Verizon (NYSE: VZ) may have built a profitable wireless business, but ongoing declines in its traditional copper-based voice service continues to eat into its wireline segment's bottom line.
To fight that downward trend, Verizon has made a $23 billion bet to build out its Fiber to the Home (FTTH)-based FiOS service for consumers and expand cloud services for businesses.
Francis Shammo, CFO, Verizon: "let's face it--the FiOS cost structure will never be as profitable as a legacy landline structure and that is because there's content"
In Q2 2011, Verizon reported that it added 189,000 net new FiOS Internet connections and 184,000 net new FiOS TV connections.
But even though Fiber to the Home (FTTH)-based FiOS network, which is growing, newly appointed CFO Fran Shammo is realistic that the service will never be as profitable as its copper-based voice service.
Speaking at this week's Oppenheimer & Co. Technology & Communications Conference, Shammo said while FiOS "profitability is starting to increase, let's face it--the FiOS cost structure will never be as profitable as a legacy landline structure and that is because there's content," he said, adding that "it is a very fierce competitive environment with the cable companies."
While FiOS may have become a new revenue generator for its wireline business, one of the glaring realities that all service providers face is that landline voice losses meant it had to make drastic cuts in its wireline employee base.
Last year, the service provider had to lay off 16,000 wireline workers, a move Shammo said helped cut wireline operational costs, but "we still have a lot of cost restructure to do within the wireline business."
These challenges to sustain the wireline business have prompted Verizon to ask for a number of concessions from its two main unions: the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW). They represent 45,000 of Verizon's workers on such issues as pension, health care contributions and sick time.
Unable reach an agreement by the time the union contracts expired last Sunday, Verizon's 45,000 union workers went on strike and have yet to reach an agreement.
Shammo said that in order to stay competitive it has to change the cost structure to stay on a competitive footing with the cable industry.
Cable, for example, is not required to provide the same benefit package that Verizon is required to give its employees.
"From a cost structure competitive nature, something has to change if we want this business to be a viable sustainable long-term business," he said. "I think we have to be realistic [that says] the wireline business has to go through a cost structure change."
Replacing copper with fiber
Another area where Verizon believes it can possibly reduce costs is to shut down its aging copper network and move customers onto fiber where it has gained decent FiOS penetration.
Last year, the service provider migrated a number of its customers in Bartonsville, Texas off the existing copper network and onto fiber.
"It was a neighborhood that had more than 50 percent penetration so it made financial sense to connect the ONT to the home and delete the copper network," Shammo said, adding that they are "doing a trial in Florida in another community."
Outside of Texas, Verizon is now researching how it could make a similar copper to fiber transition in Wesley Chapel, Fla., a rural town outside Tampa.
Regardless of its progress in replacing copper with fiber, Shammo is quick to point out that the real cost challenge with deploying FTTH is not the equipment, but actually the man hours it takes to connect a subscriber to the network.
"Because it takes an employee--it's the hourly salary of that employee that gets capitalized for connecting up that home," he said. "That's really the intensive capital nature of the connection. It's not the hardware."
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