In the financially difficult world of landline service, there has been one bright spot for Verizon — its state-of-the-art fiber optic service FiOS.  The cost of replacing obsolete copper phone with 21st century fiber optics has proved to be an expensive, but successful endeavor, at least in the eyes of customers.  Hated by Wall Street for its costs but loved by those who enjoy the service, FiOS has successfully proven traditional phone companies can earn money by providing the kinds of services consumers want, just so long as investors are willing to hang in there while the investment pays off over time.  But many investors aren’t.

Some of Verizon’s critics in the investment community complain the company is n0t earning enough from FiOS — in fact, for some critics who didn’t want Verizon spending money on a fiber-to-the-home network in the first place, financial returns provide the evidence used to claim they were right all along.

Despite the naysayers, revenue for Verizon FiOS is up by almost one-third each year, with average revenue per user now reaching $145 a month.  That’s well above the money Verizon earns on its legacy copper network phone customers keep leaving, especially outside of major cities where DSL service is spotty.  There is plenty of room for Verizon FiOS to grow in the limited communities it reaches.  Unfortunately, Verizon has stopped expanding its FiOS network to new communities, in part from pressure from investors who want to see cost cutting from the telecommunications giant.

Despite the positive reviews (subscription required) FiOS earns from consumer publications like Consumer Reports, Verizon slashed marketing and promotion expenses, resulting in second-quarter net additions for FiOS TV coming in at 174,000, compared with 300,000 a year earlier.

With Verizon now deploying service to communities on a reduced schedule, the results have been underwhelming according to the Wall Street Journal:

Verizon Communications may want to tweak the ad slogan for its TV and ultrafast Internet service to “This is FIOS. This is pretty small.”

Not catchy, but it would be more accurate than the current “This is Big” line.

[…]It eventually became clear that Verizon had slowed the time frame of the buildup, originally scheduled to be mostly done this year. Instead, it now expects to meet its target of passing 18 million homes with the network by 2012.

The slower timetable allows Verizon to trim capital spending this year. The problem is that FiOS’s expansion could stall with a less aggressive approach to growth. Already, Verizon has retreated from its target of adding one million subscribers a year, in favor of boosting penetration to 40% of homes passed. At June 30, its 3.2 million TV subscribers was about 20% of homes passed.

[…]And that can only reinforce questions about long-term returns on the $23 billion FIOS investment.

Evidence that Verizon is looking for more customers in its existing FiOS markets can be found in the news the company dropped its contract commitment for new customers.  The term contracts may have held some potential customers back out of fear of a lengthy term commitment with a $360 early cancellation fee.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Verizon FiOS goes contract free ad.flv[/flv]

Verizon started running this ad several weeks ago touting its new “no contract” FiOS service.  (15 seconds)

But a change in strategy isn’t enough for investors who demand immediate results through further cost cutting measures.

In Verizon’s second quarter earnings reports, company executives speak to this perception, proudly noting they have slashed costs through job-cutting and reduced spending on infrastructure and services.  Some of those services include DSL expansion for rural Verizon customers, many who are now left on hold waiting for broadband from Verizon indefinitely.

In many states, Verizon’s DSL expansion was incremental at best, with the company issuing press releases touting new service for literally hundreds of potential customers.

Verizon’s traditional landline business continues to lose customers year after year, and is abandoning millions of others through sell-off deals with companies like Frontier Communications.  Light Reading notes Verizon eliminated 11,000 jobs in its Mid-Atlantic and Eastern regions through early retirement incentive programs, an idea soon to spread to other regions, particularly California and Texas in the coming months.  This kind of cost cutting saves cash and allows companies to report positive financial results in quarterly reports.

According to John Killian, executive vice president and CFO of Verizon, the job cuts are just getting started.  As Verizon further alienates its non-FiOS landline customers who can find better service and lower prices elsewhere, the company expects “further force reductions” in the coming months.  Verizon is also slashing costs by selling off real estate, consolidating operations and vacating buildings.

The impact can become a vicious circle of deteriorating service, customer defections, and additional cost cutting, which starts the circle all over again.  In West Virginia, deteriorating Verizon phone lines reached the point of serious service outages whenever major storms hit the state.  Then Verizon simply sold off its network in West Virginia.  Those customers are now served by Frontier Communications.

Verizon previously declared the era of the landline dead, and is now seeking to prove its point, even as it demonstrates it can make money by spending money on FiOS, if only investors would give them the chance.

[flv width=”576″ height=”344″]http://www.phillipdampier.com/video/CNN Behind the scenes at Verizon Fios 3-15-10.flv[/flv]

CNN took a behind the scenes tour of Verizon’s FiOS network in New York City, from the central offices to individual apartments.  (4 minutes)

Week one of the transition for millions of ex-Verizon landline customers didn’t exactly go off without a hitch.  A few problems with support issues for certain business customers in West Virginia, a major multi-state DSL outage from a fiber cable cut in Virginia, and long hold times of 30 minutes or longer have afflicted the all-new, super-sized Frontier.  Also not inspiring confidence: a plummeting Frontier stock price as Verizon shareholders, which now own 68 percent of Frontier Communications are hurrying to dump their stock and get out.  It has gotten so bad, TradersHuddle declared Frontier Communications the worst performing stock on the S&P 500.

Not much of this comes as a surprise, particularly the fleeing of Verizon shareholders who received 0.24 shares of Frontier, worth about $1.75 on July 1st (but now dropping fast), for every Verizon share they owned on June 7.  They’ve learned from prior experience that holding onto spun-off stock from similar deals with companies like FairPoint Communications and Hawaiian Telcom ended in financial disaster — bankruptcy.  As we predicted last Halloween in our true-to-life telecom horror story, once this deal was completed, Verizon shareholders would rush for the exits, selling their Frontier stock even as the share price plummets.

Shanthi Venkataraman, a reporter for The Street, noted the selloff in progress after the 4th of July holidays.  On Tuesday the stock was down 4.5% to $7.02. More than 30 million shares have changed hands, five times its average trading volume of 6.3 million.  Analysts believe the “turbulence” in Frontier stock is likely to continue for another week as new shareholders from Verizon complete their sell-off.

Zack’s Analyst Blog notes shareholders should be concerned with the future of Frontier’s business model — focusing on a decaying landline business.  Frontier’s revenue is particularly in peril in their biggest service area, Rochester, N.Y., which represents 25 percent of the company’s total access lines.  Customers in the Flower City continue to dump Frontier’s phone and broadband services, preferring Time Warner Cable’s less expensive “digital phone” and far faster Road Runner Internet service.  Time Warner Cable has consistently reported much of their growth in new customers has come from departing landline and DSL broadband customers disconnecting service.

While shareholders have the power to cut ties with Frontier, rural telephone customers in 14 states now confronted with a shotgun wedding to Frontier are not so lucky.  For millions of rural customers, there is no other choice for telephone and broadband service.

Stop the Cap! has reviewed dozens of local news accounts regarding the transition Verizon customers are now confronting as they are introduced to Frontier Communications.  Overall, most of the rural communities are taking a “wait and see” approach, hoping Frontier’s near-universal promises of better broadband and improved customer service will come true.  Verizon effectively slashed spending at least a year or two ago in many of these communities knowing in advance they were not going to be around for much longer.  In states like West Virginia, the results have been devastating for broadband penetration statistics.  While Verizon prepared for a sale, it kept nearly the entire state waiting for better broadband that would never come from the telecom giant.  Now with news Frontier plans to spend millions to improve broadband in the state, residents are hoping that will actually bring a broadband breakthrough in West Virginia.  Time will tell.

Many communities who have long felt ignored as “too small to matter” in Verizon’s larger plans also hope Frontier will manage better customer relationships with residents. After all, Frontier is promoting itself as the phone company with the small-town feel.  But after week one, some customers are feeling Frontier is giving them the big city runaround.  We’ll explore that, and the reactions from community leaders, consumers and businesses to the promises Frontier is making in our multi-part series exploring their transition to Frontier.

The West Virginia Public Service Commission has denied a request from the agency’s Consumer Advocate Division to reconsider the sale of Verizon landlines to Frontier Communications.

The CAD criticized the proposed sale, pointing to earlier failures of similar transactions in Hawaii and northern New England which harmed consumers and businesses in those areas.  The consumer advocate sought a formal independent audit of the deal and increased safeguards to protect service quality and the customers soon to be served by Frontier.

The PSC claimed the CAD didn’t supply any new evidence in its filing justifying a reconsideration of its earlier order approving the sale.  It turned the request down on Monday.

Both Verizon and Frontier had asked the commission to reject the CAD’s request.

“It’s FairPoint Communications all over again,” writes Stop the Cap! reader Jenna who is mad as hell with Verizon Communications who first locked her out of her e-mail account, and then accidentally deleted it, along with all of her e-mail, in preparation for the handover to Frontier Communications.

Jenna is referring to similar debacles which caused billing and service nightmares for residents in northern New England who lost their Internet access for days, along with e-mail accounts, followed by months of inaccurate bills when FairPoint moved away from Verizon’s internal systems.

Her problems started the last weekend of March, when Verizon notified Jenna and other Fort Wayne, Indiana residents who use Verizon Yahoo! e-mail service that they would have to take steps to convert their e-mail accounts.

Verizon Yahoo!: Service No Longer Available in Some Areas

Starting March 27, 2010, Verizon Yahoo! for Broadband will be discontinued in the following areas:

AZ, ID, IL, IN, MI, NV, NC (except Knotts Island), OH, OR, SC, Crows-Hermatite (VA), WA, WI, and the following communities in California that border AZ, NV and OR–Big River, Blythe, Coleville, Crescent City, Desert Center, Eagle Mountain, Earp, Felicity, Fort Dick, Gasquet, Klamath, Kneeland, Markleeville, Merced, Needles, Orick, Parker Dam, Ripley, Smith River, Topaz, Trinidad, Vidal and Winterhaven.

These changes will not impact your Verizon Internet service access plan or pricing, and your Verizon.net email primary and sub-account User names and passwords will stay the same.

“They told us we would have to use this service called Verizon TrueSwitch in order to convert our e-mail box and that all of our contacts and existing e-mail would be transferred from the old Yahoo! webmail account to the new Verizon one,” Jenna writes.

But her experience with Verizon TrueSwitch turned into a TrueNightmare when attempts to use the service resulted in error messages.

“First it popped up with ‘unable to authenticate’ error messages, and then we were locked out of our Yahoo! e-mail account.  The Verizon e-mail account worked, but was empty,” she writes. “I tried to use Verizon’s ‘in-home agent’ online support but it suddenly told me it was ‘only available to Verizon customers.’  Apparently they can’t wait to get rid of us.”

Jenna then did what most customers of a phone company might do — she picked up her phone and called customer service.

“That was the second nightmare — I waited on hold 49 minutes the first time before a representative came on the line, sneezed, and then disconnected me.  The second call was a real marathon — over two hours on hold waiting for someone to help me,” Jenna notes.

When a representative did finally speak to Jenna, she apologized for the delay and candidly admitted their call center was swamped with calls regarding the e-mail conversion.

“When she thought she put me on hold, I was able to overhear her talking with someone else about getting word from a supervisor that the problem was somewhere on their end, and she felt bad because she had spent a good part of the morning blaming TrueSwitch, which I later found out was not even owned by Verizon — it’s a service sold by Esaya, a private third-party company,” Jenna says.

Jenna was transferred to a supervisor when attempts to correct her e-mail account lockout were not working.

“The guy they transferred me to wouldn’t listen to me and kept telling me he knew what the problem was, claiming I had ‘sub-accounts’ and they were messing up their systems,” said Jenna. “But Mr. Expert ended up permanently deleting the account, along with all of my e-mail, contacts, and everything else Verizon claimed I was able to store online.  Years of e-mail and contacts — gone.”

Jenna was right when she noted Verizon’s call centers were jammed with customers experiencing similar problems.

Verizon’s own customer support forum is hot with angry customers who are going through the same thing:

• Verizon/Yahoo! ‘Devilish Switch’
• Verizon Sold Everything to Frontier
• I’m Not Able to Receive E-Mail
• New Set-Up
• Verizon E-Mail Has Been Down for a Week

Verizon spokesman Harry Mitchell acknowledged the significant e-mail conversion issues were partly in preparation for the pending transition some customers face to Frontier Communications.

“The systems realignment will facilitate the closing of the transaction with Frontier, which we expect at the end of the second quarter, subject to conditions including regulatory approval,” Mitchell told the Fort Wayne Journal-Gazette.

Mitchell released a statement to the paper regarding the problems:

“In advance of a planned systems conversion over the weekend of March 27-28, Verizon online users who maintain e-mail accounts with Yahoo were notified that a customer-initiated service change would be required following the systems conversion in order to maintain their e-mail service,” he said in an e-mail.

“Customers were given instructions to use a ‘Trueswitch’ service to migrate their existing e-mail and contact information from Verizon Yahoo to Verizon servers in order to maintain e-mail access. Some customers have experienced difficulty when trying to initiate the service change. We’re working to address this as quickly as possible with those customers.”

Mitchell stressed that customers should make sure they validate their passwords in both the Verizon.net e-mail system and the Verizon Yahoo e-mail system. And they should “take extra care to write down those passwords so that, if they want to migrate their old e-mail and contact information, it will go smoothly through the Trueswitch process.”

Unfortunately, that won’t help Jenna.

A supervisor contacted her this week to apologize for the problems and the loss of her e-mail, which may not be gone for good if Verizon and Yahoo! can figure out a way to get the deleted account back, but for Jenna the damage has been done.

“I have read Stop the Cap! since 2008 and followed the misadventures of FairPoint Communications and the endless promises from Frontier they won’t repeat the mistakes the others have made, but it’s a case of ‘here we go again,’ and Frontier isn’t even in the picture yet,” she says.  “Verizon clearly can’t wait to get rid of us and Frontier will probably make us wish we had Verizon back, which should tell you the people of Fort Wayne now live on the corner of Rock Avenue and Hard Place.”

Gerace

The former head of corporate communications for Verizon Wireless will now serve as head lobbyist for Verizon Communications’ New York and Connecticut region.

As president of the New York region, Jim Gerace will be responsible for Verizon’s corporate interests — including public policy, government and external affairs, regulatory matters and philanthropy — in New York and Connecticut.

Gerace began his wireless communications career with NYNEX Mobile Communications in 1986 as a manager in employee communications.  He went on to serve in a variety of communications positions and was named director-public relations in 1991.

In 1995, he directed the announcement of the merger between Bell Atlantic Mobile and NYNEX Mobile, then the largest merger in the wireless industry, and was named vice president- public relations and a member of the senior staff of the new business.  In 2000, he directed the communications for the merger of Bell Atlantic Mobile and AirTouch, which launched the Verizon Wireless brand.

Verizon has a track record of signing up non-profit groups to support its telecommunications causes.  In addition to providing corporate executives for board positions of various community service groups, Verizon financially supports a wide range of not for profit groups, many of which later turn up writing letters of support in favor of Verizon’s policy positions.