Analyzing Verizon's FiOS Bet

There’s a lot of discussion today about whether Verizon’s (VZ) $23 billion investment in its FiOS network was worth it, but the argument really comes down to this: How much is future-proofing your business worth?

The New York Times did an in-depth analysis about Verizon’s FiOS rollout and quotes a prominent bear on the effort. Verizon bet a bundle and moved to offer a triple play–TV, Internet and phone–to better compete with cable.

Saul Hansell, who also detailed the bear case separately, pits Wall Street skeptics and Verizon against each other. Verizon claims FiOS is a hit while others–some of them given some play here–say that it’s a losing battle.

The whole discussion raises interesting economic questions: Would Verizon have been better off handing $23 billion over to shareholders? Should Verizon have just let its phone and DSL business wither on the vine? Does Verizon have an obligation to compete in what used to be its dominant turf? Should Verizon just go wireless? And the biggest one: How do you weigh short-term costs (and Wall Street’s 3-month myopic view) with the long run?

Economics and assumptions aside, I argue that Verizon made the right call. Sometimes you have to go with your gut and make a few big bets. Here’s what Verizon could have done:

• It could have stood by and watch cable become the dominant monopoly;
• It could have watched its access lines dwindle to nothing;
• Or it could have used its growth engine–wireless–to diversify and future- proof its business.

Door No. 3 will turn out to be the best move. If Verizon did nothing, its business would look a lot like AOL or EarthLink, two companies trying to retool as a former cash cow dies. If Verizon did nothing, the shareholder hackles would be even worse. They’d want Verizon Wireless spun off or some corporate shell game in the name of shareholder value.

Disclosure: I’m a Verizon FiOS TV and Internet subscriber and glad the company made the move. Since installing it a little more than a year ago (gallery right) I’ve had zero outages. Zip. Zilch. With Comcast I wouldn’t make it two weeks without an outage. I left Comcast for reliability–Comcast was cheaper than Verizon–and when I get the cable giant’s mailings I just chuck them. I must admit, however, that I did take a second glance when Comcast offered me a Wii for signing up for the triple play again.

But if you work from home at all you just can’t have Comcast’s flaky network under the hood.

In the grand scheme of things there will be two flavors of broadband and TV providers–cable and fiber to the premises (FTTP). And guess what will win the day? Perception and customer service. It won’t happen overnight, but making customers–instead of short-term investors–usually pays off big. And I can tell you I’m feeling pretty good about Verizon, which wasn’t the case back in my DSLHell days.

Simply put, Verizon has future-proofed a few things. First, it has future-proofed a customer base. Second, Verizon has future proofed its network. While Comcast upgrades, Verizon can flip a switch to get me more bandwidth. That edge will last for years. Is that worth $23 billion? In my book it is.

Comments

[Eric in IL]

Verizon and AT&T have to compete with cable head-to-head. Unlike the ridiculous Dennis Kneale suggests, wireless cannot stand alone. Cable Cos would just make a wireless acquisition and squash them with the value add of the triple/quad play. Traditional POTS lines are dying/dead and the telcos have the global networks to provide a superior data service to Cable. I agree with your AOL comparison. The right choice was for Verizon to move forward with FiOS and differentiate themselves with a convergent platform to compete with cable. If I had to make a bet on where Comcast will be relative to Verizon in 5 years, I think the equity of Verizon will outperform that of Comcast by 100%. Both AT&T and Verizon are getting traction and their subscriber numbers are growing rapidly. They'll face their hiccups, but these guys know how to operate. Also, in my experience, the Telcos are better at transforming than the cable cos. One other notion is that of a ripe market vs a spent market. The market for landline/voip probably won't grow in net, so Cable's gain on voice will slow, while there is plenty of TV market to take away from Cable, so here the telcos will flourish. I reiterate a 5 year horizon, but I would even bet than by EOY 2009, VZ & T will be amazing people.

[helplessobserver]

From a technical point of view FIOS wins hands down. It will not be made obsolete by higher frequency, higher capacity spectrum. Coax cable channels at 500 MHz was fine for low resolution TV with a few voice and music channels thrown in. High defTV uses 19.38 megabits/sec for over the air broadcast which uses most of their bandwidth. HighDef sub channels use standard definition 480i, the same standard in use since the 1940s. Everything you see is not HighDef either on cable or over the air.

[imrms]

I worked on the project for the then Bell Atlantic (pre GTE merger to Verizon) when it was called Fiber to the Home (FTTH) in 1987. That same year the FCC opened up the Cross-Ownership rules for re-examination. These rules prevented Telephone companies from owning cable TV franchises. As one of only twelve employees and members of the Cross-Ownership Docket Team, I presented the only position paper that urged Bell Atlantic to pursue a challenge to the present prohibition. It was subsequently overturned by legal department on the grounds of a first amendent violation.

From that point on Bell Atlantic should have rigorously pursued the cable business by acquiring or building their own systems. However, after an unsuccessful merger attempt with the then cable giant TCI (CEO John Malone) and an tepid aquisition of a system (Jones Cable) in Virginia, the process stopped. Had the company not lost sight of the future or "truth (Verity) on the Horizon" (Verity + Horizon = Verizon - truth on the horizon - that's how they came up with the silly name) they would have spent far less capital over the last twenty years while still building a fiber network where it was far less costly to do so in new construction areas. The result would have been much the same, but at far less cost. The executive decision to pursue the venue came much too late. That's why they are doing what they did. However, dividing the revenue of an existing market with that kind of capital investment will take many more years to be fruitful if it ever does.

[ubet]

Its about time someone wrote a positive article regarding Verizon's FIOS.Apparently forward looking into the future is something of the past with the majority of the current analysts take on Verizon's FIOS.Someday,Verizon will go out of franchise and be very successful with this product.Their stock is cheap and the dividend is attractive.

[CPAinVA]

I think Verizon has a huge opportunity on their hands. Comcast has been treating customers poorly for so long because they had no other real alternative. I live in Northern Va., where the only thing keeping customers from signing up with Verizon is the availability of service. I have switched over and I can echo the writers comments that I have not had a single outage over the past year. It may take a while to pay off, but I’d never chose to go Comcast ever again.

[User 154334]

Always bet on fiber optics and those that deliver reliable service. Low price is often associated with bad service. You get what you pay for.

[sofaking30]

Verizon is constrained on capacity for DSL infrastructure. They do not offer above 3Mbps and 1.5Mbps is the norm. I am speculating in a few years, Verizon will sell their whole stake of Verizon Wirelss to Vodaphone. Telco companies need a narrow-minded one-way vision in their corporate mindset. Can't do too many things at once.

FTTH is an opportunity for Verizon as the technology is one step ahead of Comcast. The sale of VZW will keep VZ financially ahead.

[dios]

The FIOS venture is a gold mine. The $23 billion dollar investment consists of both capital outlay and labor cost. So if they were spending that money anyway on engineers, technicians who they couldn't get rid off because of union restrictions, a substantial cost can be considered sunk.
In a few years, most carriers including cable companies would have to move from copper to fiber to bring the same quality that Fios offers. The longer the rest of the telecom gang delays the launch, mainly AT&T, Qwest, the riskier that investment will be considering that the legacy product revenue that's keeping the telecom players afloat today won't be there tomorrow.
This isn't anymore Telecom, Cable companies. We are talking about a major consolidation of services into vertically intergrated media companies of tomorrow

[Hans Castorp]

VOD + Telepresence + Femtocells + WTFK = plenty of BW needed at the home, in a few years. My FiOS ONT is capable of handling 622MB right now, and nothing will come close other than another fiber strand to my house. If investors have enough patience (and that's the question), FiOS will be the only game in town, and we'll all have to pony up to Verizon. By 2020 we'll be complaining about Verizon's 1950's style monopoly and customer service in holograms over FiOS.

[Philly_Skinny]

I was a Comcast customer and switched to Verizon as the FIOS internet and TV service offered superior advantages in overall performance and quality. In all my 46 on this Earth I have never dealt with a comany that has no idea what the left or right hand is doing. If you can stomach pouras customer service and competancy, G-d bless.

Don't do it. I have reps knowing that they don't have thier act together giving me discounts free services, thier first and last name and direct number to call.

It will be decades before Verizon knows how to support the superior products they have.

Good Luck and if your not having problems think seriously about switching.

[fabricator]

I agree with this analysis. I'm a FiOS subscriber too and while there have been some glitches, overall I'm very pleased. I left Earthlink without looking back and also toss the Comcast flyers in the trash.

And those who continue to believe that the world can go 100% wireless are ignorant. Wireless cannot provide the same speed, reliability and security that FiOS can. Obviously the future will still be a mix of wired and wireless... the only question is what that ratio will be.

[imrms]

Hey, 'dios' the 23 billion dollars is not for the engineers and technicians they have today. Design and construction of all that fiber cable is being done by outside contractors. It's all additional cost. After service to the customer has been established, it maintained by Verizon union technicians.

[rattlesnake0407]

I switched to FIOS in No Virginia as soon as it was offered in my neighborhood and I could not be happier. Although contrary to the author, my service (TV, Internet) winds up costing me less when adding in phone service than under Comcast - and the quality is excellent. I cannot comment about customer service with FIOS as I have had zero problems.

I used to work for AT&T from 1964-1980. Infrastryucture was always looked at with a 20-year plan. You just cannot be concerned with short term economics with the necessity for that kind of planning. I recollect from that time period that my older brother remarked that the Japanese had a 100-year plan. And yes, I own stock in VZW, T, and Comcast (due to the split of from the original T). And I like the dividends; they'll help in my retirement.

[grich240]

Cheaper, faster, better---what's not to like?? I for one hate Cablevision and am thrilled not to be giving them money. My Fios is off all outside metallic wiring so it does not break down(3+ years running).

[Johnj]

DIOS ya hit the nail on the head. all this talk of costs. Guess what if the crews were not laying fiber they would be doing something else that would "cost". The only real overhead is the material (fiber, splice machines etc.) and that is well worth it to put VZ in the lead. I agree with your whole statement

[rozbeck]

Love the FIOS product. I just wish they could get my bill right!! Customer service is lacking and billing requires my due dilligence every month to prevent being ripped off.

[Ron Massachusetts]

Ok, I took the plunge:

- sales guys were not forthcoming about costs
- sales guys told me I would be getting four high def boxes, got one
- sales guys told me there was free dial in for travel; it costs
- sales guy gave me cell phone number to call; it doesn't work
- install guy didn't hook up phones right; so I have to spend an extra day waiting to get hooked up -- and this by a phone company!
- install guy left me with no literature on services, etc.
- web site for downloading software (for a product I did not want and asked to not get) busted

I can see an improvement in television quality, but internet not significantly faster than service from Charter (a forelorn company), and wireless setup slower than my old Lynksys system.

On the plus side I got very quick and easy telephone tech service to help with phone situation.

Feels to me like they rushed this out the door, especially in my town. I switched mainly because of some sleazy Charter business practices, too much internet down or slow time, and horrific new mail client (I've permanently switched to Gmail) that does not work with many portable devices. Why do I think these companies are going the way of the legacy airlines?