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March 30, 2010

The FIOS Freeze

In the last few days, word came that Verizon’s FIOS expansion is finally winding down. But it’s a mixed blessing for cable. On one hand, the news creates some certainty that cable operators in franchise areas not yet targeted by the telco can breathe easier. So far, Verizon has focused FIOS efforts mostly on its primary stomping grounds along the East Coast, although it has hit major markets in California and Washington state as well. Now the telco will largely focus on completing existing buildouts—especially in the dense and culturally important Philadelphia; Washington, D.C.; and New York City areas where Comcast, Time Warner Cable and Cablevision offer tough and well-funded competition.
It’s easy for cable operators to view this as some kind of failure by Verizon. After all, doesn’t this prove that its expensive overbuild strategy (with costs approaching $1,500 to pass and hook up just one FIOS home) finally reached a breaking point? Doesn’t it signal that Verizon execs and its board can no longer stomach FIOS’s huge capital outlay? Doesn’t it mean that cable has done a better-than-expected job holding its own against a much bigger rival? Perhaps all of the above. To be sure, the FIOS buildout has cost Verizon billions at a time when it’s already bleeding profusely from the loss of phone and DSL customers—not to mention business customers who increasingly turn to cable operators for commercial services. And the telco’s stock price has hovered in a flat trading range for the last five years. But many pundits believe the stock would have completely tanked had Verizon not acted so boldly to overbuild cable. It clearly had no choice. It was either that or a slow landline death. Now it can focus less on construction and more on marketing its existing franchises. And that’s not necessarily great news for cable competitors.
Another factor is wireless. Verizon remains the wireless king, mostly because of its excellent network, and those wireless revenues have helped offset landline losses. But AT&T’s exclusive deal for Apple’s iPhone put a serious dent in Verizon’s wireless armor Now, Verizon must upgrade to LTE technology to maintain its reputation as the carrier with the best network—and of course to ensure that devices on its network are able to meet or exceed anything offered by AT&T and its iPhone darling. (Just this week, rumors are flying that Apple plans a Verizon-enabled iPhone, which could significantly change the game). Now that the FIOS buildout has started winding down, it can devote more resources to its wireless plans. And as cable just starts to tip-toe into that market, Verizon's renewed focus will make it an even tougher competitor.
Of course, all of this partially validates the cable industry’s early warnings about FIOS: That Verizon would simply pick and choose the best markets and ignore rural areas, smaller cities, low-income urban areas and even certain suburbs whose inhabitants don’t fit Verizon’s preferred demographic profile. It’s politically difficult to redline particular neighborhoods once a company has committed to wire a city, so Verizon has avoided locales where it might have to serve large numbers of poor or working class customers. For example, the telco has deployed FIOS across several wealthier Baltimore, MD, suburbs but has no plans to enter comparatively less affluent Baltimore City. Yet only a 45-minute drive to the South, it’s wiring all of Washington, D.C., where the money-drenched Northwest quadrant of the city can more than subsidize poorer areas. This isn’t really redlining, per se. It’s selective deployment. So the revelation that it’s done building out FIOS for now doesn’t bode well for cities and counties that Verizon has yet to deem worth its time and money.
The bottom line is that Verizon’s decision to stop expanding FIOS doesn’t necessarily validate the cable industry’s competitive response, which has been mixed depending on the local FIOS market. But it does create more certainty for cable and should help operators make more informed decisions about where to deploy upgrades and marketing dollars. Verizon has simply made a cold, hard business decision. The kind that cable operators make every day.

(Michael Grebb is executive editor of CableFAX)

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