FiOS, Cellular Won't Save Verizon - Sanford Bernstein

After billions of dollars spent over several years building FiOS, a high-speed fiber-optic network, Verizon Communications (VZ) may not end up with much to show for it, writes Sanford Bernstein & Co. telecommunications analyst Craig Moffett in a note to clients Friday. Returning to a theme he has touched on frequently, Moffett states that “horrific line losses” and “dismal broadband gains” mean that Verizon’s, and to a lesser extent, AT&T’s (T) wired communications network may not be able to remain competitive with the networks of Comcast (CMCSA), Time Warner Cable (TWC), and the other cable networks, which he describes as being economically more efficient.

For both AT&T and Verizon, “the decline in access lines is outpacing the ability of the carriers to shed costs,” says Moffett. But the situation is worse for VZ than for T.

Moffett says AT&T “pulled a rabbit out of its hat” on Wednesday when it reported profit per share that matched analysts’ estimates, excluding some costs. But Verizon may not get away so easy: Its loss of wired telephone and broadband customers has been worse than AT&T’s for some time now, putting it in an already weakened position just as the economy sends customers rushing to cancel their phone lines.

FiOS, the fiber-optic network Verizon is rolling out to deliver high-definition video, calling, and broadband Internet, won’t help things. Writes Moffett, “FiOS will cease to be a drag on earnings not when it becomes EBITDA positive, but instead when FiOS margins are higher than non-FiOS margins. Given the very high variable costs associated with the video business, and the therefore inherently low margins associated with FiOS service, this unlikely to ever be the case.”

And in case you thought the cell phone part of Verizon would help make up for lost landline business, think again. Most of the losses in traditional telephone customers is coming from cable phone offerings, not from people switching over to using their cell phones. So Verizon isn’t getting much new business by moving people from wired to mobile phones, argues Moffett.

Moffett has a $37 price target for Verizon and rates the shares “Market Perform,” while he has a $42 target for AT&T stock and rates it “Outperform.”

For a very different perspective, see Monday’s post about Pali Research’s Rich Greenfield, who downgraded shares of Time Warner Cable. He thinks Verizon poses a big threat to cable by undercutting voice, video and broadband packages with cheaper bundles, thanks to FiOS.

Today, Verizon shares closed down 64 cents, or 1.82%, at $34.45, while AT&T shares closed down 30 cents, or 1%, at $31.40. Verizon has fallen 34% from its 52-week high, while AT&T is 37% off its high.

Comments

[metalhead:]

More competition is good for the consumer. For too long the pigopolists at Comcast and TimeWarner have enjoyed a monopoly. Good for Verizon and AT&T.

A weak economy hurts Comcast and Time Warner too. People will give up cable TV before they give up their cell service.

2008 Jul 26 08:09 AM

[Igneous:]

I think FiOS with fiber "to the house" will revolutionize home media across the nation. Verizon enjoys the best customer satisfaction and reliability in the cell phone business. These are some of the reasons I hold the stock as a telcom pick. This is a perfect time for asute investors to become shareholders.

2008 Jul 26 09:16 AM

[sailsofar:]

Seems to me that Craig Moffett either lacks vision or has an agenda that benefits by a market perception of Verizon being way out in left field of corporate success.

Many investors likely look at Verizon as a utility company, and it is. But more importantly to invertors it is also a growth company. Building out its fiber optic network will benefit Verizon now and is taking the company into the future. What does science have that replaces the benefits of light. I doubt there is anything commercially viable in the foreseeable future. Meaning that fiber optics is the "NOW" and the " FUTURE". The future is going to put demands on networks that only fiber optics can fully accommodate. Copper and coaxial systems are going to become old technology that just won't keep pace with the ever increasing needs of future technologies and services. AT&T had announced to the investing community that they would continue to get the most out of their copper network. This is what Craig Moffett embraces.... What a head in the sand analyst he makes himself out to be.

Reports such as this one from Craig Moffett might sway investors, who lack understanding of technologies, briefly to a negative stance... but long term, Verizon's investment into building it's nation wide fiber optic network is creating a mega communications company leaving its competitors to old technology that will prove to be under competitive and the least prosperous.

2008 Jul 26 11:21 AM

[LT777:]

Interesting counter to Moffett's opinion, this one based on facts:
www.247wallst.com/2008...

Whom to believe?

2008 Jul 28 09:21 AM

[Scott Berry:]

FiOS is a defensive play to stop erosion on local loop services, with an option on undeveloped bandwidth hungry apps.

Note they are tearing out copper wherever fiber goes in. This sharply reduces opex and allows them to upsell video, which they couldn't before. Line losses to wireless--much going to Verizon anyway--and competition from cable is offset by a lower plant operating expense and revenue upside.

The option comes from future-proofing their outside plant. First fiber to the home wins.

2008 Jul 30 10:57 AM

[directcommu...:]

i do agree the customer satisfaction is amazing

Nov 07 04:40 PM