Verizon Says No More DSL in FiOS Areas

The Verizon (News - Alert) earnings call this week focused a lot of attention on its wireless business and the increase in contract subscribership, as well it should. However, while it may have taken a little while to sink in, there was other interesting news that has raised some eyebrows.  Turns out the company is not only continuing to lose customers on its DSL lines, but going forward it does not plan to offer DSL in areas where FiOS is offered. It may not be surprising that Verizon is hemorrhaging DSL customers, what is surprising is the admission that it will not even attempt to compete against cable companies by having a two-tiered approach to broadband with DSL positioned as the diet version. 

This little tidbit has started to germinate some questions.   Again, this should be no surprise. 

The background for all of this starts with a simple running of the numbers. According to the company’s release on its financials:

• Verizon added 193,000 new FiOS Internet connections and 180,000 new FiOS Video connections in first-quarter 2012. Verizon had a total of 5.0 million FiOS Internet and 4.4 million FiOS Video connections at the end of the quarter.
• FiOS penetration (subscribers as a percentage of potential subscribers) continued to increase. FiOS Internet penetration was 36.4 percent at the end of first-quarter 2012, compared with 33.1 percent at the end of first-quarter 2011. In the same period, FiOS video penetration was 32.3 percent, compared with 29.1 percent.
• Broadband connections totaled 8.8 million at the end of first-quarter 2012, a 3.3 percent year-over-year increase. The net increase of 104,000 broadband connections from fourth-quarter 2011 was the highest quarterly net-add total since second-quarter 2009.

So, let’s look at some arithmetic that has caused a bit of a stir. 193,000 new FiOS Internet customers (we will give them the max and not look at the video or even triple play customers that are lower in total) minus 104,000 net new broadband connections equals a loss of 89,000 DSL customer. Plus, given the penetration numbers above also consider that Verizon gets 63 percent of its total consumer wireless revenues from FiOS. This is not a pretty picture.

Now in the company’s defense they are promising an acceleration of FTTH FiOS deployment, and surely they would rather go into battle against the cable companies on a fiber plant than DSL. However, it would be interesting to know how much share they are willing to lose since VDSL2 technology, especially from a Verizon preferred vendor Alcatel-Lucent (News - Alert), who can in theory keep them in the game at an incremental cost during the transition from FTTN (assuming there is an accelerated build-out to nodes that are not currently fibered) to all FTTH FiOS everywhere in the markets they target.  This of course has regulatory implications in terms of promises made and kept, but that is a discussion for another day.

The speculations about the strategic machinations are growing. As Bernie Arnason at Telecompetitor in his take on this pointed out, it may be okay for Verizon to go forth and conquer with the FiOS brand and kill DSL as an option for new customers in those markets. But that leaves open the question as to what they will do with their non-FiOS markets, where DSL really is their only wireline broadband option. His choices were:

1. Let them die a slow death, while pushing new customers to cable or HomeFusion (the 4G LTE (News - Alert) option which has light deployment).
2. Sell them off
3. Upgrade those DSL markets to a FTTN option and use VDSL2 or some other next-generation DSL
4. None of the Above

At the risk of beating a dead horse here, I am going to come back to a position I have taken for more than two decades. Verizon (and possibly AT&T (News - Alert) at some point) may decide it is in their best interests to actively pursue #2 with a catch.

The catch is that this is not abandoning customers, as it seems Arnason is suggesting. I am talking about divesting themselves of their outside plant operations entirely. This could be in the form of a sale to a cable company (in exchange for spectrum maybe?), to private equity folks, or interested third parties like electric utilities. Or it could be a media company with a robust ecosystem that believes in the Steve Jobs (News - Alert) view of the world of owning everything end-to-end.   Did I hear the names Apple, Amazon and Google pop up?  

It all gets very complicated based on determinations about the value of physical networks in relation to the ability to charge for the potential traffic they may carry and the level of engagement one has with a customer to extra next generation value-added revenue. In fact, this sounds like a problem that telecom service provider CFOs need to turn over to one of those cloud-based super computing clusters that Amazon hosts so well.

There is more that is sure to come on all of this just on the DSL side of things. It is hard to imagine Verizon ceding too much of that customer base since they need to run fiber in lots of places to keep their business customers happy. How far is interesting. What regulators at the state and local level are likely to say about license obligations will be important. What a host of interested parties are going to definitely say about rates and what can or cannot go into rate calculations, and what does all of this mean for things like VoIP and E-911 going forward in terms of carrier obligations is why this is so tricky.

The last sentence actually is why divestiture, in fact, creating a combined communications outside plant utility melding telecom and cable assets so there was a one-wire solution may be the cleanest fix of all. There is nothing wrong with plumbing, so long as it is state-of-the-art and everyone has an equal chance to use it. I probably am showing my age, but the industry has been arguing about this for over 30 years. DSL customers in FiOS area are likely to experience rate shock as they are phased out, and DSL customer in non-FiOS areas may have no alternative but the cable company. This decision by Verizon goes a bit deeper than it looks on first blush.