Verizon: Red Flags Surrounding FiOS Direction

Jun. 6.12 | About: Verizon Communications (VZ)

One of the main advertising points telecom companies rely on are fast Internet download speeds. The idea is if a customer likes the speed at which they can download movies, games, and other media to computers, televisions, and smartphones, they won't stray - especially if the monthly price is right. Verizon (NYSE:VZ) debuted its FiOS high speed Internet service back in 2004. Catering mostly to those living in the northern and eastern parts of the US, FiOS can be found in some smaller areas in the south, mid-west, and western regions.

Recently, the company stated it has no plans to expand FiOS services to more territories for now, but did announce the launch of advanced Internet download speeds (up to 300 Mbps) for customers willing to spend more each month. A new payment structure will be announced within the next few weeks.

So, what does this mean for existing FiOS customers? Currently, Internet download speeds for top paying customers are 150 Mbps for around $200 per month. Additional plans include slower download speeds, 75 Mbps (which the company plans to discontinue and instead offer 25 Mbps and 35 Mbps), and 15 Mbps. Interestingly, the majority of FiOS customers often request the 15 Mbps plan.

Marketing Disaster or Potential Money Maker?

Even though Verizon doesn't have any plans to expand FiOS to new territories, the company is hopeful that faster Internet speeds will attract more high paying customers. But with only a small percentage paying for higher speeds now, the question is how many people will sign up to pay even more each month? I think investors need to seriously consider whether customers will pay for faster download speeds if they're already content with what they have now.

This isn't the only potential issue Verizon has with FiOS. Currently, 5 million people have signed up for FiOS service - that's out of a potential 13.7 million who live in areas with available service. If Verizon has difficulty selling basic FiOS service, why offer advanced download speeds to people that aren't interested in FiOS at all? This seems counterintuitive to the age-old principles of supply and demand.

But perhaps Verizon is counting on the fact that more and more people download videos, games, movies, and other media to their televisions and computers. And, that these people have more than one device at home in which to do so. For hardcore gamers, for example, faster download speeds means less time waiting for screens to refresh. This does make playing interactive online games much easier and more fun.

FiOS vs. Cable Internet Service

The FiOS vs. cable Internet service battle continues with the latest service offerings from Verizon. But most cable service providers like Comcast (NASDAQ:CMCSA) don't seem threatened by higher Internet speeds. The company offers a variety of Internet, phone, and television packages in more areas than FiOS. Other telecom companies that offer high speed Internet services include Charter Communications (NASDAQ:CHTR), CenturyLink (NYSE:CTL), and Windstream (NASDAQ:WIN). Each of these companies has a comfortable market share that allows them to remain profitable even with increased competition.

Also, since Verizon provides FiOS service to a limited number of people, cable service providers have the advantage of less competition in areas where FiOS is not an option. Companies like Windstream have expanded into many new territories over the years to maintain steady profits. The company currently provides Internet and other telecom services to both business and residential customers.

Into the Unknown

It is unknown whether Verizon predicts upcoming technology will require faster computer download speeds, or if customers will begin to demand these speeds. So offering faster speeds now may be a preemptive move to get a jump on the competition. If this is true, the question remains why Verizon hasn't expanded FiOS and has no plans to do so. From an investment perspective, not having a complete grasp on Verizon's reasons for offering faster Internet download speeds may cause unrest as investors do not have enough information to determine which direction the company is going.

Since the Internet continues to grow, perhaps Verizon is preparing for the future by becoming the only telecom company so far to offer Internet speeds of 300 Mbps. I think investors should research what is going on in the telecom industry focusing primarily on upcoming technology. This may provide investors with more information so they can better understand Verizon's motivations for offering advanced download speeds to a small number of customers.

Customer's Changing Needs

With continuous online growth, the needs of customers will change. In the past, people had to wait two or three minutes to download a webpage or song. Nowadays, people wait as little as three to five seconds thanks to advances in technology. Today's customers don't (or can't) wait minutes for online content to download. Viewing movies, games, video content, and photos requires faster download speeds - it's just that simple. But how much are FiOS customers willing to spend each month for faster and faster download speeds if the average customer signs up to receive the slowest speeds to begin with? I do question the potential profit Verizon hopes to earn by offering faster download speeds.

In the end, investors will just have to wait and see how customers react. If there's enough demand, then the new download speed package will perform well. If not, then Verizon may have to discontinue this package or come up with a new pricing strategy. But over time, people will start to demand faster download speeds as they have in the past. Soon, three to five seconds will not be fast enough to keep up with the technology that's just around the corner. Perhaps that's what Verizon is counting on - to be ready for the next generation of home entertainment and computing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.