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Verizon Uses Fios as Shiny Object in Q4

Mari Silbey
1/24/2017

After years of turning its focus away from Fios, Verizon is once again shining a spotlight on the consumer-facing wireline business. There are two reasons for this. One, Verizon's alternative Go90 mobile video service appears to be in trouble. And two, Verizon is now combining its Fios efforts with buildout plans to support 5G wireless broadband deployments, giving it new reason to extol the virtues of Fios fiber networks.

In its latest earnings report, Verizon Communications Inc. (NYSE: VZ) said that total Fios revenues rose to $2.9 billion in Q4, up 4.4% from the prior-year quarter. For the full year 2016, Fios revenues were up 4.6% to $11.2 billion. The telco also gained 21,000 Fios video subscribers and 68,000 Fios Internet subs in the quarter, bringing its total count to 4.7 million and 5.7 million Fios video and Internet customers respectively. (See Verizon Misses Estimate in Q4 Earnings.)

On a negative note, Verizon has confirmed that it laid off 155 employees from its Go90 business last week as first reported by Variety. While the company claims the layoffs were about getting rid of "duplicative resources" and "are not indicative to a change in our strategy," the lack of traction for Go90 makes the Fios video numbers more important. Verizon hasn't reported the consumer adoption rate for Go90, but signs have not been favorable. Verizon would only say today that average daily usage among Go90 customers hovers at about 30 minutes, while Go90 video represents less that 20% of traffic on the company's wireless network. (See also OTT Went Big in 2016, Aims Higher in 2017 and Verizon Backpedals on Go90.)

The Fios video additions may also not be as positive as they seem. Although Verizon added customers in 2016, it acknowledges that demand for Custom TV packages remains strong. Since Custom TV packages typically cost less than a traditional Fios video product, Verizon may be seeing its average revenue per user (ARPU) for Fios video headed downward. (See also Skinny Bundles Sock FiOS Video Revenues.)

There are also caveats to Verizon's Fios success on the broadband side. While the number of Fios broadband customers grew from 5.4 million at the end of 2015 to 5.7 million at the end of 2016, Verizon lost a total of 282,000 Internet subscribers for the year with DSL customers factored in. Those DSL subs are far less valuable to Verizon than Fios subs, however, and the shift in the company's customer base is undoubtedly making Verizon's wireline business more profitable.


The rollout of FTTH broadband networks is spreading. For more on fixed-line infrastructure, check out our dedicated gigabit/broadband content channel here on Light Reading.


Speaking of profitability, better results in the wireline business aren't being by helped by Verizon's enterprise and wholesale operations. Even though EBITDA (earnings before interest, tax, depreciation and amortization) rose a whopping 17.7% to $1.9 billion for the wireline segment, Global Enterprise revenues were down 4.5% year-over-year in the quarter to $2.9 billion, and Global Wholesale revenues were down 7.5% in the same time period to $1.2 billion.

Total wireline revenues were down 3.1% to $7.8 billion, and Verizon said it expects to close on the sale of its data center business to Equinix Inc. (Nasdaq: EQIX) in Q2, which will affect future enterprise revenues further. (See Finally! Equinix Pays $3.6B for Verizon Data Centers.)

But thanks to cost-cutting measures, Verizon thinks its wireline profit margins will continue to rise.

"It would be reasonable to expect wireline margins for the year as a whole to be in the low twenties [in 2017] compared to the 19% that we saw for 2016," said Verizon CFO Matthew Ellis on the earnings call. "So we see a lot of improvements going through the business there. Obviously we're going to get the full-year benefit of the new labor contract through there, and we continue to manage costs in that business very closely."

Fiber is a key component to Verizon's wireline plans in 2017. The company is keen to emphasize both its One Fiber initiative in Boston, which is designed to bring new wireline and wireless services to the region, and its XO acquisition, which is expected to close this quarter and includes metro fiber rings in 45 of the top 50 markets in the US. (See Verizon Hails Boston Fios Launch but Eyes 5G and Verizon Bags XO for $1.8B.)

Ellis noted on today's earnings call that fiber to support Verizon's growth (both wireline and wireless) may also come from multiple different sources going forward.

"How we deploy that fiber can differ from location to location," said Ellis. "We certainly look where it makes sense for us to own the fiber. But if there's ways for us to partner with other people, or they can build the fiber on our behalf, we'd certainly do that as well. So it's a location-by-location, case-by-case basis. We look at the economics and we decide the best way to the fiber asset that we need."

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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mendyk
mendyk
1/24/2017 | 2:47:20 PM
PR is a lovely language
In the end, we are all duplicative resources.
KBode
KBode
1/25/2017 | 11:28:14 AM
Go90
I think most people could see those Go90 troubles coming from a few miles away. They're not built for disruption. I know these giant telecom companies think they can just turn a switch, throw a few billion at the problem and become the next Netflix, but it doesn't seem to work that way in practice.
mendyk
mendyk
1/25/2017 | 11:54:37 AM
Re: Go90
Not only are such services not built for disruption, they are created to prevent disruption. As in, "Let's come up with something that the kids will like but that doesn't threaten our core business." The usual result is lukewarm water.
KBode
KBode
1/25/2017 | 12:00:27 PM
Re: Go90
Yeah I think the fear of cannibalizing existing, traditional TV is just too great, so execs always put the axe to any aspects of such services that actually are disruptive...seems to happen several times a year...

I think you're right. It's about claiming you're being disruptive and hoping nobody notices. Doesn't work out. 

Granted Verizon still will make plenty of money on location and other user data. 
brooks7
brooks7
1/25/2017 | 2:27:30 PM
Re: Go90
And I would actually argue that we don't want them disrupting.  What we want SP's for is being reliable.  Disruption often means experimental...

seven

 
KBode
KBode
1/25/2017 | 2:41:07 PM
Re: Go90
Depends what you want, I suppose. If you honestly want them competing with existing streaming providers, some amount of disruption on pricing and innovative presentation is necessary. But again I think it comes down to the fact that they don't really want to offer TOO compelling a product or they'd cannibalize the existing cable roster.

A lot of these services from ISPs seem largely designed to make it APPEAR they're being innovative so potential cord trimmers or cutters remain in house. 

Also I don't really see disruption as synonymous with unreliable in this context, but I agree reliability is a priority. 
mendyk
mendyk
1/25/2017 | 2:55:27 PM
Re: Go90
Right -- this is more a disruption (or lack thereof) of a revenue model. It's the kind of idea that executives come up with when they are pressured to "do something" while making sure not to harm what already exists. This would be less of an issue if network operators focused on their core business -- delivery of broadband connectivity -- but that wouldn't sit well with stockholders who want something more.
brooks7
brooks7
1/25/2017 | 3:25:01 PM
Re: Go90
Dennis/Karl,

I would argue that if the Service Providers could provide incremental profit growth and NOT innovate their shareholders would be happy.  The SPs, and us here because of what we hear from them, have a bias on how this needs to happen.  In this case, it is to grow the value of a bit per second.  I would argue that this has been attempted for at least 15 years and not gone anywhere.  I would also argue that they should focus on their core (delivering broadband) and helping services that drive consumption.  Try to dump about 1/2 of their white collar staff and simplify the network.  Top line grows with consumption and it is compounded on the bottom line by lowering costs.

To expect a management team to build massive, reliable networks and then operate like South of Market Software startups is just not sane.  They drive themselves crazy with all kinds of ideas that don't come to fruition.  They would be better off with investment arms to help services that will consume bandwidth to grow.  Unfortunately, they have this viewpoint that partnerships work best when they have their hands around your neck.  They treat customers and vendors that way, so nobody partners with them.  Why would they?  They don't get that Google (Youtube) and Netflix are some of the best things to happen to them.

That is what needs to get fixed.

seven

 
mendyk
mendyk
1/25/2017 | 3:33:22 PM
Re: Go90
Seven -- Exactly right, and this is why an industry that should be humming along on the road to nice steady profits for many years to come has instead developed a massive inferiority complex that threatens its existence. Yes, prices per bit are falling, but the number of bits will only grow massively as long as we can keep the mushroom clouds at bay.
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