FiOS

Verizon quarterly financials tell classic telco story

Verizon delivered a classic US-telco story in the third quareter: Wireless was doing very well, telco TV was doing better, enterprise services were under price pressure, and wireline losses continued.

For Verizon, the net was better than Street expectations. Most encouraging were revenue gains of more than 10%, though about half of that was from the Alltel acquisition. Customer churn was up slightly in wireless, and DSL broadband subscribers continued to decline, but the latter was more than offset by broadband FiOS growth, suggesting that Verizon FiOS is attracting broadband users beyond its own DSL base.

The company promised investors that LTE would not generate a big capex surge, a relief given that the large up-front FiOS load is finally tapering down. In all, the story was good but not great. You can see that Verizon, like AT&T, is spending a ton of money on wireless and making a big bet it will be able to capitalize on that investment. We think that in the near term, that is almost certain. But the long-term viability of wireless depends on the ability of the operators to create value beyond voice and Internet.

Verizon DirecTV acquisition could ease FiOS video load

Some financial industry speculation is buzzing about the possibility that Verizon might buy DirectTV. While Verizon is clearly committed to FiOS, it’s not clear just how far FiOS could extend toward thin geographic areas or areas where household income is low.

Given that, a satellite offering would give Verizon a way to offer broadcast TV without consuming broadband capacity, which could be critical given cable’s plans to push DOCSIS 3.0 to the 50-to-100 Mbps level. video on demand (VoD) could still be delivered over DSL.

A deal would also tweak AT&T’s nose since that provider relies on DirecTV and is also rumored to be looking at the company.

Telco-versus-cable: An upload/download competition?

Cox is moving its DOCSIS 3.0 50 Mbps service into two areas where FiOS is available, creating another face-off between fast cable and FiOS. The two are priced similarly (cable is a bit cheaper), but FiOS has four times the upload speed. This creates an interesting dynamic. Verizon might find itself a promoter of the “no-caps” position simply because P2P hurts it far less than it does cable.

There is even some talk that telcos in general will be talking up unlimited access because it favors their architecture, just as higher download speeds favor cable over DSL. The question now is whether both parties will play chicken on capital infrastructure issues, hoping to force the other side into a costly investment they’d just as soon not make, or whether there is actually a longer-term division of customers ahead, where upload-centric users migrate to telcos and traditional downloaders move to cable.

DOCSIS 3.0 pushes U.S. broadband speed wars

Cablevision is planning to launch a 101/15 Mbps DOCSIS 3.0 broadband service, which would be the fastest available in the U.S., at a price of $99 per month. The service will launch in NYC suburbs, an area where Verizon has gained strongly with FiOS.

It’s expected that cable will be pushing speed limits up this year, since DSL services can’t begin to match DOCSIS 3.0 performance, and only Verizon among the U.S. RBOCs has the regional demographics to make FTTH widely suitable. This could be good news for equipment vendors, because nothing other than competition is likely to provoke investment in wireline broadband given the low ROI.

Cable companies look at RF over Glass for video delivery

In yet another sign of stress for the IPTV camp, cable companies are looking hard at their own RFoG or linear RF over glass approach, as more telco experience is showing that to be the best way to deliver broadcast channels and (some say) even some video on demand.

A cable shift to fiber to the home has been a possibility for years as the potential of FiOS becomes clear, but the timing of the shift depends on more effective RFoG architectures, which are now emerging.

Our models suggest that there is a narrow range at present where any FTTH approach is too expensive to support and DSL-IPTV is still cost effective.  Below a certain economic density, DSL-IPTV can’t produce decent ROI. RFoG could lower the minimum density for FTTH and so threaten IPTV-DSL as a strategy for telcos, which are likely to adopt some of the principles of RFoG themselves for areas othin in demand to be served by PON. So far, cable appears to be looking at the technology for greenfield builds.

AT&T’s U-verse: The beginning of the end?

AT&T’s new deal with DirecTV may be the beginning of a shift away from U-verse toward the “Homezone” satellite-and-IP/VoD hybrid model, according to rumors we’ve heard.

The problems with U-verse are that the service has an extremely high pass cost—on the order of 4 to 6 times that of cable—and that the limits of DSL in delivery of both content and Internet make U-verse very vulnerable to DOCSIS 3.0 competition. The IPTV model has become more complex and costly over time, and faces its greatest challenges in conjunction with interactivity and HD programming.

We’re also hearing that more EU operators are looking at the linear RF broadcast model of FiOS. Cable has a parallel channel for TV, and competing with cable without that capability is likely to be increasingly difficult no matter where you are in the world. Some cable operators, like Time-Warner, are also now looking at the linear RF FTTH model for green fields, which would be a blow to IPTV supporters.

On Verizon’s and Tier One revenue…concerns beyond the economy

Verizon wasn’t able to match analyst estimates for growth in Q1, but the company’s wireless unit increased revenues by 12%, even while subscriber growth slowed and losses increased slightly.

In the wireline area, Verizon continued to lose both business and residential fixed lines to mobile, to cable and (relatively few) to VoIP. FiOS reported strong numbers and good growth, but there are concerns that even this most successful of the telco TV offerings may not grow fast enough to generate the revenue and profits to offset wireline declines.

Verizon has been bringing out VoIP and femtocell add-ons, as other reports on this blog show, and we believe the company is preparing to make a more elaborate VoIP and FMC offering available. Its Voicewing product apparently has been withdrawn.

While revenues for Verizon and other Tier One providers are up, which would not put direct pressure on capex, we believe service providers, including Verizon, are very concerned about the declining voice margins, declining mobile growth, and the failure of their monetization strategies so far. These factors will have far more influence on spending in 2009 and beyond than the economic problems.