Verizon gives 'FiOS-envy' markets little reason for hope

Sean Buckley, FierceTelecom

Verizon (NYSE: VZ) may be focused on enhancing its FiOS subscriber counts in the markets where it already built out fiber to the home (FTTH) infrastructure, but as seen in its first-quarter earnings results, it looks as though those markets are becoming saturated.

During the quarter, the telco only added 98,000 FiOS Internet customers, down from the 126,000 new subscribers added in the fourth quarter of last year, and the 188,000 users it added in the same period a year ago. Likewise, Verizon reported that it only added 57,000 FiOS Video customers in the first quarter, down from 92,000 customers last quarter and 160,000 subscribers one year earlier.

The telco blamed the poor weather conditions and aggressive pricing campaigns by cable operators as the culprits.

FiOS video subscriber and broadband subscriber penetration now stands at 35 percent and 39.7 percent, respectively.

By comparison, AT&T reported that it added a total of 634,000 U-verse broadband and 201,000 U-verse TV subscribers, ending the quarter with a total of 11 million and 5.7 million subscribers, respectively.

Interestingly, Verizon said that more subscribers are buying up higher speeds. Fran Shammo, CFO of Verizon, said during the earnings call that nearly 51 percent of FiOS Internet customers subscribe to Quantum, which offers speeds ranging from 50 megabits to 500 megabits per second.

All of this begs the question: Will it ever consider expanding into new markets to build new growth for FiOS?

Stopping short of revealing any specific plans, a small ray of hope came in March when Shammo said during an investor conference that the only way it would look at expanding into new markets is when it generates more cash within the wireline business.

"We have to generate more cash within the wireline business and once we do that and I feel that FiOS has returned its cost of capital, then we can look at expansion, but at this point we're happy with what we have."

Another possible benefactor of some near-term possible expansion could be small to medium businesses (SMBs) that reside in existing FiOS markets. Extending fiber-based services to this segment could enable it to battle cable operators and local CLECs that have lured this segment with much higher speeds than Verizon could provide over its existing copper-based networks.

"Now, there will be certain areas, maybe another year or so, where we may look to extend the fiber a bit and include some small businesses which we compete extremely well in within the FiOS footprint and they are very profitable customers," Shammo said.

From an overall potential expansion perspective, some areas where Verizon could target could be Boston, Alexandria, Baltimore, Buffalo and others that continue to suffer from what Verizon spokesman John Bonomo calls "FiOS envy."

One city that continues to pine for FiOS is Buffalo. According to a Buffalo News report, 176,000 households around the city have access to FiOS. Local politicians recently hosted a meeting with community leaders and residents to discuss ways to influence Verizon to deploy service in their city. However, Verizon shows no signs of changing its mind anytime soon.

Outside of the FiOS footprint, the reality is that traditional wireline subscribers will be relegated to either a slow DSL connection or seeing their copper line replaced with Home Phone Connect or Voice Link. This strategy hasn't gone as well as it had hoped. After facing an outcry from local residents over its decision to replace its ravaged copper lines with its wireless-based Voice Link on New York's Fire Island, the telco changed its tune last September and decided it would install FiOS there instead.

Another option that Verizon may be considering is selling off its wireline business altogether to a competitor like Google Fiber. Earlier this year, a FierceCable column outlined the reasons why such a pact could make sense. 

Karl Bode, editor of Broadband Reports, theorizes that Verizon CEO Lowell McAdam's ongoing focus on growing its wireless business is the reason none of these cities will ever see FiOS installed in their town.   

Former Verizon CEO Ivan Seidenberg "was bullish on fixed-line broadband, and new CEO Lowell McAdam is bullish on wireless, where heavily capped usage makes returns significantly more appealing," Bode wrote. "It's why FiOS expansion was frozen and the company is actually working to drive un-upgraded DSL users to cable competitors."

Bode is right. Cable operators like Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) can already deliver higher speeds of 50, 100 and even 300 Mbps over their existing infrastructure and will continue to poach customers in areas where FiOS likely will never become available.--Sean