Verizon's Big TV Bet Pays Off

Investors battered the company's stock for years. But now they're beginning to show support for CEO Seidenberg

by Steve Rosenbush

Two years ago, Verizon (VZ) CEO Ivan Seidenberg's aggressive push into the pay TV market was widely dismissed as an expensive corporate boondoggle. Many investors and analysts fretted that even if Verizon could overcome the thorny technological and regulatory challenges of providing TV over fiber-optic cables, the costs were simply way too steep for the potential profit. Seidenberg, in perhaps the most ambitious effort by any phone company in the world, wanted to spend tens of billions of dollars to go head to head with cable companies in their core business. The credit-rating agency Moody's (MCO) cited the project's "highly uncertain returns" when it downgraded Verizon in 2005.

Now, Seidenberg's big bet is starting to pay off. Revenues from the effort are surging, and Verizon's TV service is helping to stem the loss of telephone customers to cable rivals. Verizon is adding nearly 2,000 television customers a day, seven days a week. Even Comcast (CMCSA), Verizon's largest cable competitor, is publicly acknowledging that it's feeling the heat. "The telecom companies have had their fits and starts, but Verizon is real. Verizon is taking video customers from us," said Stephen Burke, Comcast's chief operating officer, at the Goldman Sachs (GS) communications conference in New York.

Seidenberg may be just getting warmed up. At the end of the second quarter, Verizon had laid enough fiber cable to offer TV service to 3.9 million homes. But by the end of 2010, the company expects to have fiber in at least 18 million households in its traditional East Coast territory, more than four times the potential customers it has today. If cable rivals such as Comcast and Cablevision Systems (CVC) are under pressure now, it's only going to get worse. "We have a really great platform that is seeing tremendous acceptance in the marketplace," says Seidenberg. "Every one of our metrics is improving quarter over quarter."

Investors Come Around

Seidenberg's strategy is to dominate the new technology that was supposed to put the phone companies at risk. By investing in fiber, he has the ability to offer essentially unlimited bandwidth. The company has the capacity to offer consumers Internet connections of 100 megabits (Mb) or more should they demand it. And the fiber network, called FiOS, allows Verizon to provide superclear TV signals without resorting to compression. Rivals from AT&T to the cable companies typically compress some of their channels because they have less bandwidth.

Verizon's chief isn't in the clear. The TV business hasn't turned profitable yet, and real vindication won't come until it does. Verizon expects that to happen next year on the basis of EBITDA, or earnings before interest, taxes, depreciation, and amortization. It expects to turn an operating profit in 2009.

But once-skeptical investors are now putting their money behind Seidenberg. Verizon's stock is up about 18% over the past six months, to more than $44. That's more than double the return of the Standard & Poor's 500-stock index and telecom rival AT&T (T). On Sept. 28, David Barden, telecom analyst at Banc of America Securities (BAC), raised his 12-month price target on Verizon to $50, forecasting an increase of another 12%. "We believe the stock can gain as the market develops an appreciation for…FiOS to transform into a positive growth contributor," says Barden.