Verizon touts FiOS market, cost-cutting success

Verizon today issued its own report card for its FiOS fiber-to-the-premises network and services, seeking to show the investment community that the $18 billion, six-year investment strategy deserves an ‘A.’

In a lengthy investor presentation, Verizon executives said FiOS is meeting goals for attracting and retaining customers, becoming less expensive to deploy and beginning to show network maintenance savings.

Among the presentation highlights:

• At mid-year 2006, FiOS passed 4.4 million in 16 states, and is on target to pass 6 million by year’s end and 18 million by 2010
• The company is achieving 15% penetration for FiOS Internet access within 12 months with a monthly churn rate of less than 1.5%. Seventy percent of those subscribers are new to Verizon broadband
  
• Verizon has 161 video franchises cover 3.3 million homes. The company expects to have 175,000 video customers by year’s end.
  
• Two-thirds of its video customers are shifting from cable TV. Seventy-nine percent of FiOS TV customers are triple-play customers.
  
• The network costs per homes passed has dropped from $1021 in 2005 to $873 by August of 2006 and is on track to be $850 by year’s end, as equipment costs drop and processes become more efficient.
  
• The cost of in-home connections has dropped from $1220 per home to $933 in August and will hit $880 by year’s end. Some of that reduction comes from the shift to using in-home coaxial cable.
  
• Outside plant trouble calls on FiOS are down 80% over voice and DSL trouble rates
  
• 84% of customers surveyed rated the FiOS installation process as very good or excellent.

“We are seeing very good churn rates, very good bundling results, we are seeing those metrics which we believe is the right mix,” said Virginia Ruesterholz, president of Verizon Telecom. “The strategy we have around FiOS -- broadband in general is a key sticky product for us. We have led in our net adds on broadband and we still have potential there. Our FiOS strategy and broadband will be winning strategy in overall combination.”

Neither Ruesterholz nor other Verizon executives would say that the company might at any point speed up its FiOS deployment, to pass more than the three million homes per year they now target. Ruesterholz did say the company is seeing opportunity for FiOS in the small to mid-sized business space, where there is a definite revenue upside and potential for innovation. Multi-dwelling units are also now on the roadmap and while dealing with landlords may make that process take longer, it will bear fruit in 2007, she said.

Bob Mudge, executive vice president and chief operating officer, said the FiOS buildout is not only transforming Verizon’s network but also its people.

“What I’m really proud of is what is going on with our people and with our team,” he said. “We knew we had to transform the network, but this is also transforming our people. At the garage floor, this is really changing our business. This is a very different experience, a very different opportunity and a very different level of pride for our employees.”

As Verizon scales FiOS, the cost of materials and equipment is falling, along with contractor costs and its internal labor costs, Mudgee said.

“We have been able to greatly simplify the installation process and have a much better customer experience,” he said. A big part of that is the shift to use Multimedia over Coax Alliance (MoCA) technology which utilizes in-home coaxial cable for TV and computer connections.

In addition, Verizon is now installing an in-home router that enables wireless connections to PCs, as well as greater visibility in the home for detecting and diagnosing problems. In the past, that visibility ended on the side of the home at the ONT.

“As we implement MoCA, those costs go down,” Mudge said. “We use it today in the set-top box and we are integrating it into ONT [optical network terminal] which we will do by the end of the year, and that will eliminate any new wires, as we use that path for video and data and grab the inside wiring for phone. That means far fewer elements in the home, less work required.”

To date, much of the productivity gains have been “from training and learning and scaling,” Mudge said. “Going forward, our productivity will be driven by moving work and elements of installation, as we will change the process itself.”