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FiOS Expansion Is Finito

News Analysis Mari Silbey, Senior Editor, Cable/Video 12/10/2013

Google may be on a big fiber-to-the-home kick these days, but Verizon Communications is still calling it quits on fiber builds. Eight years after breaking ground on its first FiOS deployment in the Dallas/Fort Worth suburbs, Verizon CEO Lowell McAdam said on Monday that further market expansion for the wireline business isn't likely.

"We've got a great footprint that we can concentrate on," said McAdam, speaking at a Wall Street analyst conference in New York. "I think there are opportunities to partner out-of-market with the companies that are there versus us going in and deploying FiOS."

Verizon Communications Inc. (NYSE: VZ) has been focused on FiOS market penetration rather than expansion for years. But an analyst at the UBS 41st Annual Global Media and Communications Conference questioned whether further activity by Google (Nasdaq: GOOG), and AT&T Inc. (NYSE: T)'s plans to deploy FTTH in Austin, Texas might have changed the company's agenda. McAdam made it clear that he believes there are better places for Verizon to invest its money.

"As I said, it's moving more and more to the broadband side than it is to the TV side," he said. "So I have not seen a case that would make any sense for us to go and open up new markets."

McAdam also said Verizon would continue to push market penetration rates for its twin FiOS TV and FiOS Internet products, which closed out the third quarter at 35% and 39%, respectively. "I don't think 50% is a ceiling for FiOS penetration at all," he said. Verizon now has 5.2 million FiOS TV and 5.9 FiOS Internet subscribers. (See: FiOS Still on Fire.)

On the same day that McAdam spoke at the UBS conference, Verizon also announced its purchase of the content delivery network company, EdgeCast Networks Inc. . (See: Verizon Scoops Up CDN Provider.)

The EdgeCast acquisition has huge implications for Verizon's ability to deliver Internet-based content, and it strengthens the company's case for expanding video services to subscribers across the entire US. In other words, Verizon is making moves to ensure that it won't be limited to the FiOS footprint for video delivery in the future. While the expansion days for FiOS may be over, Verizon's overall infrastructure for video delivery continues to grow.

— Mari Silbey, special to Light Reading Cable

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mendyk 1/8/2014 | 4:18:36 PM

Re: Copper redlining Margins are definitely wagging the business dog right now in many organizations. It's the result of too many people wanting to prove how smart they are.

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qco900 1/8/2014 | 4:08:15 PM

Re: Copper redlining It's even more convoluted than that at the local level.... There are areas where Verizon has paid the franchise fee, completed all the ducting and even installed some of the trunk fibers, but will not sell the Fios service to customers (75013 comes to mind).

The policy decision has been made at the senior levels based on the overall financial performance of the fiber-to-the-home business, therefore no more expansion will occur whether or not it makes any sense at the local level. No-one at Verizon became successful by going against policy decisions!

Going forward, all the arrows point to Verizon continuing to exit the local wire/fiber delivery business and focusing on content/services and wireless delivery. Note also that selling the wire delivery pieces helps pay for the high cost of aquiring back the vodafone piece of the wireless entity, which is an essential part of the future strategy.

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Bruce Kushnick 12/15/2013 | 4:03:36 AM

Re: fios >Wireline segment 3Q operating margins were 1.6% versus 33.8% for wireless. EBITDA margins were 22.7% and 51.1%. They didn't break out FiOS (which probably has much better margins) >from everything else in wireline, including an anemic enterprise business and a dying POTS business. From that perspective, you can see the basis for their investment decisions.

I got a different take--

You might want to read this report...

http://newnetworks.com/VerizonNYAffiliatereport.pdf

When you dump lots of your wireless expenses into wireline, it's easy to goose your wireless profits... which was the issue in our new analysis in New York --Verizon is paying1/2 or 1/3 of what AT&T are paying for access and large chunks of the construction budget are also being paid by the wireline division.

And remember, the access revenues profits are, what 80% last time the numbers were available -- or higher. Moreover, they keep claiming FiOS is in a different bucket as compared to POTs -- in NJ they've already stated in the response to a show cause order that it was part of their Opportunity New Jersey requirements -- and it's listed as title II, common carriage... because it can be dumped into the utility expenses and then they raise POTS rates, and all ancillary services.

or see our testimony about New jersey's requirement to have 100% of the state upgraded with 45 Mbps

http://newnetworks.com/PreparedTestimonyOCT1.pdf

However, they are throwing away their wired business where-ever they can, so without audits it's impossible to break out these numbers-- for example, FiOS TV is offered by Verizon the utility incumbent, like Verizon New York but it's set top box is in another affiliate, Verizon online and who knows where the actual programming revenue is...

This movement of the assets -- ie, privatizing FiOS and claiming it's a separate network -- gets even more distorted when you examine AT&T's U-Verse, which is all over the POTS wires.

these movements have been going on for at least since the FCC decided to not require any more data in 2007.

If the affiliates actually paid what competitors were paying, Verizon wireless wouldn't be any where near as profitable

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albreznick 12/13/2013 | 5:47:14 PM

Re: fios Sounds about right. Would be fascinating to see those numbers that they keep behind locked doors.

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Duh! 12/12/2013 | 5:27:46 PM

Re: fios The 10Q doesn't provide sufficient quantitative guidance for calculating ROI of just the FiOS portion of wireline (nor would I expect it to). There is a figure for FiOS revenue, but not cost of sales, and SG&A attributable to FiOS, so no way to calculate operating earnings. And beyond the $23B committed 10 years ago, we don't know how much they've invested, or the current value of those assets. Nor would such a figure take into account cost reductions and other benefits from squeezing out copper.

If I recall, they announced in late 2008 or early 2009 that FiOS had gone ROI positive, and shortly thereafter that it was cash flow positive. That was with lower penetration and lower ARPU (but perhaps lower ARPU margin due to content cost). So draw your own conclusions. Your SWAG would be as good as mine.

You saw some pretty strong hints from McAdam that FiOS is still a good investment, but not as good as wireless. I would assume that those numbers are closely held inside information.

.

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brookseven 12/12/2013 | 4:11:20 PM

Re: fios Alan,

Duh! already posted ROI numbers in this thread. He did so by reminding us that they report these numbers each quarter. Nobody here needs to guess.

seven

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albreznick 12/12/2013 | 3:41:32 PM

Re: fios So how do you think FiOS compares on this scale with the other Verizon initiatives? is their rate of return up there?

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brookseven 12/12/2013 | 12:55:00 PM

Re: fios Companies look at relative rate of return. Should I put more in Enterprise, Wireless, or FiOS? They can not fund all possible initiatives. They fund the ones that match their investment criteria. seven

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fiosjoe 12/12/2013 | 12:24:14 PM

fios I hope vz continues to build out fios. Its a great product that people want. If you build it, they will come... Why give away potential revenue to other ISP's?? Vz doesnt make cents ,they make $$.

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albreznick 12/11/2013 | 5:59:31 PM

Re: fiber, CDNs that's good question, David. Unfortunately, I don't have a good answer for it. Do you really think they want out of residential wireline altogether? Don't they make good money on FiOS?

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