Verizon's Big Bet Starts to Pay Off

(page 2 of 2)

Broadband on the March

Verizon Wireless is also outpacing its bigger competitor when it comes to growth. Verizon Wireless sales grew 16.3%, to a market-leading $10.1 billion, from $8.69 billion a year earlier. And the so-called churn rate, measuring the average percentage of subscribers who defect each month, came in lower than many forecasts, averaging an industry-leading 1.14%, compared with 1.8% for AT&T.

Verizon's phone business continued to shrink, but the revenue decline was offset by growth in other areas—digital subscriber line, or DSL, Internet access; the new, higher-speed broadband and TV network; and the former MCI operations that cater to corporations. Revenue for all wireline operations fell 3.5%, to $12.73 billion, compared to a 4.7% decline in the third quarter. "Wireline financials were slightly better than expected," wrote Bank of America analyst David Barden.

The improvement was driven mostly by new broadband customers. In the fourth quarter, Verizon added 409,000 new fast Internet connections, including 165,000 for its new fiber-based FiOS broadband service. The company now claims 687,000 FiOS Internet subscribers, representing a 14% penetration of the homes to which it's available. "The market penetration is exceeding some earlier expectations," says Rosenbluth. "The product is resonating with customers."

TV Taking Off

Perhaps the biggest surprise of the quarter came from Verizon's new effort to sell TV service and turn up the heat on cable providers such as Comcast (CMCSA) and Cablevision (CVC). Verizon has connected 6 million homes with fiber optics and cable broadcast technology—twice as many homes as AT&T.

Thanks to a strong fourth quarter, the company also handily surpassed analyst expectations on the TV front. For the year, Verizon signed up 207,000 TV customers, compared with 181,000 expected by analysts at UBS (UBS). By contrast, AT&T has signed up only about 15,000 TV customers for its comparable U-verse service. "We chose a proven technology that allowed us to get to market quicker," says Marilyn O'Connell, Verizon's senior vice-president for video solutions. "I feel so much better going into this year. We've got some momentum."

But Verizon is also taking a much bigger financial risk. Verizon's network will cost more than three times as much as AT&T's because it requires digging up trees and tulips to put fiber into every house. AT&T is only laying fiber into neighborhoods and using already laid copper lines to carry video the last mile to living rooms.

Despite the higher price tag, UBS expects Verizon to produce a return on its investment by 2011. The reason? It believes the higher bandwidth of Verizon's network will attract more video, Internet, and phone customers—at higher prices—and thus generate about four times as much revenue as AT&T's network.

Although the market for corporate customers has been declining the last few years, Verizon's enterprise business appears to be stabilizing. Revenue totaled $5.3 billion in the fourth quarter, up 2.7% over the year-ago quarter. Most analysts expected a small decline in sales. The company said it is seeing stronger demand for consulting services and broadband connections. Verizon also boosted its estimate of 2007 cost-saving targets from the MCI merger to $900 million, up from $825 million. "We believe this is a meaningful turnaround in the business," says Verizon Chief Financial Officer Doreen Tobin. "Verizon Business continues to have lots of opportunities to grow market share and increase efficiency."

To keep the momentum going, Verizon must continue to post strong results in its wireless arm as AT&T steps up the competition. One key test will be to see how the company's new mobile TV service performs when it is introduced over the next few months. Just as important, Verizon must continue to report gains in newer markets such as broadband and TV against aggressive rivals in the cable industry. Otherwise, investors will again raise questions about the wisdom of Seidenberg's plan.

Ante is Computer Editor for BusinessWeek.