Verizon provides FiOS update

Verizon this week provided an update on its fiber-based FiOS service rollout in an effort to appease squeamish investors and analysts on the project’s return on investment.

FiOS is Verizon’s fiber-to-the-premises (FTTP) buildout intended to bring high-speed Internet and video services to homes and small business. The project’s total cost is $18 billion over six years, $23 billion in the fiber rollout minus $5 billion in spending on copper.

Wall Street tends to cringe at that figure, believing that Verizon may be spending too much to run fiber directly to homes, while AT&T and BellSouth are running it only to the curb or neighborhood node, a strategy some believe could provide comparable service at reduced cost. FiOS provides bandwidth tiers of 5Mbps to 30Mbps downstream, with 50Mbps downstream in a few select areas, and plans to boost rates to 100Mbps.

So Verizon sought to assuage the skittish this week, proclaiming that FiOS investments would generate positive economic returns based on increasing broadband market share, early TV success, service differentiation driving new market opportunities, and network and operating cost reductions.

Verizon said it plans to pass 18 million premises with its fiber network by the end of 2010, or more than 50% of the approximately 33 million households in the company’s 28-state wireline service area. The FiOS network build-out is on target to pass a total of 6 million premises by year-end 2006, with an additional 3 million a year planned through 2010, the carrier says.

Verizon said that FiOS will generate positive operating income beginning in 2009, based in part on growing revenues from FiOS services combined with declining operational costs because of fiber network efficiencies. The project will generate profitable growth within four years of initial investment, the carrier says, based on expectations of attracting up to 7 million Internet customers and up to 4 million TV customers by year-end 2010.

 Verizon says that about 70% of FiOS Internet subscribers are new Verizon broadband customers. The carrier has set a target of 725,000 FiOS Internet customers by year-end 2006, with the service available for sale to 5 million premises.

This would represent a market penetration of about 15%, toward a 2010 goal of 35% to 40%, or 6 million to 7 million FiOS Internet customers. This is an increase from the previously announced target of about 30% FiOS Internet market penetration by 2010.

This change is based on stronger-than-expected customer take-rates, Verizon says. In areas where FiOS Internet has been introduced for sale, market penetration rates have averaged 12% after the first nine months and 15% after the first year, the carrier says.

By the end of the third quarter 2006, Verizon expects to have more than 500,000 FiOS Internet customers, compared with 375,000 FiOS Internet customers at the end of the second quarter 2006. Monthly churn rates, a measure of customer turnover, have been below 1.5%, indicating customer loyalty that Verizon says exceeds its initial expectations.