Back in 2006 you'll recall that some investment analysts insisted that Verizon's $24 billion FiOS investment was "doomed
" before it even got out of the gate. The position reflected a general inability among telecom analysts to see the larger picture, such as the fact that Verizon needed to reinvest $24 billion into their network to remain truly relevant. Sanford Bernstein's Craig Moffett in particular has been very hard on FiOS, spending a good chunk of the last five years arguing that phone companies shouldn't bother to upgrade
networks and that Verizon FiOS was destined to be a failure
That didn't happen. FiOS wound up being hugely popular among consumers, the fiber investment turned cash-flow positive in 2008 as the cost of installs dropped, and the upgrades put Verizon in a position to be competitive for decades. Though we've criticized Verizon heavily
for hanging up on rural America, their decision to upgrade to fiber, offload unwanted DSL networks, then fill in the gaps with LTE (maybe even winning some ex-DSL customers back
with fixed LTE) was a strategy that completely retooled the company as cable's top competitor in a relatively short period of time.
However, the smaller companies Verizon has offloaded unwanted DSL markets to, like Frontier and Fairpoint, have struggled. Frontier in particular found it couldn't afford the high programming costs associated with the 100,000 FiOS TV customers they recently inherited from Verizon. As such, they recently decided to jack up both the installation fee and monthly rate by a huge amount
, in the hopes that customers would flee to DirecTV. Oddly, in a piece over at Business Week
, Craig Moffett is back again insisting that Frontier's trouble somehow means Verizon's FTTH bet was a bad idea:
Frontier's proposed pricing moves suggest to Craig Moffett, a telecom analyst with Sanford C. Bernstein (AB), that FiOS does not turn a profit for Verizon, either. Moffett says his view is reinforced by Verizon's announcement in 2010 that it would effectively freeze its FiOS footprint. "It was a tacit admission that building new networks is a losing proposition," he says...Verizon spokesman Bob Varettoni counters that the fiber investment turned cash flow-positive in 2008.
Moffett's logic is bizarre, in that he's suggesting that because a smaller telco like Frontier can't afford the same high programming costs as a massive company like Verizon, Verizon's fiber to the home build somehow must magically lose money. Moffett also oddly insists that because Verizon has frozen new FiOS installs, that somehow means that the entire investment wasn't worth it. Except as we've covered (and criticized) extensively
, Verizon froze FiOS for a number of reasons -- including the hopes of getting new government USF subsidies for the next build phase, and to ramp up marketing in order to increase penetration levels in deployed areas. Verizon continues to expand FiOS in DC, NYC and Philly.
Verizon had the money to invest back into the network and they did. Even if the company is still losing money on the short term, they'll reap the rewards over the next decade. While Verizon pauses between phase one of the deployment and the next phase, the cost of fiber to the home hardware continues to drop. Regardless of whether or not you like Verizon's business practices (and we're often critical of their lobbyists and persistent magic inability to bill consumers accurately
), it's undeniable that FiOS was a good decision. The alternative was irrelevance.
Moffett's solution for the nation's copper-bound phone companies is to sit on their hands and do nothing -- which one can only assume means his goal is to drive up the value of cable industry stocks, since sticking with vanilla DSL is allowing cable operators to eat the phone companies' lunch
. If you want to be considered a next-gen broadband company, investing back into the network to make yourself competitive isn't a "losing proposition." What's a "losing proposition" is milking your aging (and more expensive to maintain) copper infrastructure, then watching as cable operators lure away your customers because you and your myopic investors were too timid to make the necessary upgrades. Stop being a coward and go long.