Verizon to Pump $18B Into FiOS by 2010

In demonstrating renewed confidence in its FiOS fiber-to-the-home (FTTH) initiative, Verizon Communications Inc. (NYSE: VZ) says its fiber-based service will become profitable after four years -- and the carrier vows to boost its investment in the market to $18 billion by the year 2010, at which point it expects to have 7 million customers using FiOS for Internet access.

The $18 billion figure is the largest public number Verizon has released to date, but it's unclear whether it represents a change from the carrier's internal growth targets. In the past, Verizon has avoided talking specific long-term investment numbers, preferring instead to update the details of its FiOS expansion in short-term stages. (See Verizon Updates on MCI, FiOS, Verizon FTTP: Plenty of Exits, and Verizon's Elby: IPTV Could Take Years.)

"It's really an acceleration," said Virginia Ruesterholz, president of Verizon Telecom, at a presentation Verizon gave to investors this morning.

Verizon officials say the revenue growth opportunities for FTTH and the declining network costs make the project worthwhile. The investment in a fiber service will turn profitable after four years, the company contends.

So far, Verizon has shown impressive progress in infiltrating the video services business and ramping up its FTTH services, say some analysts.

"Verizon's relatively pragmatic architecture, compared with pure IPTV, has enabled them to scale video subscribers much faster than their telco peers and compete with cable more effectively as a result," says Rick Thompson, a senior analyst with Heavy Reading. "At the same time, they've been able to deliver an advanced feature set on top of the platform (multi-room DVR, HD, media manager, widgets, etc.) that will continue to evolve."

Verizon claims more than 500,000 FiOS customers with 5 million homes passed by fiber. Its year-end target is 6 million homes passed. Verizon says of those 500,000 users, it expects to have 175,000 of them using a video service by the end of the year.

The company sees that the FiOS services becoming profitable within four years of initial investment, which may be boosting its desire to spend more money. The $18 billion in net capital Verizon says will be invested in total from 2004 through 2010 does not include $4.9 billion that would otherwise be required to maintain traditional copper plant during the same period.

Verizon said it expects this investment to result in 7 million FiOS Internet customers and up to 4 million FiOS TV customers by year-end 2010.

“We see this as a great growth opportunity to grow profitable revenue,” said Ruesterholz. “We know the market is changing from narrowband to broadband… I feel the network is future-proof.”

Ruesterholz said Verizon has been encouraged by a low 1.5 percent monthly churn rate among FiOS customers. The initiative is also important because of its potential to develop new revenue from additional applications such as video-on-demand and gaming.

The video portion of the network is progressing on schedule, said Ruesterholz, with more than 200 video service offices. In addition, Verizon currently holds 161 local video franchises -- more importantly, Ruesterholz says that local franchise regulation is not slowing deployment of the service down.

”We had to learn if this was going to be an issue," she said of local video franchise regulation. "This isn’t holding us back in our deployment of video.”

Verizon said the migration to a fiber network will also result in $1 billion in savings in annual operating expenses by 2010. Capex costs are also declining, according to the company. Average capital expenditures to pass a home were $873 in August, less than the previously announced year-end 2006 goal of $890. The new year-end target is $850 per home. The cost to connect has declined from an average of $1,220 in January 2006 to $933 in August, but that was higher than the announced year-end 2006 goal of $715. The new year-end target is $880 per home in connection costs, Verizon said.

Verizon shares edged slightly lower on the news, dropping $0.36 (0.95%) to $37.61 by 11 a.m. ET.

— R. Scott Raynovich, Editor in Chief, Light Reading