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Verizon Communications (NYSE:VZ)

UBS 41st Annual Global Media and Communications Conference

December 9, 2013, 8:00 AM ET

Executives

Lowell McAdam - Chairman and Chief Executive Officer

Analysts

John Hodulik - UBS

John Hodulik - UBS

My name is John Hodulik. I'm the telecom analyst here at UBS. Thank you all for braving the weather and joining us this morning. We're very pleased to announce, our keynote speaker is, Lowe McAdam, the Chairman and CEO of Verizon. Lowe, thanks for being here.

Lowell McAdam

Good morning, John. Thank you all. Bob, congratulations on another great conference, 40-plus years very impressive. And thank you all for coming, braving the first storm of the year here in New York, welcome to winter. It's good to be here with you.

John Hodulik - UBS

We're just going to dive right in. We've got about 45 minutes here for Q&A. I'm going to lead off with a number of questions, and then we'll have some time to take some questions from the audience.

So, Lowe, 2013 was a big year for the company. I think it will be remembered mostly for the end of the partnership with Vodafone and Verizon taking full control of Verizon Wireless. But can you highlight some of the other big milestones that the company had this year?

Lowell McAdam

Sure. So let me just comment quickly on the Vodafone, and then we can move to the broader business. Obviously, that's a huge thing for us. We've been focused on that for about 10 years, so as they say, good things come to those who wait. And I think we have found a win-win for Vodafone and for us. It gives them the money to sort of retool their business and it gives us, what we would argue is, the strong position to do whatever we need to do.

We see a huge growth spurred ahead of us in wireless industry and in telecom in the U.S., and Bob did a little bit of an overview of why he is excited, and UBS is excited about this whole sector of the economy. So if you look at day one, we'll have 10% EPS accretion. Some of you in the audience are arguing, we're conservative on that, we'll see. But sets us up for probably some of the things we'll talk about in the next 45 minutes.

If you look around the rest of the business though, you feel -- I feel very good that this year we completed our LTE build. I think we announced in June or July, 301 million tops covered, gives us tremendous platform for video and machine-to-machine going forward, lots of opportunity to make that more profitable.

On the wireline side, we introduced FiOS Quantum. So in the market we have 300 megabit service into the home, soon to be 500 megabit more broadly available. We've converted 300,000 this year. We said we'll hit that number and we will. Our copper customers over to fiber customers, so with that comes better cost structure and better revenue structure.

And then on the VES side, well, we're still seeing the headwinds that everybody sees on the government sector, et cetera, for enterprise. But we've taken this time to sort of retool and redesign our processes, make as more efficient. We've been able to accomplish that. And we're seeing nice growth on our strategic services side, in our cloud platforms, our security platforms, et cetera.

So I think we've had a very good year from an overall return. We're seeing at the end of third quarter I think 16.6% growth for our customers and for our shareholders. And we expect to have good results to end the year, and we'll be setup well for next year.

John Hodulik - UBS

So why don't we first start with, dig into those different pieces, starting with wireless. Obviously, being the first to deploy LTE in the U.S. is a big win for Verizon, allowed you to build upon your leading market share. Now that some of your competitors, sort of AT&T, has LTE in the market, as you look forward to '14, how do you continue to differentiate Verizon Wireless?

Lowell McAdam

Well, if you look back over the last decade, you see this effect where we typically have led out with the next generation technology, we've used this as a competitive advantage, and then others talk about sort of catching up to us. But our view is there is always another chapter in that book. So as we're deploying AWS now, that gives us additional speed and additional capacity in the network to provide services like video.

And one of the things we're going to do at the Super Bowl here, in not less than two months now, is demonstrate the broadcast technology. So in New York City with the right device, with caveat, you will be able to watch the Super Bowl live. I think you will see as we roll out services in '14 and beyond, more and more things you'll be able to watch live on your device. And that sets us up for things like machine-to-machine and all the healthcare, and energy and education, the smart home that we've talked about as well.

So I think our goal is to keep the network ahead of our competition, we think we can do that, but that by itself is not enough. It's one of the applications and the solutions that you're bringing to take advantage of that technology. And I think that's how we differentiate going forward.

John Hodulik - UBS

Staying on that video point, I mean video seems to be getting a lot of attention. Can you just talk about on the wireless side, exactly how you're doing to monetize that opportunity? You talked about the multi-cash network, when will that be ready? And then in terms of the relationship with the NFL and Super Bowl, how are you monetizing that? Is it driving subs or is it ARPU?

Lowell McAdam

Well, I mean none of these things are one single effect, right. So the NFL Mobile app is an example. We're seeing significant rise. If you just watch in, the NFL's never been more popular, never had more viewers. So that service is available as a free app and then it has premium services that we sell on top of that. And so the regular basic app drives a lot of usage for us and then we get additional subscription revenue as a result of the premium apps.

I think that's our formula going forward, whether we're working with other sports networks or providing other video applications. The big trend that I see coming, we call, converge services, and that's the ability to take the things that you have in your home on mobile as well.

I think we just announced last week another dozen channel, so we're up in the 20, 25 range at this point. So you can take that content from your FiOS set-top box and stream it on to your mobile device, and I see that coming more and more. And if you look at whether it's Google and YouTube or you look at some of the Facebook and Twitter applications, much more focused on mobile video.

Now, there is lots of ways to monetize that. We just announced EdgeCast this morning, as an acquisition for us, as part of our Verizon Digital Media Service platform, VDMS, that allows you to insert ad, it allows you to tailor the content of the individual user. So there will be lots of ways for us to monetize, including these 800 numbers that you hear about. But I don't think those models are clear yet, but I think there is lots of opportunity to monetize.

John Hodulik - UBS

So switching to competitive environment, I think 2013 will also be seen as a year where you start to see a little bit more pressure definitely in the low-end of the market with T-Mobile starting to grow subs again. As you look on the '14, I mean, how do you see the competitive environment evolving?

Lowell McAdam

Well, I think the good news is that you're hopefully going to see a couple of other carriers that have had some difficulty, get a little bit healthier. And I think that's better for the overall marketplace to have four healthy carriers than it is two very healthy ones and two that are struggling, because frankly that forces them to do irrational things in the marketplace. So I am hopeful that they are.

Now, if you look though over the last 10 years or 15 years now at Verizon, we have not been the one to go down and chase the low-end of the market. And whether it be a pre-pay or an MVNO or carriers that have kind of come and gone over the years, we've continued to offer that sort of high-end reliable experience with good customer service, and as a result we've had the lowest churn in the industry for probably 10 years. So I do expect the dynamics to change, but we're going to continue to play our game and you won't see us going down and chasing the low-end of the market.

John Hodulik - UBS

In terms of the success you've had in 4G, has driven some traffic that seems as if it was maybe stronger than you'd expect it coming out of the gate here and has resulted in some congestion issues in some big markets. Can you update us on where you are in terms of riveting those issues?

Lowell McAdam

As you go around New York, you'll hear in a little clear terms. So let's put that in perspective. So we have seen tremendous relative market share growth for Verizon over the last couple of years. And there are certain hotspots that frankly the network hasn't performed at the level that we'd like it to.

But let's also put it in perspective. There are, depending on how you want to define the New York market as an example, 300 cell sites. There maybe a handful, a dozen, that we felt we had issues with capacity. And with LTE, if you load the cell site up, the cell site actually shrinks. They call it breathing.

So we've had to go in and fortify. We were fortifying 49 cells in the New York area. 42 of them are already done, so we've got just a handful left. And when you put AWS on those, those we advertise and talk about 8 megabits to 12 megabits of throughput, if you read the bloggers that have AWS handsets, they are seeing 50-60 megabits of throughput. So the cells recover very quickly, when you can add that additional spectrum.

So we are I think now back where we want to be with the exception of those couple of cell sites we've got left to do, and we'll have a plan to stay ahead of that. So I think it's a short-term blip, and this just proves that you got to stay ahead of the demand and we'll do that.

John Hodulik - UBS

Now, you discussed New York, is that in the same schedule in other markets where you're seeing the same issues?

Lowell McAdam

Yes. But there is no place I would say that we're seeing the issues that we saw in New York. New York is just a different animal, but we've got in the neighborhood of 50 different cities around the country that we've got. We're planning on having AWS fully deployed in the first half of this year to stay ahead of it. And that involves deploying the handsets as well as deploying distributed antenna systems, some in-building systems, and obviously the spectrum on the cell sites.

John Hodulik - UBS

Now, in terms of the excess usage you saw, was it faster growth in 4G devices or is it more usage per device?

Lowell McAdam

A little bit of both. I mean I'm not here to talk about fourth quarter numbers, but when the analysts and the audience do the net add and the market share, you'll see that we're taking a lot of market share right now. And people love the service. The video demand on the network is pretty dramatic. So if you look at our LTE devices are in the ballpark of 50% and we're seeing over 60% of our usages on LTE now. So people when they get that device in their hands, they use it a lot.

John Hodulik - UBS

Staying on the technology side. Where is Verizon in terms of LTE Advanced? And what is really the advantages to rolling out LTE Advanced versus LTE?

Lowell McAdam

I just sat down with a couple of our, well, our two main vendors, Alcatel-Lucent and Ericsson and talked about this. And I think we love to think about events and there will be a 5G or there will be a LTE-Advanced, but it really is a series of upgrades and use cases to improve things like throughput, improve things like handling video, improve some of the security aspects of it. So there will be this massive change out of antennas and networks as we did between 3G and 4G. So it will be the sort of ongoing peel-back the layers of the onion approach. So it will be much more around optimization throughput capacity and those sorts of things.

John Hodulik - UBS

In your opening remarks you talked a little bit about some of the new opportunities like video and machine-to-machine. I think you've said on the call that it's going to be hard to maintain that kind of 8%-ish service revenue growth that we see. First, could you talk about a little bit more detail about now that we're reaching capacity on the sort of traditional handset market reaching full penetration, what these other growth areas are? And do you continue to expect to be able to grow faster than the market?

Lowell McAdam

Well, so in our case, about two-thirds of our devices in the market are smartphones. And so we've still got a little bit of a headroom here, 30% headroom, to change our basic devices. Then our smartphone base, about half of those are LTE. And when you convert to LTE, you see that rise in usage and revenue associated with it. So I would say we are definitely not tapped out from a growth perspective. And then you layer on the video applications that we talked about.

And just to say a couple of words about machine-to-machine. If you walk around CES last year and those of you that will be there this year, I expect even more, they had an entire hall dedicated to machine-to-machine applications. So all of the smart homes, the medical devices, I'm on a CEO Council with Muhtar Kent from Coke that's looking at healthcare and how we can deploy technology and best practices to lower healthcare cost for employees.

We work our way through literally thousands of applications in healthcare that will improve management of chronic diseases and that sort of thing. Those are huge usages drivers on the network, but you're looking at tens of millions of connections. And at margins we expect that it will be pretty good. So I think there is a great opportunity to see, as I said in the opening remarks, the next wave of innovation and the next wave of growth for the wireless industries is going to be a good one.

John Hodulik - UBS

So maybe we could drill down a little bit on the cost side. First of all, the churn has started to rise a bit from admittedly very low industry-leading levels. Is this something we should worry about? And if you could talk a little bit about what's driving the basis points increases in churn you guys have seen?

Lowell McAdam

So I mean if you look over the years, you'll remember, when we started we had churn of 2.5%. So being down well below 1% doesn't feel like a high level. A basis point up or down on sort of a seasonal basis doesn't worry me, but you do have to pay attention to what customer needs are. That's why things like staying ahead of the network, staying ahead of these applications are important.

My expectation is, as you see competition change as other carriers come in and out of the marketplace, you'll see a little bit of that. But the core high-end postpaid customer for us is very strong. And we'll make some tweaks. I think you saw AT&T make some pricing adjustments over the weekend. That was in my view was just some slight adjustments, nothing that we need to reactive. They really at the high-end just came down to match us, where we were. But as I said in the beginning, our main customer base is at the low-end that has a tendency to move. So we'll see a slight movement in churn. But I don't expect to see major shifts and to the extent we have to react where we're at.

John Hodulik - UBS

Let's turn to subs, as you're focused on cutting subs cost through fewer upgrades. Any chance that we could see some pressure on the subsidy per device over time as you give more comparability between the smartphones?

Lowell McAdam

Well, that something we've always talked about is how you're going to see handset subsidies come down, because of the lifecycle position or you're able in our case maybe to take a chip out of the phone here in the next couple of years, as you move to VoLTE. But what I expect is that you're going to see additional capabilities move into the phone as well. We talked about the broadcast technology for video, that's one of those that would add to the cost.

So our belief is that we will see relatively flat on the subsidy side, because there is some puts and takes here. But every time you've seen devices have increased capability, and remember, huge discussions around this when we did the original Apple deal. And I said, oh, my god, the cost of the device is so much more, your subsidy is going to be higher. Well, our revenue, that's what's driving our revenue up by 8% on wireless. And we've never had higher margins than we've had in 2013, as we said it will come in the 49% to 50% range. So I think at the end of the day, increased capability on the mobile device is a good thing for the industry, not a bad thing.

John Hodulik - UBS

So update us on your VoLTE plans, I mean, say, something you've talked about and starting to rollout I think by the end of '13 here. First of all, what are the advantages, one to the customer and then to the company? And when can we start thinking about phones that are just VoLTE only?

Lowell McAdam

Yes. So as you said, we're testing VoLTE in the market now. The advantages to the customer, really there is a whole suite of sort of high-end communication services that has been on the roadmap for quite a while. So HD voice conferencing, the video, the FaceTime like applications will be much easier from the device than they are today. So I think those will be a nice improvements for the customer.

What it really allows us to do from a cost perspective, eventually it will take the chips out of the handset and that will take $105 or whatever you want to believe on the handset out of it. But what it allows us to do is manage our spectrum better. Then we'll be able to retire some of the spectrum that we've had dedicated to the voice and move that on the data, the refarming. And that's really the price for us. So the price for customers is higher definition and a few more services and the price for us is reducing our cost on managing the network.

John Hodulik - UBS

So finishing up on cost, the 45% to 50% margin guidance has been really the whole market and you have the specifics taking the ground for Verizon Wireless?

Lowell McAdam

It's $40 million to $50 million. You said 45. Fran would not want me to let that go to 45. Our business units would love it, but it didn't happen.

John Hodulik - UBS

How sustainable is this level, given the increasing competition we're expecting?

Lowell McAdam

Well, I know a lot of the folks in the audience would love to here us say, well, we can push that higher. Inside the business, here is how we think about it. There is lots of opportunity for us to take more cost out of the business. Our IT team does a terrific job of streamlining the processes and the system, so we can activate more and self-heal the network. So that's a positive.

We deployed, what we call, Verizon Lean Six Sigma couple of years ago. This year we'll take about $5 billion of cost out of the business. And how that manifest itself is by improving the product and the network, you take fewer calls into the call centers. We shutdown I think three call centers and call centers are typically 800 people for us. We're shifting more traffic to the web. So there is all sorts of opportunities to take cost out of the business. And that gives us a little bit of headroom, if we have to do something from a competitive perspective. So our view is maintain those margins on the wireless side.

And on the wireline side, we said this year would be flat, it is. We had a good third quarter and lots of people are expecting that to improve, but we said flat. And then next year, we expect to see some expansion. And that's things like moving people off of copper on FiOS, seeing greater penetration of FiOS in markets like New York, growing strategic services on the VES side. So we think those are sustainable and we've got lots of opportunities and make sure they are.

John Hodulik - UBS

Before we switch to wireline, just a couple of questions on spectrum. AWS spectrum is being rolled out, I think faster than originally planned. Do you still feel confident that Verizon has enough spectrum in its current holding to see you through the incentive auctions or some of these other auctions that are coming up?

Lowell McAdam

We think so and you have to look at this from several aspects. If you look at it from the product side, I mentioned, handling video through more broadcast technology. We're also working with some compression techniques with chipmakers. So instead of needing 10 megabits of throughput for video, we'll be rolling out chips next year that you can do with 2 megabits of throughput. Same quality video, so that expands the capacity dramatically.

We talked about things like VoLTE that allows you to repurpose your old spectrum that's been deployed on the 1X technology. So we still do feel that we'll be able to see our way through to the spectrum auction. And we've said, we're interested in AWS and we'll see how the broadcast spectrum gets repurposed. I saw that Chairman, Wheeler, pushed that out to '15, but even if it's auctioned in '15, we think we're in good shape through '17, '18.

John Hodulik - UBS

Now obviously, the other side of the coin to spectrum is CapEx. I think we're building in higher CapEx, not just for Verizon Wireless, but for every of the major four in '14 versus '13. I mean, how should we see that? Is the overall capital intensity of the business growing, given all this data traffic or is it sort of just getting the capacity out there for the growth of LTE now?

Lowell McAdam

Well, I think the thing you've seen out in Verizon over the years is pretty consistent in our deployment of capital. We're not bragging about being down in single digits of revenue one quarter and then announcing a big network build the next quarter. So I think we're on track for plan this on 16.6. We added 400, because we saw the opportunity really to pull in AWS for this year.

We're expecting to be relatively flat. We'll give guidance probably in January on that, but consistency is the name of the game for us. If you get behind in a network, then you've got to do this massive build, but we've kept ourselves in pretty solid position. So we expect to be consistent.

John Hodulik - UBS

And then last on wireless. Obviously, centerpiece of this is this rather large wireless transaction you have in going on right now. First of all, I guess could you update us on what's the latest you've done in terms of win that Verizon Wireless deal that will close?

Lowell McAdam

I think most of you saw we got the SEC approvals last week, that's a great milestone for us, really no issues whatsoever for us from a regulatory perspective. In our filings, we said we're going to do the shareholder meeting, January 28, I think is the exact date. And then from there it's a little bit in Vodafone's court, they will have their shareholder vote, which I don't want to speak for Vittorio, but I don't think we've seen any major issues there.

Then at all in the U.K., it has to circulate back through their court. So we're a little bit at the mercy of their court approval process, but we monitor this very closely. We don't see any hiccup. So we've always said first quarter, sometime in that timeframe, it should easily get done.

John Hodulik - UBS

And for the Verizon Wireless deal, there is a lot of speculation that Verizon could be looking into Canada as another area of growth. I mean is that completely off the table now? And how do you view Verizon Wireless as it relates to other sort of international opportunities?

Lowell McAdam

So I think that people mischaracterized a little bit. And I'll comeback to Canada, our motivation here around Vodafone. When we looked at the Vodafone deal, we compared a full merger to what we felt we could do in the U.S. And it was very clear in our minds that our shareholders would be better off being very focused on the U.S. for the next several years. I didn't ever say that we wouldn't go international, and we wouldn't look at properties that came available to us as we go along.

Now, we don't feel a huge need, especially in Europe to own the underlying network, because the regulatory environment is such that an MVNO is really in a very strong position in Europe. So if we need to service our customers, we're in a 150 countries around the world through our VES service.

We've got cloud datacenters all over the world. If we need to go in and service that segment for us, we think there is lots of ways to do it. But that doesn't rule out, if we saw the right regulatory environment, we saw the right economic environment, we would go in and very selectively participate in those particular markets.

Canada is a great market, but given our priorities over the next couple of years, and that is network, its deploying things like video machine-to-machine, it's paying back the bonds that we took out. So we've got a lot in the next couple of years, we need to payback there. Obviously, we want to maintain a strong dividend for our shareholders. If you look at those priorities for us, going in and doing a major acquisition that would involve many, many countries, we didn't think was the right thing for our shareholders.

John Hodulik - UBS

Now switching to the wireline side, as you said there is lots going on in wireline and it was an unexpected bright spot in the quarter. You sound very confident.

Lowell McAdam

Maybe unexpected for you, we had a plan, John.

John Hodulik - UBS

So as you look down to '14, you sound very confident that you're going continue to see the margins, the year-over-year margin improvement. Can you talk about what are some of the factors driving that margin improvement?

Lowell McAdam

Yes. And simply put, it goes back to some of the work we're doing around process improvement, that VLSS program that we talked about, that that is what is driving things like moving customers off of copper on to fiber. We were maintaining networks, because certain people just wanted voice service. We were maintaining some of those copper networks when we really didn't need to. So if they want voice, we give it to them at the same price, but we provide it to them over copper and we cut it out completely.

I am very pleased with the work that Bobby Mudge and his team are doing here in New York City, as an example, our fastest growing market in FiOS at this point. And because we've got the fiber running down the street, we're literally doing these short runs into these high-rise buildings and we're taking significant share in New York City for FiOS.

Now, we're also seeing the broadband outpace the TV service, which is good from our perspective. You don't have all those content cost on top of it. So there is a number of areas there. Then if you look at VES, we're beginning to see cloud and security grow nicely, what we call our strategic services in the enterprise group.

And as we said over the last, almost three years now, we went on a four-year retooling of that business, so that as we deployed single billing systems instead of multiple billing systems, you don't have all the manual effort we're seeing flow-through dramatically improve. So while enterprise still has work in progress, I think that, what we call the consumer in mass business side is on its way to expanding margins, and that's why we feel comfortable about saying, we'll expand wireline in '14.

John Hodulik - UBS

Maybe if we just drill down on the residential side and FiOS, fiber migration seems to be gathering some momentum. It seems like you're out there in a few markets, you saw the cost savings, you saw some revenue uplift, why not go faster with that initiative?

Lowell McAdam

Well, at the end of this year, we'll have less than 1 million customers left on copper where we have fiber capability. And it's really a balance. I have to meet the current demand. I don't want to grow a fixed labor force frankly to do that. So it's a balance of being able to do this on the margin, while we take care of the core business.

And it really funds itself, because as you transition someone to fiber and they see the improvement, within 90 days, we see roughly 30% of the customers then move off of just the voice service on to a triple play, so it's a very good thing for us to do, but I have to balance how quickly I do it, just for overall labor costs and structural costs.

John Hodulik - UBS

I mean, can you see looking out five years an environment where there is no more copper loops in the residential market in Verizon territories?

Lowell McAdam

Well, I'd love to say that's the case, and I know Randal is going to be here tomorrow. He's got a formula to do that I think. I'd love to see that. In our markets, I think it will be tough to get completely off, but what we use the term as we modernize the network, we're sort of pinching down the copper.

So we talked about where we've got fiber, where we don't, and mid-Pennsylvania is a good example of that. We're actually deploying wireless to handle those sorts of lower speed. I am certainly not promising 300-megs over wireless, but you can certainly do voice, you can do what we think of is DSL quality data, and that's going to be our goal to minimize the amount of copper out there.

And it's an antiquated technology. It doesn't really meet the majority of customers' demands, and it's a leakage from a value perspective for our shareholders. So we're going to be very focused on getting as much as copper out as we can.

John Hodulik - UBS

And again, I don't think you've quantified, you've talked about the cost savings, but whether it's retiring the copper to the fiber migration, whether it's IP transition that you were talking about, I mean what kind of cost savings are we talking about from a wireline margin standpoint?

Lowell McAdam

The reason it's a little difficult to do that, as it's almost a jurisdiction by jurisdiction. If you just as an example, some jurisdictions would say, that's very nice that you pulled all the copper off of the poles, you still have to pay the same amount of tax, whether it's up there or not. So we get the operational savings. We recycle all the copper. We can be much more efficient, but it is a little hard, John, and we haven't said anything publicly about what the savings is. So that's what's driving some of the margin expansion.

John Hodulik - UBS

And then in FiOS penetration, the penetration numbers, I think across the board, you've been much stronger than we had originally targeted, and in some markets you're using obviously even higher than the overall. I mean how much growth is there left in your existing fiber markets?

Lowell McAdam

Well, that's part of the reason why we're interested in these converged services, so let's break it down. I mean, in Texas, we're roughly 50% penetration on the broadband side, and maybe five or eight points below that on the TV side. I still think there is opportunity there because as you roll out things like Quantum and you give 300-megs and you give 500-megs, people see that.

I got an email from a 15-year old in Florida, in Daytona Beach, that I read on the way, ending of this morning begging for us to deploy FiOS, because he said, I can't get those kinds of speeds and he has a friend that does have it. So there is a lot of push to do that. I think how penetration goes up is for us to get it right, and I believe we are on a path to get the converged services right.

And I know you got Les coming in I think this afternoon. Les and I talk about, how do we mobilize more and more of that content, and when you can have the great experience in your house and team that with the best experience on the mobile platforms that we've just finished talking about, that's the next wave of penetration for both. So I don't think 50% is a ceiling for FiOS penetration at all.

John Hodulik - UBS

So just talking about Les and CBS, you've had this SpectrumCo JV with the cable industry that was essentially wound down during the year. I mean could you talk about your relationships with Comcast, with Time Warner Cable, and if you're still doing anything to work on converged services on that?

Lowell McAdam

So let's be real specific about that, and I don't know whether you have anybody from Comcast over the next couple of days, but all we wound down was the joint development of products together. We still do the distribution. We still meet regularly at the senior levels, Dan, and Neil Smith, that I meet regularly. I think we're important partners to each other.

What we found though was we hoped on the way in that we would be able to do one set of products and deploy it nationally with all four of the cable partners. What we really found was that their infrastructure was so different that we ended up with four different sets of products, which just became unwieldy for Verizon Wireless.

We have gotten to that 49% to 50% margin by being very disciplined about our processes and what we offer and we just found that the costs were such and it slowed us down to market. That doesn't mean we can't work with any of the cable companies to do converged services. So it's just not a joint win for our company.

John Hodulik - UBS

And then, lastly on just the residential side. AT&T is now saying that they will deploy more fiber or beginning to do fiber-to-the-home. They're doing in Austin, where they get these, kind of regulatory framework that Google has gotten in a few markets. So how does Verizon view that? Is it possible given this seeming change in the sort of local regulatory environment that Verizon can do more FiOS market?

Lowell McAdam

Well, we kind of smile at that. When I meet with Eric Schmidt and Larry Page, I kind of laugh with them about the fiber deployment, because we've been doing it for almost a decade here, and they're now going, oh, this is a new thing. So that's good, I guess. I think though the point for us is that while there might be a couple of things on the fringe, going in and digging up backyards again, and deploying fiber into a lot of new markets, I don't think is in the cards.

More and more things are going mobile. We've got a great footprint that we can concentrate on. I think there is opportunities to partner out of market with the companies that are there versus us going in and deploying FiOS. As I said, it's moving more and more to the broadband side than it is to the TV side. So I have not seen a case that would make any sense for us to go and open up new markets.

Now what Randal has already got is he's got the copper into the homes, right? He is changing out the last mile or whatever it is for him. A little bit of different situation for us. We'd have to go in and get the local franchise agreements, and that always gets pretty complicated.

John Hodulik - UBS

So last question on wireline. You talked a little bit about VES and then cleaning out the basement and repositioning that wholesale, and direct and enterprise business. Talk a little bit about Terremark, how has that acquisition been for the company? And what does it do in terms of growth and when can it start to be a real needle mover for the company?

Lowell McAdam

So Terremark has been a great acquisition for us, having the cloud datacenters around the world, London and Frankfort, Amsterdam, Honk Kong, when you combine it in with the ones that we already have. So it gives us a great base. We did another less known purchase of CloudSwitch, which brought some real, it was almost an [ph] aqua hire. We've got some great talent associated with that.

And we announced our next generation of cloud, which gives the customer a lot of flexibility in deciding the performance parameters and the capacity of their cloud, and we're deploying it now. It's been very well received by our customer base. And when you combine that with all the security aspects that we've got with Cybertrust, and we've quietly added capability to that. Those are really the big drivers of growth.

Now, I mean relative to the core market, is it going to really move the needle? I think that's what will get VES. We're in a 8 to 10% decline in the core markets. So it's so big, that does not really move the needle, but that's what flattens it out. And if you think about the history of Verizon, that's exactly what we were saying about FiOS, five or six years ago. And eventually that will turn, but it's not a '14 phenomenon in our view.

John Hodulik - UBS

And then my last question before we pull the audience. You've mentioned Chairman Wheeler come in new to the FCC. One of the first thing he did was push back the incentive auctions. He has made a number of comments that I think it sound a little bit more, sort of bullish for the industry from a business standpoint.

And some that have been in my mind, a little bit surprising. From a regulatory standpoint, are there any big issues coming in '14, that either worry you or that may work out good for the company? And just generally how do you see the new leadership of the FCC?

Lowell McAdam

I am encouraged I have to say, by Chairman Wheeler. I've known Tom for over a decade. He is certainly nobody's patsy. He is a very bright guy. He knows the business well on both sides. But I also think that Tom understands what has been created here, and where the U.S. is. I was reading some facts on the way in here, obviously the last full year data of 2012, and there was about $30 billion of capital deployed by the wireless carriers in the U.S. That was 25% of the entire world's CapEx.

And when you think about that, you've got a market that's performing very well. And if you look at how Europe is performing now, there is really not much investment because there has been over-regulation. And I know the big concern is, well, how has pricing done over the last few years.

Well, in the last again, between '11 and '12, the consumer price index for a wireless, and that's a number published by the government not a carrier, literally went down by 8%, when the overall consumer price index went up by 16%. And if you look at data, it dropped by 50% from $0.06 a megabyte down to $0.03 a megabyte.

So if you look at those dynamics prices are coming down for consumers. The carriers are still doing massive investments in the market. That's a pretty healthy economy. So I do expect that Chairman Wheeler will act on the things that he thinks are important. And he has already said, and I like the way he did this, things like, if the industry acts on this issue, the FCC will not. And I think that's really where you want to get is to hold the industry accountable.

The problem that I see with over-regulation is that the best, like any of the brightest commissioner in the world, the best you can do is take a snapshot of what's going on and try to regulate to that snapshot. We change so dramatically. I mean think about how things were two years ago in this industry and what they are like today.

How could you possibly predict what was going to happen? And I think that's the danger that we run into, and that's what Europe kind of ran through that stop sign and see what you've got? So I am comfortable that with a lot of dialogue, we'll find a good balance for consumers, but also to maintain a healthy industry.

John Hodulik - UBS

We have some time to take some questions from the audience. I think we've got some microphones in the back, if there are any questions? Doug, right here in the middle?

Question-and-Answer Session

Unidentified Analyst

My question is about video over wireless. And whether you think it's more going to be a traditional video, that's going to go over wireless through FiOS or by the Redbox Instant, can do more things in the area? How do you think that's going to play out?

Lowell McAdam

Well, I think there is going to be a whole bunch of sources for that. I mean the biggest drivers for us right now are things like Netflix and YouTube. Redbox certainly can play in there. We expect to scale that appropriately over time. But I also think that if you can get access to the news or to a sports, we're having lots of discussions with the sports leagues, they like the idea, especially out of market.

There is a lot of content rights that need to be work through. I think, Les, when he is here this afternoon, we'll talk about, he doesn't necessarily -- well, I don't want to attribute this to Les. So when I talk to all the content providers, they are very careful about cannibalizing the day of broadcast, but three days, four days, two weeks, whatever it is to get access to all of that content that's quote in the archives, and in our case give another 101 million sets of eyeballs access to it, is a real win-win.

So I think the market has demonstrated that it wants it. You can see that in the performance of the companies like Redbox and Netflix. And so we're going to have to figure out how to get there. And there will be several different models, several different technology trials, several different venues to get it out there, but I predict that within the next two years you'll see some dramatic change in viewership.

Unidentified Analyst

[indiscernible].

Lowell McAdam

Meter bandwidth? So you're thinking on the fixed line side then? Well, so I don't know anything Australia. So let's just be really clear about that. But on the FiOS side, you really have an unlimited pipe. And we think it will be a long time before we need to talk about metered bandwidth on the FiOS side.

I think the big knock against the cable companies is when the kids all come home from school for the day and they all get on the internet, the network slows down, we don't see that on the FiOS side. That's one of the competitive advantages we have. So that's not something that's on my radar to look at in the short run anyway is metered bandwidth.

John Hodulik - UBS

Any other questions from the audience? That's great. Lowell, thank you very much for your time. And I thank you all for being here.

Lowell McAdam

Thank you.

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