Verizon FiOS:
Economics, Prospects and Impacts
In this report we explore the economics, prospects and potential impacts of Verizon’s deployment of its fiber-to-the-home service, FiOS. We examine the growth in FiOS availability and consumer adoption through 1Q 07. Our analysis includes comparisons with Verizon’s chief cable competitors, who are at various stages of deploying and marketing VoIP and triple-play services, and responding to FiOS launches in portions of their footprint.
We also look ahead to the future of FiOS by considering the potential expansion of FiOS availability, subscriber growth, ARPU, revenue and EBITDA, and how these are likely to impact Verizon’s overall revenues. We then consider these revenue-side factors in relation to FiOS capital costs, to explore potential payback scenarios and the key factors likely to determine which of these scenarios become a reality.
Additionally, the report examines potential competitive impacts of FiOS on cable customer counts and revenue. And it includes various steps Verizon is taking to drive penetration and ARPU to levels that can generate healthy returns on its FiOS investment.
In the final section of the report, we discuss some of the external factors likely to impact FiOS financial prospects, including the competitive response of cable operators; the potential for third-network competitors; and trends in “over-the-top” content and service provision, and the related issue of network neutrality.
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Introduction
FiOS Early Growth
Service Availability and Subscribers
FiOS TV vs. Cable VoIP
ARPU and Revenue
Looking Ahead
FiOS Availability and Penetration
Incremental ARPU and EBITDA
FiOS Capital Costs
Capital Costs and Penetration
FiOS Payback Scenarios
Impacts on Cable Competitors
Driving Penetration and ARPU
Competitive Challenges
Cable’s response
Third networks
Over-the-top services
TABLE OF FIGURES
Fig. 1: FiOS Coverage of Verizon Homes Passed (000)
Fig. 2: FiOS Internet and TV Subscribers (000)
Fig. 3: Cable VoIP Availability vs. FiOS TV Availability (% of total homes passed)
Fig. 4: Cable VoIP and FiOS TV Availability (% of total homes passed)
Fig. 5: Cable VoIP and FiOS TV Penetration of Marketed Homes
Fig. 6: Cable VoIP and FiOS TV Penetratio of Total Homes Passed
Fig. 7: Consumer ARPU
Fig. 8: Consumer Revenue Growth
Fig. 9: FiOS Coverage and Subscribers (projected to 2010)
Fig. 9: FiOS Impact on Verizon Consumer Revenue
Fig. 11: Bundle Pricing
Fig. 12: FiOS Service Mix, Discounts and ARPU
Fig. 13: Pre-FiOS Verizon ARPU
Fig. 14: FiOS Incremental ARPU
Fig. 15: Total Incremental EBITDA per FiOS Connection
Fig. 16: Planned FiOS Cost Reductions (per home)
Fig. 17: Average FiOS Capital Costs
Fig. 18: Penetration Impacts on FiOS Capital Costs
Fig. 19: FiOS Penetration, ARPU, Margins and Payback
Fig. 20: ROI and Incremental Monthly EBITDA
Fig. 21: Percent of Cable Revenue Lost to FiOS
Fig. 22: FiOS Penetration & Cable Subscriber Losses
Fig. 23: Cable Subs and Revenue Lost w/15% FiOS Coverage of MSO Footprint
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FOR IMMEDIATE RELEASE
FiOS Boosts Verizon’s Competitive Strength, but also its Investment Risk, Pike & Fischer Concludes
Silver Spring, MD, July 10, 2007 - Though Verizon’s FiOS service has so far shown healthy subscriber growth, the company continues to face substantial financial risks associated with its plan to pass 18 million homes with fiber-optics, a new report from Pike & Fischer concludes.
The 36-page P&F financial analysis cites challenges Verizon faces as it rolls out FiOS as an alternative to cable’s expanding “triple-play” bundles. For example, it takes Verizon far more time and money to roll out FiOS TV than it does for cable operators to deploy digital phone service, P&F consulting analyst Mitchell Shapiro points out.
The report suggests Verizon is spending so much on FiOS that it could take a decade or more for the company to pay back its investment should it fall considerably short of its market-penetration goals. Alternatively, if FiOS exceeds its penetration goals by 10% and generates strong per-subscriber revenues, Verizon could see payback in just four to five years.
“The tradeoff for Verizon’s large FiOS investment is that it provides technical capabilities to outperform cable in terms of capacity and services,” Shapiro says. “Verizon’s return on that investment will depend in large part on how well it leverages those capabilities in an increasingly competitive market.”
The analysis considers potential growth scenarios for FiOS availability, subscribers, revenue and margins, and their likely impact on Verizon’s investment payback and the revenues of its cable competitors. It also considers key elements of Verizon’s FiOS strategy, cable’s competitive response, and potential impacts of third-network competitors and Web-based services.
Pike & Fischer, a BNA company, offers a host of legal and business information products covering the telecommunications industry. This new report, Verizon FiOS Economics, Prospects and Impacts, is priced at $799 and can be purchased at www.broadbandadvisoryservices.com. To arrange for analyst commentary or to request a briefing or executive summary, contact Scott Sleek at 800-255-8131 / ssleek@pf.com.
For more information about Pike & Fischer’s Broadband Advisory Services, visit www.broadbandadvisoryservices.com or contact Jonathan Wentworth Ping at 212-576-8741 / jping@pf.com.
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Mitchell Shapiro
Mitchell Shapiro, a Senior Consultant for BAS, has been analyzing media and telecom markets for more than 17 years. He has authored numerous in-depth reports for Pike & Fischer on competitive dynamics, vendor shares and market growth in the broadband industry, including studies on the high-speed Internet pricing, the market for municipal broadband services and strategies for deploying fiber-optic networks. He also regularly tracks the financial performance and broadband initiatives of the regional Bell operating companies.
Mitch previously served as senior vice president at Probe Research, where he was responsible for the company's tracking and forecasts of broadband network, service and CPE markets. He has also served as a senior consultant with Pangrac & Associates, a broadband engineering and strategic consulting firm, and as an analyst with Paul Kagan Associates, where he tracked technology trends and equipment markets in the cable and cellular industries. He holds a B.A. in Economics from the University of Michigan and an M.A. in Telecommunications from Michigan State University.
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