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FiOS Still on Fire

Verizon FiOS must have missed the memo about the saturated US pay TV and broadband markets.

Despite the declining, and even negative, growth rates in the two markets, Verizon Communications Inc. (NYSE: VZ) reported Thursday that FiOs added more big chunks of TV, Internet, and VoIP subscribers in the third quarter ended Sept. 30, making further inroads against cable operators in the residential space. Verizon also claimed that its fiber-to-the-premises (FTTP) network is starting to gain market share against cable providers in the increasingly competitive small-to-midsized-business (SMB) market.

Specifically, Verizon reported that FiOS picked up 135,000 video subscribers in the summer quarter, up 13 percent from 119,000 a year earlier. Over the first three quarters of the year, Verizon has netted 444,000 FiOS Video customers, up 6 percent from 419,000 in 2012. As a result, the telco now has nearly 5.2 million pay TV subscribers, more than all US cable operators except Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC).

Similarly, on the broadband side, Verizon said FiOS added 173,000 new broadband subscribers, up 27 percent from 136,000 a year earlier. Verizon has gained 522,000 FiOS Internet customers over the first nine months of the year, up 13 percent from 463,000 last year. Thanks to these gains, Verizon now has more than 5.9 million FiOS Internet subscribers, more than most US MSOs again.

With the all-fiber FiOS network now passing 18.3 million small homes and businesses, Verizon executives insist that they’re not resting on their laurels just yet. Noting that FiOS Video’s penetration rate is 35 percent of homes marketed, and FiOS Internet’s penetration rate is 39 percent of homes marketed, they argue that they still have plenty of room for growth.

“We are going after market share,” said Verizon CFO Fran Shammo, speaking on the quarterly earnings call with financial analysts. “The fact of the matter is we still have a long runway.”

In particular, Shammo said FiOS is still gaining momentum in the New York City market, where it competes head-to-head against Time Warner Cable and Cablevision Systems Corp. (NYSE: CVC), and in the Philadelphia and Washington markets, where it goes up against Comcast. “To my mind,” he said, those three key markets are still “underpenetrated.”

Seeking to make FiOS Video even more competitive against cable video packages, Verizon recently began offering free mobile access to nine live TV channels via the FiOS Mobile app, with plans to add more in the coming months. The app also enables FiOS customers to buy or rent up to 45,000 on-demand movie and TV show episodes from FlexView, Verizon’s multi-screen video service.

On the broadband front, Verizon boosted the maximum speeds for FiOS Internet to 500 Mbit/s downstream and 100 Mbit/s upstream in July, briefly making FiOS faster than any major North American cable operator’s broadband service. But Comcast promptly responded in August by upping its fastest broadband speeds to 505 Mbit/s downstream and 100 Mbit/s upstream. (See: FiOS 500 Leaves Cable in Dust and Comcast Zips Past Verizon.)

Verizon does not break down how many of its broadband customers subscribe to each FiOS Internet tier. But the company said 40 percent of its customer base now subscribes to at least 50 Mbit/s downstream speeds, up from 35 percent at the end of June.

Shammo said FiOS is also making headway against cable in the SMB market as Verizon shifts its focus to building more connections to shopping centers, business districts, and other commercial locations. But he conceded that Verizon is still losing ground to cable in areas outside FiOS’s footprint because of DSL’s limitations. “Outside of FiOS, it’s hard for me to compete with the speeds cable can offer through Docsis 3.0,” he said.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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