of FiOS.  Service availability is obviously chief among them. Consumer take-up rates in areas where FiOS is available have been rising steadily. From a demand perspective, broadband consumers have become a lot more sophisticated with regards to their home communications in the past several years. Many are starting to see the limitations that slower connections place on the activities they want to pursue. Then, of course, there's the aggressive advertising campaign.

Fierce Telecom: How does their approach stack up to cable competition such as Comcast with its new 50 Mbps capabilities?

Piper: It seems that every few weeks we hear about another service provider "one-upping" the competition in speeds and price. Cablevision was among the latest; they recently launched a 101 Mbps service in the New York area at a $99.95 price point. That said, Verizon has shown some restraint in responding to competitive offerings--one spokesperson there called the cable companies' pricing "publicity stunts," and added that Verizon could "easily turn up the speed" on its FiOS service.  For the time being, they don't seem to have any reason to.

Fierce Telecom: While FiOS grew, there was inevitable voice line and DSL line loss. Will increased FiOS subscriber help to curb some of that pain?

Piper: DSL and fixed line loss are basically inevitable, and the FiOS net additions have largely offset these. 

Fierce Telecom: Do you think the Verizon FiOS base of 3 million subscribers and counting could drive increased volumes of network gear (Optical Network Terminals and even fiber) and as a result help smaller telcos prove out a business case for FTTH.

Piper: I think it's possible, but I wouldn't expect Verizon's success to necessarily usher in a fiber renaissance to the US. Fiber deployment costs are tied up largely in civil works (the actual digging of trenches), rather solely than in equipment cost.  That's what makes the business case so much more difficult for smaller and less urbanized telco networks.

Fierce Telecom: You mention in a recent report that consumers are unwilling to give up their broadband connections. Why is that? Is it the utility of the web services?

Piper: I have long argued that broadband is the "fifth utility" and, as such, has become inextricably linked to our daily lives. Think about what we do online today compared to a decade ago; it's hard for me to imagine the last time I wrote a check, went to a travel agency, or paid a bill via mail. While it may have been seen as a novelty or a luxury 10 years ago, broadband today it has taken on a completely different shape. Our survey data suggest that Americans value their broadband connection to such an extent that only 4 percent would drop it. That translates into a 96 percent 'keep rate', which is pretty phenomenal. 

Fierce Telecom: When I asked Larry Irving, co-chairman of the Internet Innovation Alliance, what the best broadband speed is, his reaction was that people want a connection to access applications relevant to their daily life. Will FTTH services further that idea?

Piper: Absolutely. This is a topic of frequent water cooler discussion among me and my colleagues. How much speed does one household really need? The average casual web surfer/emailer isn't going to see a 50x increase in utility between a 2 Mbps and 100 Mbps connection. A heavy online gamer or serial high-bandwidth downloader might. Video, clearly, is what will drive increased bandwidth requirements. As our consumption habits change, so will our bandwidth needs.  

For more:
- See this Strategy Analytic's research note

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