Digital Art Services, an advertising firm based in Great River, N.Y., has sued Verizon Communications Inc. (NYSE: VZ) for allegedly inflating its FiOS TV subscriber numbers in order to demand higher advertising rates.

Digital Art Services claims that Verizon used inflated subscriber figures by including customers who had signed up for FiOS TV, but were not yet connected to the service.

"Verizon's fraud in overstating the number of subscribers indisputably meant that purchasers of advertising time were paying for FiOS subscribers who did not exist," the ad firm's complaint states.

The lawsuit alleges that 38,000 of the 115,955 reported FiOS TV customers Verizon claimed at the end of the second quarter were not yet connected.

Verizon says this is all nonsense. "If anything, I would argue that we understate out numbers," said Verizon spokesman Eric Rabe. "It's simply a customer who apparently has not been as successful as it wanted to be and now wants to get out of the contract."

Rabe notes that of the 515,000 FiOS TV subscribers reported by the company at the end of the second quarter, every single one of them was connected to the service and not pending.

The practice of speculating on future subscriber figures when negotiating advertising rates is far from abnormal however. "They bought advertising space over a year-long period," says Rabe. "We would say to them that we're adding this many subscribers per week, so you might expect this many by the fourth quarter. Sometimes there's a provision that if you don't get as many views as you wanted, you get extra advertising."

Verizon does not negotiate advertising directly with customers. It outsources that task to a company called Viamedia. Rabe asserts that if Viamedia itself were inflating subscriber numbers then Verizon would not be doing business with it.

— Raymond McConville, Reporter, Light Reading