Verizon to Shut Down FiOS Investment Post 2014

Verizon CFO Fran Shammo stood up this week and made it clear
in a Q&A at the Goldman Sachs Communacopia conference that
FiOS build out is over. The company will continue to build
past 1 million homes a year for each of 2013 and 2014, and
then stop building fiber.

Shammo gave the clarification in answer to questions after his
presentation at the conference, saying, “the significant build
in is at the end of 2014…. we are not passing more than we
originally said. We will still end up at around that 18
million to 19 million from a pass perspective. And at this
point we won’t build beyond that, because at this point we
have to capitalize on what we have invested.”

The continued build outs are only continuing because when
Verizon originally made deals with each US state, it was given
minimum build out franchises, and it plans to complete them,
but then do no more.

Shammo also laid out how the company was improving on its
truck roll process to light up that fiber, talking about DSL
call outs now resulting in flipping the homes over to fiber
and then selling them up on services once they saw the speed
of the fiber compared to DSL. In the past the company would
fix DSL a few times at a home with the cost of truck rolls,
and only upgrade them if they asked for it.

Recently Verizon has been carrying a huge capex burden on
building out more fiber at the cost of some $700 per
connection, but it has been losing DSL connections at an
alarming rate, around 132,000 during the last quarter, against
the 120,000 gains it made on FiOS broadband. While this has
been balancing out, this has all been fine with the better
ARPU from a fiber line — both in terms of adding TV to the
broadband and voice — more than making up for the fall in high
speed Internet lines.

But Verizon has agreed to partner with local cable operators
where its FiOS service does not reach, and this means it can
let its copper DSL go to hell, knowing that when these people
switch to cable, it can sell them the service, and as a result
make as much profit on managing the customer for the cable
companies as it made on DSL.

The net result is a far less competitive broadband environment
in the states where Verizon does not have FiOS, something that
was feared when it first mooted its potential relationship
with Comcast and the other cable operators — buying their
spectrum and offering MVNO cellular to them and cross selling

This, in turn, will also lead to a less competitive cellular
environment, as Verizon and AT&T become increasingly more
dominant in the US, and Verizon has the marketing help of the
cable companies in reaching a quad play.

This is similar to the attitudes of the two major Baby Bells,
back before they agreed to push on into IPTV and fiber TV,
back in the 2004 time frame. Their reluctance to build fiber
closer to the home, or in Verizon’s case, all the way to the
home, forced a change in US law. First, a court said that DSL
could not have enforced wholesale pricing put on it, and then
the FCC said that fiber would be exempt from unbundling, where
it went within 500 feet of the home. In actual fact, most U-
Verse build out only went to within 5,000 feet of each home,
but AT&T still managed to keep the competitive wholesale CLECs
at bay.

The other thing Verizon might do is to copy the approach of
AT&T and use vectoring on its DSL, so as to get it up to 100
Mbps, and then use further techniques like Phantom mode and
bonding to allow multiple lines to carry a single signal,
which might easily get broadband up to 100 Mbps upon install,
and up to 400 Mbps in the medium term, so that it remains
competitive with cable.

Shammo’s comments aren’t really new, but they do confirm what
analysts have thought since the striking of the cable TV deal,
and we could see a period of massively reduced capex and
higher wireline profits from Verizon as it heads toward a
future where there is less meaningful competition.

This article appeared in Faultline.

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