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Broadband Battle: Verizon's Fiber Strategy Working But Enterprise Disappoints

Posted by: Spencer Ante on January 27, 2009

A quick thought on this morning’s earnings from Verizon. The most noteworthy news out of the announcement, besides the fact that Verizon’s business model is mostly holding up during the recession, is the strong performance of the company’s audacious fiber optic investment. Still, Wall Street seems to be focusing more on the negative data points, as its stock is down around $2, or 5%.

A few years ago, Verizon took a lot of heat from Wall Street for announcing it would invest more than $10 billion in upgrading its -network from copper lines to much faster fiber optic cables. Now, that investment looks like it is starting to pay off. Growth of its two fiber products, Internet access service and TV, is accelerating. Meanwhile, DSL service continues to fade like an 8-track player in the 1990s. Conclusion: American consumers want their broadband fast, and they want it now.

Verizon said its FiOS TV and Internet service, which competes with cable service providers, grew at its fastest pace ever. It reported 303,000 net new FiOS TV customers, compared with 226,000 in the fourth quarter 2007. The company had 1.9 million FiOS TV customers at year-end 2008, adding nearly 1 million FiOS TV customers since year-end 2007.

Verizon added 282,000 net new FiOS Internet customers, compared with 244,000 in the fourth quarter 2007. The company had nearly 2.5 million FiOS Internet customers at year-end 2008, adding nearly 1 million FiOS Internet customers since year-end 2007.

These two revenue streams are becoming meaningful. Broadband and video revenues from consumer customers totaled nearly $1.2 billion in the fourth quarter 2008 — representing year-over-year quarterly growth of 42.0 percent. This means Verizon is starting to pose more of a threat to the cable industry, which has had far more success poaching phone customers from the telcos to date.

The FiOS numbers also helped cushion the blow from sales declines at its enterprise business unit and slightly slower growth in subscribers at Verizon Wireless, owned by Verizon and Britain’s Vodafone Group Plc. Most investors wanted to know how many Blackberry Storms the company sold but it declined to specify the number. Given that the company only signed up 1.4 million wireless customers in the fourth quarter (down from 2 million subscribers a year ago), I would take that as a sign that the launch was not a smashing success—certainly it doesn’t compare to the iPhone launch, which sold more than 2 million units. I have also heard anecdotal reports that Storm customers like the device less and less as they use it; most of the complaints are about its new touch screen.

Verizon’s enterprise unit, which serves corporate customers, saw its sales decline 2.2%, compared to Sanford Bernstein’s forecast of a 1% decline. In a research note this morning, Bernstein analyst and telecom bear Craig Moffett wrote that enterprise is “the most cyclically exposed part of the portfolio” and the poor performance suggests a “full-year ‘09 decline that is significantly worse than our below-consensus (3.3%) forecast.

Still, Moffett gave Verizon’s earnings a “passing grade” and said that its overall results were “significantly better than what most companies can expect.”

— Spencer Ante also publishes the Creative Capital blog. Click here to see more.

Update: In a story in the Wall Street Journal today, Verizon President and Chief Operating Officer Denny Strigl said the company sold 1 million Storm units since the device was released in late November, and could have sold another 200,000 units if inventory wasn’t limited at launch. This means Storm launch sales could approach iPhone launch sales, since the phone was introduced in the middle of the fourth quarter.

Reader Comments

Lloyd Hoofles

January 27, 2009 12:35 PM

I own the Blackberry Storm and the phone is not even close to my sister's iPhone. They really should not even be compared to each other.


January 27, 2009 6:47 PM

I called to get fios and was left on hold forever. never talked to anyone. My cell phone service is has gotten worse over the past 6months with them too?


January 27, 2009 8:01 PM

I just got back from Verizon to pay my wireless bill and I go to play around with the Storm.

I left unimpressed. It felt cheaply made, and I absolutely now understand the dislike of the click-screen...While it is a neat idea, its way to easy to make mistakes with it.

I plan on switching back(unfortunately) to ATT for several reasons, most of it being the iPhone. The other main reason is the phone selection with Verizon is absolutely terrible.

My only grief with going back to ATT is their call quality has not improved since 2006(when I left them for Verizon), while Verizon has outstanding call quality.


January 27, 2009 10:47 PM

Levi - so just buy an iPod Touch because apparently the actual "phone" is not important to you. I had the Storm and then returned it because the phone part did not work well, otherwise I loved it. I just tried an iPhone and the ATT signal was not good enough in my area, otherwise I liked it. I actually like the Storm's concept better.

But at the end of the day, I need a phone not a toy.


January 28, 2009 2:41 PM

It is interesting to see how this all plays out. I know from being in the telecom business, all these companies have some major issues. This recession might be a good thing for them to take a look at ways to cut needless expenses and increase revenue. I think a rate increase will be coming on the long distance side of things.

Van from St. Louis


February 15, 2009 4:12 AM

We need fast internet, in Tokyo they are offering 2 months free 1 gigabit dedicated to the home, plus a $300 coupon to buy anything in the store, for $60 a month. Contracts are quite long at 3 years. 1 gigabit rollout is available is vast parts of Japan now, as opposed to select areas in 2006 when it first became available. If you live in apartments, you must share the gigabit with your neighbors, but its slightly cheaper at $40 per mo. But few people are upgrading as 100 mbps is sufficient for most Japanese, so thats why the government is pushing such massive incentives like $300 coupons.

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