Verizon has a moratorium on further expansion of its fiber to the home service except in areas where it has existing agreements to deliver service.

Verizon Communications will not expand their FiOS fiber optic network beyond the current obligations the company has with communities where it presently provides service.

Verizon chief financial officer Fran Shammo told investors the company intends to wind down FiOS expansion once its contractual commitments to state and local authorities are met to reap the financial rewards of the fiber optic network it began building in 2006.

“At this point we won’t build beyond that, because at this point we have to capitalize on what we have invested,” Shammo told an investor at the Goldman Sachs Communacopia Conference.

From 2014 beyond, Verizon plans to substantially decrease capital investments in its wired networks and continue to shift spending towards Verizon Wireless. Shareholders may also benefit from an increased dividend payout as the company’s balance sheet improves.

In real terms this means that Verizon will only expand FiOS where it previously signed agreements that allowed the company to gradually roll out its fiber optic network. Large sections of Verizon’s service areas, including major cities in the northeastern corridor, are not on the upgrade list and will not get the service.

Verizon’s experience and scale rolling out fiber to the home service over the past five years allowed the company to achieve a cost of  just $700 to reach each home, less than half the original estimated expense for fiber upgrades. But Verizon still considers the network too expensive to expand further.

Shammo also admitted Verizon is targeting its landline investments to bolster its more profitable wireless business.

“The fact of the matter is wireline capital — and I won’t give the number but it’s pretty substantial — is being spent on the wireline side of the house to support wireless growth,” Shammo said. “So the IP backbone, the data transmission, fiber to the cell, that is all on the wireline books but it’s all being built for the wireless company.”

Bruce Kushnick found no bump in construction expenses for FiOS after 2008 and no major increases in capital expenditures in general. In fact, Verizon, on average, spent more on construction from 2000 to 2004 than from 2005 to 2011, when FiOS construction was at its peak.

Bruce Kushnick from New Networks Institute has been tracking Verizon’s capital investments for the last decade and found Verizon was hardly hurting paying for FiOS network upgrades. In fact, Kushnick suspects much of the money to pay for FiOS came from a combination of ratepayer rate increases and diversion of investments intended to maintain Verizon’s existing landline network:

Whatever amount Verizon did spend on FiOS — and obviously it was a not insignificant amount — would therefore appear to have come out of the standard construction budgets that were supposed to be used to upgrade the lines that most Americans are still using for their phone service: the Public Switched Telephone Networks, or PSTN. It would seem that customers, including seniors, low income families, minorities and municipalities have been funding the construction of a cable service through the hefty monthly fees they pay for a dialtone and ancillary services. In some states this is actually illegal.

If Verizon did actually spend $23 billion, then it appears to have come at the expense of the traditional maintenance and upgrades of the utility plant — and the PSTN got totally hosed. At the very least, prices for basic phone service should have been in steep decline as one of the major costs, construction, was dramatically lowered.

Instead, Verizon was also getting rate increases specifically to pay for FiOS. For instance, Verizon persuaded New York officials to increase rates for “fiber optic investments,” where the only service that could use the fiber optic service was Verizon’s FiOS.

For instance, when New York State Department of Public Service Commission Chairman Garry Brown announced the approval of a $1.95 a month rate hike for residential phone lines in 2009, he said “there are certain increases in Verizon’s costs that have to be recognized.” He explained: “This is especially important given the magnitude of the company’s capital investment program, including its massive deployment of fiber optics in New York. We encourage Verizon to make appropriate investments in New York, and these minor rate increases will allow those investments to continue.”

Of course the states weren’t told that everyone would be charged extra for a service that only some people were going to get. In New Jersey, for instance, Verizon made a firm commitment to rewire the entire state with fiber optics — capable of 45 Mbps in both directions. It was supposed to be 100 percent completed by 2010. Instead, Verizon claims to have “passed” 1.9 million homes, representing 57 percent of the households in its territories — but “passed” may or may not mean that they can actually get service.

With Shammo reporting FiOS investments winding down by 2014, Verizon is not increasing the budget to maintain the copper infrastructure it will require non-FiOS customers to keep using for service. Instead, capital investments will continue to be spent supporting Verizon Wireless, although in lower amounts.

“So if you look at overall, I continue to say [investments] will be flat to down and I think we will be probably more slightly down than flat, and [CEO] Lowell [McAdam] and I are really starting to focus in on where we spend that investment and make sure that that investment returns on a shorter period of time,” Shammo said. “And that is really the focus. So what I like to say is that our ratio of CapEx to revenue will continue to decline.”

A N.J. State Commission report from June 2010 saw this coming two years earlier and noted:

“While it is possible for Verizon to extend service throughout its authorized territory, to an additional 155 municipalities in the state that are not included in its current application of 369 towns, Verizon has indicated it will now concentrate its capital expenditures, expected to be between $16.8 billion and $17.2 billion in 2010 on its wireless telephone network. Further FiOS expansion will be limited to increasing penetration in those communities where FiOS is currently available, according to the company.”

Apple’s newest iPhone is proving to be a mixed blessing for wireless carriers and their Wall Street investors as company margins suffer from the subsidies paid to woo customers with discounted phones.

The biggest winner remains Apple, which charges between $649-849 for an iPhone 5 that IHSiSuppli estimates costs between $207-238 to manufacture, depending on the amount of memory included. Regardless of how much you pay for your next iPhone with a 2-year contract, Apple gets a much larger wholesale price, upfront.

Barclays analyst James Ratcliffe estimates AT&T, Verizon Wireless, and Sprint are providing nearly $400 in advance subsidies to reduce the contract price of the iPhone to between $199 and $399. That subsidy is 60 percent higher than comparable Android smartphones.

“We always say an Apple a day keeps the profits away,” Neil Montefiore, chief executive of Singapore wireless carrier Starhub said during an August earnings conference call.

Wireless carriers have to report the subsidy on balance sheets as a drop in earnings before interest, tax, depreciation and amortization (called EBIDTA on Wall Street). AT&T and Verizon typically don’t see profits from Android smartphone customers until 5-6 months after selling them a new phone. Apple iPhone customers are unprofitable for up to nine months.

According to Reuters, profit margins will fall for America’s two largest cell phone companies because of the newest iPhone.

AT&T’s margin is expected to fall from 45 percent in the second quarter to 40.8 percent in the third quarter and 35.7 percent in the fourth quarter. Verizon’s margin is expected to fall from 49 percent in the second quarter to 47.4 percent in the third quarter and 43.6 percent in the fourth quarter.

Sprint CEO Dan Hesse

Under pressure from investors, wireless carriers are trying harder than ever to reduce the financial hit from the endless two-year upgrade cycle most North Americans have gotten used to over more than a decade.

For most, changing data pricing has been the key to earlier profits. Both AT&T and Verizon Wireless have eliminated unlimited data plans for new customers, and Verizon has taken away subsidies for customers holding onto a grandfathered unlimited plan. As contracts expire, customers seeking upgrades must either purchase their next phone at the unsubsidized price or give up their unlimited plan for good.

Sprint continues to bank on its unlimited data offer bundled with Apple’s iPhone 5 as an important marketing tool to attract new customers. It has worked for them, but the company may eventually capitalize on that growth with increased prices, but not before Sprint completes an ambitious upgrade to a 4G LTE nationwide network.

“We have a competitive disadvantage in terms of LTE footprint,” CEO Dan Hesse told investors. “You don’t increase your price when you have a network footprint disadvantage. You want to wait and think of that until you get to that point.”

The foundation for future profits come from data usage.

Verizon’s chief financial officer Fran Shammo believes Verizon Wireless’ foundation for higher profits will come from their new family shared data plans.

“When you think about revenue growth into the future, the shared revenue plan and what I’ll call revenue per account if you will, is really the critical piece because there are two functions,” Shammo told investors last week. “One is get people to share so that data becomes the most significant piece of the plan and the more data they consume the more they will have to buy up in bundles.”

“And the second one is make it easier for customers to attach more devices. So when you think about that future of the car, the home, medical devices, and anything else that you want to attach to that wireless network, […] I get incremental dollars for each device that’s attached and that is really what drives the future revenue growth.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/CBS Sprint CEO talks iPhone 5 and unlimited data strategy 9-20-12.flv[/flv]

Sprint CEO Dan Hesse last week appeared on CBS’ “This Morning” to discuss the arrival of Apple’s newest iPhone and the company’s unlimited wireless data plan.  (4 minutes)

Despite industry propaganda touting an “unlimited broadband future” (possibilities, that is, not an end to usage caps) and good sounding headlines about robust competition in the broadband market, the reality on the ground isn’t as rosy.

Americans looking for a better deal for broadband are largely stuck negotiating with the local cable company or putting up with less speed from the phone company to get a cheaper rate.

That is hardly the “success story” being pushed by the Mother of All Broadband Astroturf Front Groups, Broadband for America. BfA, backed by money from some of America’s largest telecom companies calls today’s marketplace “dynamic” and “rapidly changing.” For them, competition is not the problem, the way we define competition is.

Tell that to San Jose Mercury News columnist Troy Wolverton, whose dynamic and rapidly changing Comcast cable bill has now reached $144 a month, and threatens to go higher still when his two-year contract expires.

Wolverton is a case study of what an average American consumer goes through shopping around for broadband service. Despite assertions of a vibrant, competitive Internet access paradise from groups like Broadband for America, Wolverton found very little real competition on the menu, despite being in the high tech heart of Silicon Valley.

Valley residents can typically choose between AT&T and Comcast, if they have any choice at all. Neither company offers a great deal for consumers.

Comcast offers faster speeds at considerably higher prices that can be reduced somewhat by signing up for a costly triple-play service. AT&T’s prices are lower, but its service is slower and is based on a technology that in my experience is less reliable.

So it goes for millions of Americans who face the same dilemma: take a higher-priced package from the cable company or settle for less from the phone company. With the exception of Verizon FiOS, most large telephone companies still rely on basic DSL service to deliver broadband. AT&T’s U-verse and CenturyLink’s Prism are both fiber to the neighborhood services that deliver somewhat faster speeds than traditional DSL, but also have to share bandwidth with television and traditional phone service, leaving them topped out at around 25Mbps.

Wolverton could not believe his only choices were Comcast and AT&T, so he visited the California Broadband Availability Map, one of the state projects earnestly trying to identify the available choices consumers have for broadband access. Despite California’s vast size, it quickly became apparent that even companies like AT&T and Comcast largely don’t deliver broadband outside of cities and suburbs. Several smaller, lesser-known providers emerged from the map that were open to Wolverton, which he explored with less-than-satisfying results:

In addition to Comcast and AT&T, it listed Etheric Networks, which offers a wireless Internet service directed at home users that’s based on Wi-Fi technology, and MegaPath, which offers Internet access through a variety of wired technologies, including DSL.

After further research I found that neither of those companies was a legitimate option. MegaPath can’t deliver residential service to my house that’s faster than 1.5 megabits per second. Etheric, which focuses on business customers, offers a service level with speeds of up to 22 megabits per second, but it costs a cool $400 a month.

Other non-options for Wolverton included the highly-rated Sonic.net, which in his neighborhood is entirely dependent on AT&T’s landlines for its DSL service. That was a no-go, after Wolverton discovered he would be stuck with 3-6Mbps service. Clearwire also offers service in greater San Jose, but not at his home in Willow Glen.

That left him back with AT&T and Comcast.

But that is not really a problem in the eyes of industry defenders like Jeffrey Eisenach, managing director and principal at Navigant Economics and an adjunct professor at George Mason University Law School. Navigant is a “research group” that counts AT&T as one of its most important clients. The firm provides economic and financial analysis of legal and business issues cover for clients trying to sell their agenda. Navigant’s “experts have provided testimony in proceedings before District Courts, the Department of Justice, the Federal Trade Commission, the Federal Communications Commission, the Federal Energy Regulatory Commission, and numerous state Public Utilities Commissions.”

Eisenach goes all out for the broadband industry in his paper, “Theories of Broadband Competition,” which throws in everything but the kitchen sink to defend the status quo:

• The cost of broadband service is declining;
• The duopoly of cable and phone companies are still competing for customers and introducing new services;
• Competition can take the form of provider innovation (ie. providers compete by offering a better services, not lower prices);
• Wireless competition is accelerating, citing LightSquared and Clearwire as two conclusive examples of competition at work;
• The cost of service on a per-megabit basis has declined.
• Competition in today’s broadband market delivers ancillary benefits not immediately evident when only considering the customer’s point of view;

Eisenach’s pricing proof stopped in 2009, just as cable providers like Time Warner Cable began raising broadband prices. TWC’s Landel Hobbs to investors: “We have the ability to increase pricing around high-speed data.” (February, 2010)

Eisenach has appeared at various industry-sponsored evidence touting his views of broadband economics and competition that later turns up as headline news on Broadband for America’s website. But just as Wolverton’s initial optimism finding other choices for broadband faded with reality, so do Eisenach’s conclusions:

1. Eisenach’s evidence of broadband price declines stops in 2009, coincidentally just prior to the recent phenomena of cable broadband rate increases, which have accelerated in the past three years;
2. Competition still exists in urban and suburban markets, as long as phone companies attempt to stem the tide of landline losses, but it’s largely absent in rural markets and in decline in others where companies “reset” prices to match their cable competition. AT&T’s U-verse and Verizon’s FiOS both effectively ended their expansion, leaving large swaths of the country with “good enough for you” service. Cable operators have even teamed up with Verizon Wireless to cross-market their products — hardly evidence of a robustly competitive marketplace;
3. Innovation can take the form of services customers don’t actually want but are compelled to take because of bundled pricing or, worse, the decline in a-la-carte add-ons in favor of “one price for everything” models. Verizon Wireless set the stage for providers of all kinds to consider mandatory bundling for any product or service that can no longer deliver a suitable return on its own. For customers already taking every possible service or fastest speed, this pricing  may deliver lower prices at the outset, but for budget-focused consumers, compulsory packages or high prices on a-la-carte services assures them of a higher bill;
4. Eisenach’s examples of competition are a real mess. LightSquared is bankrupt and Clearwire has shown it cannot deliver an equivalent broadband experience for customers and throttles the speeds of those perceived to be using the service too much. Other wireless providers typically limit customer usage or cannot deliver speeds comparable to wired broadband;
5. While the cost per megabit may have declined in the past, cable providers are still raising prices, and as Google and community-owned providers have illustrated, delivering fast speeds should not cost customers nearly as much as providers continue to charge, with no incentive to cut prices in the absence of equally fast, competitive networks;
6. While broadband may open the door for additional economic benefits not immediately apparent, competitive broadband would further drive innovation and reduce pricing, delivering an even bigger bang for the buck.

Wolverton recognized taking a promotional offer from AT&T will temporarily deliver savings over what Comcast charges, but he would have to set his expectations lower if he switched:

I’m reluctant to switch to AT&T. [U-verse] Max Plus is the fastest level of service it offers at our house, but with a top speed of 18 megabits a second, it’s significantly slower than Comcast’s Blast. Speed matters to us, because my wife and I often share our Internet connection, and we frequently use it to transfer large files such as apps, videos, photos or songs to or from the Net.

[…] What’s more, as the FCC outlined in another recent report, Comcast does a better job of delivering the speeds it advertises than does AT&T.

What’s worse in my book is that AT&T’s U-verse’s Internet service is a version of DSL. It’s faster than regular DSL, because the copper wires in your house and neighborhood are connected to nearby high-speed fiber-optic cables. Even with that speed boost, though, I’m hesitant to go back to any kind of DSL service, because my wife and I suffered through years of unreliable DSL service from AT&T predecessor PacBell and then EarthLink, which piggybacked on AT&T’s lines.

Wolverton also objected to Comcast’s bundled pricing scheme, which delivers the best value to customers who sign up for broadband, television and phone service. Wolverton does not need a landline from AT&T or Comcast, and would like to drop the service. He’s not especially impressed with Comcast’s TV lineup (or pricing) either. But he noted if he switched to broadband-only service, Comcast would effectively penalize him with a broadband-only rate of $72 a month, exactly half the current cost of Comcast’s triple-play package.

In a later blog post, Wolverton confessed he liked Comcast’s broadband service and speeds, and with the carefully-crafted pricing the cable and phone companies have developed, he expected to remain a Comcast customer given his choices and pricing options, which are simply not enough.

AT&T customers upgrading to Apple’s newest iPhone will be able to keep their grandfathered unlimited data plan and purchase the phone at discounted prices starting at $199, with a new two-year contract.

AT&T’s definition of “unlimited” has, for at least a year, actually meant up to 3GB of usage before throttling your 3G speeds to something comparable to dial-up Internet. But with the iPhone 5 ready to run on AT&T’s higher capacity 4G network, the company is increasing the limit to 5GB per month.

AT&T has been working hard to hold onto its significant base of iPhone owners, who have endured dropped calls and slow data in many cities for the last several years.

Customers planning to leave AT&T will find a considerably less-friendly attitude at Verizon Wireless, where new customers are compelled to sign up for a Share Everything plan that starts with just 1GB of usage per month.

Sprint is retaining its unlimited smartphone data plan with no hidden limits or speed throttles, but Sprint’s overburdened 3G network is not known for fast and reliable speed, and the company’s aging 4G Clearwire WiMAX network cannot perform as well as Sprint’s forthcoming LTE counterpart, which has only appeared in a handful of cities so far.

The iPhone 5 will be the first Apple phone ready to take advantage of 4G LTE speeds, which could give those new networks a real workout as millions of new iPhone owners pile on.

Verizon is pulling back on its traditional landline service and FiOS expansion to continue focusing on its more-profitable wireless service.

Verizon Communications’ landline customers will endure continued cost cutting as the company focuses on its increasingly profitable wireless division, now set to bring in even more profits with Verizon Wireless’ transition to new, often higher-priced service plans.

Verizon executive vice-president and chief financial officer Fran Shammo yesterday told investors attending Bank of America-Merrill Lynch Media’s Communications & Entertainment Conference that the company is pleased with Verizon Wireless’ successful transition to Share Everything, which includes a shared data plan for multiple wireless devices.

Shammo characterized the true nature of Share Everything as a data plan that happens to include unlimited calling and messaging.

“It really comes down to data consumption and that is what drives revenue,” Shammo told investors. “And really the reason we did this was because we saw what happened in Asia with some of the text messaging and the dilution and voice migration.  So you are protecting that revenue stream going forward and we think that is beneficial to the consumer and the company.”

Shammo sees increased profits in Verizon’s future as customers transitioning away from unlimited data plans eventually bump up and over their new plan limits. But the revenue gains actually begin the moment customers sign up, as those bringing various wireless devices to a shared data plan are immediately told to upgrade for a larger data allowance at an additional cost.

“We are telling them that they really need 2GB per device,” Shammo said. “So if they want to bring five devices, they really should be buying the 10GB ($60/month) plan. What we are finding is customers are very receptive to that formula because they can get their head around the 2 gigabytes. They understand what their usage is. So part of it is that they are actually buying higher up packages than we’ve anticipated.”

Verizon also has a plan to deal with potential bill shock from customers using their wireless devices for high bandwidth applications. The company is receptive to letting content producers pay Verizon to cover customer usage charges.

Share Everything = a data plan that happens to include unlimited calling and messaging

“So when you look at that, revenue per account may not go up, but service revenue will because you are just getting it from someone else,” Shammo said. “So the LTE network allows the differentiation, and the way I like to classify it as you can have an 800 service over here, which is ‘free data’ because somebody else is paying for that and then you have your consumption data over here.”

Shammo believes customers who gave up their unlimited data plan believing Verizon’s basic data allowance will suffice for years to come will be surprised at how fast they will hit their limits as wireless data becomes more important.

“I think we are going to see this accretion faster than people think,” Shammo said. “If you look at our SpectrumCo [cable operators Cox, Comcast, Bright House Networks, and Time Warner Cable] deal, [CEO Lowell McAdam] and the team did an outstanding job convincing the Department of Justice about the innovation that can happen here and maybe being the first in the world to really integrate wireless with inside the home and content outside the home. And if you think about how that content can be streamed outside the home within cars, you really say this is unlimited as to where this can go. So I think the innovation is going to come very, very quickly here.”

With the spectrum deal with cable operators in place, Shammo said Verizon will not be in the market for any large spectrum acquisitions in the near future, and even plans to sell off some excess spectrum it does not currently need, so long as the company gets paid what it believes the spectrum is worth.

Verizon’s concern for keeping large amounts of cash on hand is evident as it continues to reduce investments in traditional landline service and FiOS. In fact, Verizon said it would continue increasing prices for its FiOS fiber network to more closely align with the higher prices cable companies are charging.

“We have really concentrated this year on getting our price points equivalent to where the rest of the market was,” Shammo said. “We were actually underpriced with a superior product to cable. So the concerted effort was we needed to do some price-ups and we are doing that over — we started in the first quarter. We did it in the second; we are doing it in the third. You saw some of that benefit come through in the second quarter where we delivered a 2.5% mass-market revenue increase, which was I think the best in years and I see that doubling by year-end. So I think that, coming out of this year, we will be on a very good path for a mass-market revenue increase.”

Two service calls in six months may get your traditional landline canceled and moved to Verizon FiOS phone service, which requires 10 digit dialing for every number.

But those rate increases will not deliver improved service. If fact, Shammo said Verizon will continue reducing costs and investments in its network. Much of its investment in the landline business has been to support Verizon Wireless’ growth through its IP backbone and fiber-to-cell-tower projects. Shammo predicts capital investments will continue to be flat to down.

One example where the cost-cutting is apparent is how Verizon deals with service calls for troubled phone lines.

Verizon landline customers in FiOS areas who report chronic service problems may find themselves disconnected and switched to FiOS Voice over IP phone service instead, because Verizon has quietly set new in-house rules about the number of permitted service calls for each customer.

“If we have a copper customer who is what we classify as a chronic (two truck rolls in a period of six months for that copper line), I am losing money on that copper customer,” Shammo said. “So if I can take that chronic customer and move them to FiOS, I deplete the amount of operational expense to keep that customer on and now I have moved them over to the FiOS network where they get the benefit of FiOS digital voice, which is clearer.”

Once a customer gets switched to FiOS, Verizon’s marketing machine swings into action.

“I now can put their DSL service onto FiOS Internet where they now realize the speeds of FiOS and what we are seeing preliminarily is even if we take a voice and DSL customer and move them, they are starting to buy up in bundles because they are starting to see the benefit of the higher speeds,” Shammo said. “Then we open up the sales routine to go after them, now for the FiOS TV product.”

Unlimited data holdouts can leave

Shammo added Verizon is becoming more concerned than ever about long term investments that leave the company waiting years for a return.

“Lowell and I have a very concerted effort to really make sure that the investments we make are returning their invested capital in a very short period of time,” said Shammo.

That spells trouble for landline service upgrades and future FiOS expansion, which both require the company to take a long term view recouping those investments. But even Verizon’s wireless business’ capital expenses are down — by $1.3 billion through the first half of this year.

Verizon Wireless has also picked up nearly $5 billion in cost savings through restructuring, including lucrative revenue earned from new activation and upgrade fees and also tightening up on subsidized wireless phone upgrades.

For customers holding onto unlimited data plans, intending to get their money’s worth from them, Shammo has a message:

“Quite honestly, they could leave my network because you are not making much money on those.”