Verizon’s FiOS Fiber-Optic Network: Payback Time?

| About: Verizon Communications (VZ)

Verizon (NYSE:VZ) reported its first quarter results and they are notable for one key reason–most of the maximum capital spending for its FiOS fiber-optic network is through the pipeline.

Simply put, the earnings hit–11 cents a share in the first quarter–that Verizon absorbs from building out its fiber-to-the-premises [FTTP] network will diminish going forward. That means it's a subscriber game. If Verizon starts landing Internet and TV subscribers for its fiber optic network, the company will differentiate itself from rivals like Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T). If not, FiOS is going to look like a boondoggle.

Verizon reported net income of 51 cents a share compared to Thomson Financial estimates of 53 cents a share. Excluding special items, Verizon reported earnings of 54 cents a share. But the big picture is this: Verizon is betting that FiOS and Verizon Wireless can transform the company.

But to date, talk of FiOS has been limited to terms such as "potential" and "upfront costs." That perception will change as Verizon rolls out services–I'm waiting for it in my neighborhood.

The early line on Verizon's FiOS service looks promising, but the network is still a case of build-it-and-hope-customers-come. In the first quarter Verizon added 177,000 FiOS Internet connections to bring the total number to 864,000. Verizon added 416,000 broadband connections, which include FiOS and DSL service.

FiOS TV added 141,000 customers and ended the first quarter with 348,000. It added 2,200 FiOS TV customers a day.

For perspective, FiOS Internet and TV combined services pass 6.8 million homes and Verizon hopes to pass 9 million by year end. FiOS Internet is available for sale to 5.3 million premises. FiOS TV is available to 3.1 million premises.

Given the number of homes passed and the subscriber tally there's a big gap to close for Verizon. But we're going to see if this bet pays off. The funny thing is that the network may not even matter. As this Knowledge@Wharton story notes, customer service will win the day for Verizon. After all, the consumer isn't in love with Verizon or its rivals.

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Tagged: , Telecom Services - Domestic
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