Verizon: Betting On FiOS And Cloud

| About: Verizon Communications (VZ)

Although Verizon's (VZ) wireline segment had a dismal performance in the fourth quarter, the fiber optic service FiOS revenue grew 15.6% year over year. After much discussion about the OnCue acquisition with Intel (INTC), Verizon finally agreed to buy assets of Intel Media, which includes OnCue Cloud TV platform and services on January 21. The deal is expected to be around $500 million and is expected to close in the first quarter of 2014. There is no doubt that OnCue was designed to change the TV-viewing experience for pay-TV services, but Intel has decided to sell off these assets to focus on its core business. Verizon will integrate OnCue with its fiber optic service FiOS, and will expand its video services. The pay-TV industry is going through a transition as companies like AT&T (T) and Netflix (NFLX) have started offering new innovative TV services, challenging traditional cable television services. OnCue delivers TV streaming over a high-speed connection through set-top boxes and applications. Thus, it has the advantage of streaming to TVs, smartphones, and tablets. This feature will give Verizon an upper hand among cable companies, since very few companies offer such service. FiOS is currently present in 16 states where it has built fiber optic network.

However, with OnCue, Verizon could expand FiOS TV service nationwide since users could access OnCue through any high-speed Internet connection. Verizon will have to negotiate deals with content providers, as it would have to provide video streaming through OnCue. If Verizon is able to forge deals with content providers, then it may be able to enhance its video offering with FiOS TV service. The launch of OnCue services will put more pressure cable and satellite companies, which are restricted on their physical network for providing pay-TV services. Verizon acquired content delivery network EdgeCast last month, and along with the OnCue service, it is a step ahead in the pay-TV market in the U.S.

Despite all this, OnCue has its own drawbacks, as it is not a standalone service. Users need to have a high-speed Internet connection with high data to enjoy OnCue services. In addition, there are also concerns about whether this service will handle high web traffic.

Establishing itself in the cloud market

Recently, Verizon partnered with Oracle (ORCL) to provide cloud services to its customers. This will allow customers to use the Oracle Database and Oracle Fusion Middleware on Verizon's cloud infrastructure and pay based on hourly use. Customers can use their Oracle licenses on Verizon's cloud platform or purchase Verizon Cloud, which includes Oracle licenses. Verizon launched its cloud services to large and mid-sized companies in October last year. Verizon runs VMware (VMW) based vCloud Express and Enterprise Clouds and provides private and managed clouds to different companies. Verizon, in collaboration with Oracle, will provide an easy and cost-effective (pay per hour) way for adopting cloud. Through this partnership, Verizon is looking to challenge one of the leading cloud providers Amazon (AMZN) Web Services, or AWS, in the Infrastructure as a Service, or IaaS, market.

Verizon entered the IaaS Cloud storage market with the launch of its revamped cloud. The Verizon-Oracle deal isn't an exclusive; AWS also offers Oracle licenses on its cloud platform. Enterprises can use different options, including Verizon and Amazon, for using Oracle licenses. The unique offerings of these cloud providers are what differentiate them from each other. Verizon is banking on its international network, managed services, and security services along with inclusion of Oracle middleware as the differentiating factor. The IaaS market alone is expected to grow at a CAGR of 41% from 2014-2016 and reach $24 billion in 2016. Verizon could establish itself with the help of this Oracle partnership, as Oracle licensing comprise of 10%-20% of the IT budgets of the company. This would help Verizon reach its goal of building an ecosystem of enterprise-class networking and storage on Verizon Cloud.

Amazon is far ahead when it comes to IaaS Cloud computing with the largest capacity in cloud based workload handling. Its cloud operations are supposed to be five times more than the combined operations of top competitors in the market, and it has been placed in the leaders quadrant in the Gartner 2013 Cloud IaaS Magic Quadrant. Verizon has a long way to go before it can actually challenge the domination of Amazon.

Bottom-line

Verizon continues to see solid growth from FIOS subscriptions, with penetration increasing to 39.5% in the fourth quarter of 2013 compared to 37.3% in same quarter last year. FiOS revenues grew by 15.6% year-over-year, and with the acquisition of OnCue, investors can expect that it will stay ahead of the competition.

In the Cloud business, Oracle deal is significant as it attract its clients to the Cloud platform. At times when U.S. Telecom market is witnessing an intense competition, Verizon's Cloud initiatives will help it against its competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.