Verizon details FTTP cost curves and ROI

In a lengthy presentation Wednesday morning, Verizon Communications chief financial officer Doreen Toben illuminated the future trajectory of costs and returns associated with the company’s FiOS fiber-to-the-premises (FTTP) deployment.

After a year of rolling out video service through FiOS, Verizon has made video service available to 1 million homes. By the end of this year, Verizon expects that number to be 1.8 million, and by 2010, Verizon expects to be able to sell video to 15 million homes.

By the end of this year, the company expects the cost of passing each home to drop to $850 from $1400 in 2004. And it expects the cost to keep dropping, to $700 per home passed by 2010. However, the company’s net capital expenditure for each home passed is $1434, and for each home connected, it’s $2535.

To get an 11% return on its investment (for the last half of this decade), Verizon calculates it would need to collect $39 a month in incremental cash per FTTP subscriber.

“Thirty-nine dollars is a very reasonable number,” Toben said.

Verizon also expects to reap savings from FTTP to the tune of about $1 billion in a $6-billion capex budget (half of the $6 billion is unaffected by Verizon’s FTTP moves, however, because it falls outside the scope of its FTTP footprint ambitions). Those savings, which Verizon estimates to be about $110 per line, come through a variety of means, including normal technology cost curves, decreases in problems, maintenance and repair and the self-installation that takes place when a new person moves into a home vacated by a previous FiOS customer.

Verizon also expects its service bundle to save 40% to 50% of the voice lines it otherwise would have lost to competitors. And it’s working to make its bundles stickier, trialing a service with Verizon Wireless that would allow customers to operate their personal video recorders remotely through their mobile phones.

Verizon’s model assumes customer acquisition costs comparable to that of its peers in the satellite and cable sectors. When one analyst on Verizon’s call questioned that assumption, given Verizon’s “feet-on-the-street” marketing approach, Toben replied, “I was amazed how reasonable the cost of acquisition is. One would have guessed that would be an expensive channel, but when you look at what they’re actually delivering, it’s absolutely within the benchmark [set by cable and satellite providers].”

Toben presented one hypothetical market in particular as a model: one with about 25,000 lines in which half of the access network is buried and half is aerially mounted. Verizon would spend about $45 million bringing FiOS to that market, $20 million of which would be used bringing fiber past homes but not connecting them. Eighty percent of Verizon’s expenditures in the market would be made in the first three years of its efforts there. Assuming 37% FiOS penetration and 24% video penetration in five years, Verizon expects FiOS to reach positive earnings before interest, taxes depreciation and amortization (EBITDA) in its third year in that market and generate positive operating income by its fourth year.