Verizon (NYSE: VZ) may have continued to add more FiOS Internet and video customers in the third quarter, but those gains were lower than what it reported in the same period a year ago, illustrating that it is continuing to reach the upper limits of penetration in its existing 13-state region.
During the quarter, Verizon added 162,000 new broadband subscribers, down 6 percent from the 173,000 added in the same period a year ago. Likewise, on the video side, Verizon netted 114,000 new FiOS video subscribers in the third quarter, down 16 percent from the 135,000 it added in the third quarter of 2013.
Even so, the service provider ended the quarter with a total of 6.5 million FiOS Internet and 5.5 million FiOS video connections, representing what it said were year-over-year increases of 8.8 percent and 7 percent, respectively.
"They have been very successful with the rollout of FiOS," said Bruce Leichtman, president and principal analyst of Leichtman Research Group, in an interview with FierceTelecom. "If you look at TV, with a penetration of 35 percent, it is pretty impressive as compared to AT&T, which is only at 22 percent penetration, but Verizon is not rolling out much new territory and that's their challenge."
Leichtman added that Verizon is facing the same challenge on the broadband side of FiOS.
"FiOS broadband penetration is around 41 percent," Leichtman said. "That's very impressive, but they're not growing much new territory so that limits the potential."
Despite calls from various communities that have been left out, like Boston and Buffalo, N.Y., Verizon's move to expand FiOS services into new markets seems like a long shot.
Earlier this year, Fran Shammo, CFO of Verizon, told investors that it won't bring FiOS to any new markets unless the current buildouts have given it the best return on its investment.
With no immediate plans to expand into new markets, one of the key themes that Verizon continues to drive is customer retention. One of the pieces in its FiOS retention effort is its "SpeedMatch" program; Verizon has upgraded almost 5 million FiOS customers to the symmetrical SpeedMatch program it launched for consumers in July and later in September for its SMB customers.
Under the SpeedMatch program, eligible customers will be able to get symmetrical download and upload speeds, a factor that will initially enable it to better battle cable, whose upstream capabilities are limited under the current DOCSIS 3.0 network infrastructure.
"Our focus in FiOS is to drive higher penetration by adding quality customers," Shammo said during the third-quarter earnings call.
Leicthman said that while he agrees that Verizon has a sound strategy, it appears that the focus has turned more to retaining higher end customers that are willing to pay more for what is a premium service.
"SpeedMatch and things like that is more about retention," Leicthman said. "At this point it's about retaining those higher end customers where you're talking about ARPU of $125 per customer for all FiOS services, which is still pretty impressive APRU."
Leicthman added that "if you're going to be a high end service, it becomes more about retaining those high end customers."
At the same time, Verizon is continuing with its copper-to-fiber plans, migrating another 55,000 customers over to fiber, bringing the year-to-date total to about 200,000. Besides lowering maintenance costs, the service provider is confident that it will have even more opportunities to upsell its suite of broadband and video services to these customers.
The question for Verizon now is how can the company maintain ongoing profitability for FiOS as its existing markets continue to become saturated and cable companies start to respond with their own higher speed offerings where they don't deliver fiber services yet? This will be an ongoing question worth watching over the next quarter and into 2015 as the broadband market continues to evolve.--Sean