Verizon (VZ) FiOS Great For Subscribers, Stinks For Investors
Verizon has apparently done a good job designing and building its "FiOS" bundle of digital TV, super-fast Internet access, and phone service: It took the top spot in Consumer Reports' February triple-play rankings. For Verizon (VZ) investors, though, it looks like a liability.
Sanford Bernstein analyst Craig Moffett takes a detailed look at the economics behind Verizon's $23 billion (projected costs) FiOS investment. Not pretty:
Translation: If VZ won't cut its losses and stop building FiOS, investors should stop holding VZ shares.
See Also: Verizon COO Strigl: No Impact From Economy
Have Free TVs Pushed Verizon Past 1 Million FiOS TV Subs?
Sanford Bernstein analyst Craig Moffett takes a detailed look at the economics behind Verizon's $23 billion (projected costs) FiOS investment. Not pretty:
We estimate the full cost of FiOS to be approximately $4,000 per connected subscriber (and that before the not inconsiderable Subscriber Acquisition Costs currently being incurred). In contrast, the present value of all components of incremental contribution, including cost savings, incremental revenues, and avoided capital spending, amount, in aggregate to approximately $3,200 per customer, yielding a negative return of almost $800 per subscriber.The best Moffett can say about FiOS is that excluding the enormous costs of laying new fiber to "pass" homes, FiOS may return $1,300 per subscriber. And you could argue that investors have already priced that into the stock, and that much of that money has been spent. Except, Moffett points out: Verizon, which has "passed" 9 million homes, still has another 9 million to go: "We remain years away from justifiably viewing the FiOS infrastructure build as fully behind us."
Translation: If VZ won't cut its losses and stop building FiOS, investors should stop holding VZ shares.
See Also: Verizon COO Strigl: No Impact From Economy
Have Free TVs Pushed Verizon Past 1 Million FiOS TV Subs?
On install day, no one showed, no one called. I had my mobile with me at ALL times. So around 1:30 PM I called Verizon to see what was going on. If something came up, I had a week off to move in and if they needed to come by in a day or two, I was totally cool with that. After about an hour on hold I got in touch with a “state level” dispatcher. That said that there were “no facilities available for my order” and I was called. Nope, I wasn’t called; they did have my cell (which I had with me all of the time) in their records. I wanted them to come out later in the week if possible since I was home. They said that their next available time for me was 4-12-08, which was a day where I was going to a wedding. The next available time after that was at the end of the month, on a work day for me.
Basically because they did not show up, or even notify me with a reason, they put me at the back of the line. I was trying to escalate my request and the support only gave me unreasonable dates and that “no facilities available for my order” BS. I later wanted to get my copper line put back so I could at least get phone service, and after a long wait in hold they gave me the end of the month as a date. Basically I was being run around in circles and being shoved to the end of the line because Verizon screwed up my installation. I was told the only way I could get it sooner is if I “knew an installer who’d do me a favor,” and I was pretty much screwed with the window of time I had to get the service installed. The salesperson fed me a load of bull and the installer didn’t even call me with a reason. I tried to figure out what “no facilities available for my order” meant, and why this was such a problem since I already had the ONT in my house. Half of their work was already done.
The same day, I called a local cable company who installed my phone, internet, and cable the next day. They showed up on time and did the normal pre and post appointment verification. I unplugged the ONT in my house and let the battery go out. Verizon gave me such a lousy customer experience I swore I would never do business with them, and be sure to let other people know about their awful customer service and commitments they setup and do not honor. Verizon screwed up prior when they bought Bell Atlantic, and screwed up our perfectly find DSL service I had around 98/99. My money is going to a competitor, and Verizon won’t see if because they have abysmal customer service. I am certainly interested in fiber optic lines connected to my house, but so long as Verizon is the only provider, I will happily do without.
As the MSOs, the telcos, ISPs and other subscription/continuity marketers know, customer inertia is your friend which only pays off over a number of years. Once you decide to make the switch from cable to FiOS, it's going to take a lot for a consumer to make the switch back to their previous providers. And that's not just because of the contracts.
If VZ wants to get the right to provide the massive amount of bandwidth we're going to consume in the future, they HAVE to put out a home-run product to drag customers away from the MSOs. And that means:
1. Quality product in voice, video and data.
2. Aggressive pricing.
3. Strong customer service.
4. Aggressive offers, e.g. VZ's recent free TV offer.
As an example, I was a long-entrenched customer of Cox (for data), DirecTV (for video) and Vonage (for voice). All were perfectly fine for me until VZ finally finished wiring my neighborhood for FiOS and met all 4 requirements above. And now that I've got the product, it's going to take a freight train on the part of Cox to drag me back.
Yeah, in the short term it's going to cost Verizon. But they're supposed to be in business for the long-term. What if they listened to the likes of Moffet and optimized for the short-term? They'd still be in the business of renting black phones and hoping their customers liked the screetch-screetch of 56K modems over their copper?
I can think of a couple of big subscriber-driven businesses that decided to manage for the short-term and, while Wall Street was happy for a long time, they're not more-or-less in the "where are they now?" category.
Forget the analysts. FiOS is good for the consumer and, in the long run, will be good for VZ.
Over what timeframe?
Of course I dont have Moffet's full analysis, but if this is really the thinking, I am not quite sure what to say but, well, how stupid.
By laying this kind of infrastructure, with the kind of speed that is only possible over fiber, verizon is putting itself in the kind of position that it had when only ma bell had copper running to people's homes. This is particularly significant since cable, as an industry has decided that fiber is only needed to the hub and not all the way into the home.
The long term advantage of fiber is staggering. We are nowhere near satisfying our thirst for bandwidth. Needing a gigabit 10-20 years from now is not at all outrageous.
So pegging the value of the Fios at $1300 (presumably one year of subscriptions) really reflects a fundamental misunderstanding of the dynamics of this business.
Take these reports with a grain of salt, unless you are day trading.