Verizon Mobile-First Strategy Validated by Fixed Network Results

Though it is the supplier of the great bulk of fiber to the home connections in the U.S. market, Verizon nevertheless has had a “mobile-first” business strategy for most of the last decade.

And though it originally expected the business case for FiOS deployments to be bolstered both by new revenues and operating cost reductions--and though that has happened--Verizon now sees the fulcrum of growth from its mobile segment.

Skeptical about the future return from deploying capital in the fixed network compared to the mobile network, Verizon clearly has concluded the investment returns are much better from mobile investment.

Verizon has capped its FiOS deployments to about 19 million homes passed, enough network to reach about 70 percent of locations served by Verizon’s fixed network. Obviously, that means 30 percent of the network never will be upgraded for FiOS.

Verizon is betting that capital invested elsewhere, in mobile assets and services, and possibly at some point in acquisitions, will produce a higher financial return than building FiOS to reach another 20 percent or so of its installed base of fixed network customers.

Stranded assets, in fact, could represent as much as half of the new FiOS access network investment, in “greenfield” builds.

The reason is simply that FiOS is unlikely to attain long-term penetration rates in excess of much more than 40 percent, either for Internet access or video services, where it operates.

FiOS Internet penetration was 39.5 percent at the end of fourth-quarter 2013, meaning that Verizon was able to sell a high speed connection to about four homes out of 10 it passes.

That might imply FiOS overall penetration of about 50 percent (assuming 90 percent of FiOS customers buy a dual-play or triple-play service) while about 10 percent of households only buy a single service.

Over a 10-year period, tthe issue is whether that actually covers Verizon’s cost of capital, given current revenue opportunities, the level of market competition and stranded capital.

In fact, Lowell McAdam, CEO of Verizon, says video growth is lagging high speed Internet access, reducing that amount of incremental revenue Verizon can earn from FiOS.

"We used to sell a TV service and an equal number of broadband services and we're seeing the gap now increase significantly," McAdam said at the J.P. Morgan Global Technology, Media and Telecom Conference. "In the first quarter where we had 20, 30 and 40 percent more broadband sales than linear TV sales."

And growth rates are slowing. In the first quarter of 2014 Verizon added a net 98,000 FiOS Internet customers, down from the 126,000 new subscribers added in the fourth quarter of 2013 and the 188,000 users it added in the first quarter of 2013.

In the first quarter of 2014 Verizon added a net 57,000 FiOS video customers, down from 92,000 customers added in the fourth quarter of 2013  and 160,000 subscribers in the first quarter of 2013.

The point is that Verizon is taking a “mobile first” approach for a good reason: that is where the revenue growth lies.