Shammo

Verizon’s vision of broadband economics depends on the technology used to provide the service, according to some insights shared by the company’s chief financial officer at yesterday’s Deutsche Bank Access Media, Internet & Telecom Conference.

Fran Shammo outlined two strategies the company is using to profit from its broadband services. For wireless, Verizon has “flipped the model” from the traditional voice plan that starts with a bucket of voice minutes towards monetizing broadband usage instead. Today, customers buy plans that focus on anticipated data usage with unlimited voice and texting thrown in. But marketing broadband on Verizon’s fiber optic FiOS network is markedly different because the company is focused on speed over consumption.

“We are now shifting into concentrating on the broadband piece of that product, and the speed that the fiber to the home can give you we believe can’t be matched with anyone,” Shammo told an audience primarily made up of Wall Street analysts and investors. “We have a superior product.”

Shammo explained Verizon intends to “monetize speeds” that fiber broadband is capable of providing. That is important because Verizon FiOS now represents 70 percent of Verizon’s wired business, as traditional landline revenue continues to decline.

That is welcome news to broadband advocates that prefer current pricing models based on broadband speeds, not usage. Verizon FiOS intends to capitalize on its superior speed to differentiate itself from the cable competition, especially when some of those competitors are slapping usage limits on their customers.

Another important new revenue source for Verizon comes from switching legacy DSL users to FiOS technology.

In 2012, Verizon commenced its copper-to-fiber migration in FiOS areas. At least 200,000 homes formerly served by copper-based DSL were transitioned to fiber. In 2013, Verizon plans to migrate another 300,000 customers. When customers are switched to the fiber network, their former DSL speeds remain the same, but now Verizon’s marketing department has an opportunity to target upgrade offers for faster speeds.

“We give them the choice to start upgrading that speed [to] 15, 25, or 50Mbps,” Shammo reports. “What we are seeing is people are willing to pay for that additional speed, so we can monetize that fiber network more.”

However, Shammo reiterated that beyond what Verizon has already committed to in FiOS agreements with local municipalities, Verizon plans no additional expansion of FiOS in 2013.

The foundation for future profits come from data usage.

Unintended Consequences of Share Everything: Customers do an end run around Verizon’s “device fee.”

The conference also provided new insights into Verizon’s Share Everything wireless plans and the company’s other strategies.

Shammo admitted customers have done an end run around the “device fee” for multiple add-on devices.

Verizon expected mobile wireless-enabled tablet sales would increase as the cost to add a tablet to a Verizon Wireless account no longer required a separate data plan. But Verizon’s “device fee,” charged for each device connected to a Share Everything plan, has backfired. Customers are instead adopting Verizon’s “Mi-Fi” wireless hotspot device or other tethering solutions. Customers can then connect up to five Wi-Fi enabled devices through the hotspot and bypass paying multiple device fees that range from $5-20 per device.

Living Off the Revenue from a 3G Network Verizon Has Stopped Expanding, Improving

Shammo also noted Verizon has stopped further investments in its 3G wireless network.

“We are not investing any more capital in that network other than to keep it up and running, so no more coverage [expansion] capital, no more capacity [expansion] capital,” Shammo said. “If I can keep that network up and running that just generates more [revenue] for us.”

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

Verizon’s Plans to Reduce Device Subsidies, Discounts

Customers have grown to expect a free or low-cost upgrade to a new smartphone every two years. But wireless companies find the costs of fronting device subsidies troubling because it affects the short-term bottom line. As wireless providers trim discounts, tighten upgrade policies, raise prices, and introduce new upgrade and activation fees, the $200-400 device subsidy recouped over the life of a two-year service contract remains a fat target for pruning.

But Verizon and other cell phone companies do not want to cut plan prices that are now inflated by $10-15 a month to cover paying back phone subsidies. The best of both worlds: eliminating device upgrade discounts –and– keeping prices the same for wireless service, banking the extra revenue as profit.

Verizon’s current solution is a middle-ground approach that gradually reduces device subsidies while hoping increased competition among device manufacturers will lower retail prices. For the consumer, that means prices will remain generally the same. But for Verizon, it means higher revenue from paying out lower subsidies while being able to maintain current pricing.

“I am a believer that over the next two to three years subsidies will start to decrease just because of the ecosystem,” said Shammo.

Verizon’s conversion to LTE means the day of a pure LTE-only smartphone is not far off. It will not include added-cost chips to support legacy technology, particularly older data networks and CDMA.

Wall Street Pressures Verizon to Talk Customers into Less-Costly (Anything but an iPhone) Smartphones

Brett Feldman, an analyst at Deutsche Bank who moderated the question and answer session with Shammo pointedly noted the Apple iPhone is the most-costly phone to subsidize.

“Are there things you can do with your sales force where you would proactively incentivize them to maybe sell different devices,” asked Feldman.

“It is critical that we don’t do that,” Shammo explained. “What is more important for us is a customer walks out with a phone that they will be happy with and not return under our 30-day guarantee. Because the worst thing that can happen for us is for me to incent a salesperson to get you into a phone thinking you are going to like and in three days you come back because you don’t. Now I’ve just subsidized two smartphones because that phone you used I can’t resell as a new phone.”

Cablevision’s executive suites are filled with intrigue and family politics. — Phillip Dampier

Cablevision’s quarterly results conference call last week was an exercise in obfuscation.

Senior management at the cable operator that serves parts of New York, New Jersey and Connecticut announced some difficult financial results, including the fact the company lost at least 39,000 customers during the last quarter — a significant number considering Cablevision only serves 3.6 million customers as of the end of December. At least 11,000 of those customers stopped paying their bills and disappeared, presumably because their homes and businesses were victims of Hurricane Sandy. But company officials admitted they also lost high-speed Internet customers because of a recent price increase and ongoing heavy promotional activity from their biggest competitor — Verizon FiOS. The phone company has offered triple play packages as low as $89 a month with $300 debit card rebates, which makes hiking rates untenable.

Cablevision CEO James Dolan has been ducking hard questions from Wall Street analysts concerned about the company’s spending and marketing, the loss of subscribers, and fallout from a 2011 management shakeup. Richard Greenfield, an analyst at research firm BTIG, has been frustrated getting answers from the Dolan family that has controlled Cablevision for decades, tweeting Cablevision executives stopped taking his questions on regular conference calls after he began asking some of those hard questions.

Cablevision’s Upgrades Will Continue; Company Wants an Improved Subscriber Experience

Greenfield

One of the problems Verizon FiOS’ fiber to the home network brings Cablevision as its largest competitor is fiber technology is superior to Cablevision’s cable network infrastructure. Verizon has been a formidable challenger. This has forced the cable operator to make dramatic improvements, particularly in its broadband product, to stay competitive. But some of these upgrades have been delayed by the effects of Hurricane Sandy, which affected 60 percent of Cablevision’s subscribers in the tri-state area.

Cablevision has been forced to offer customers service credits, substantially curtail sales and advertising efforts, and suspend the non-pay collection rules and disconnect policy.

Cablevision has also committed itself to an expensive robust Wi-Fi network to differentiate itself from Verizon. Cablevision has an extensive Wi-Fi presence in its service area, offering unlimited free service for its customers. Verizon does not. Cablevision ended 2012 with more than 67,000 installed hotspots, with more than 30% of Optimum Online customers using the service in 2012.

At the same time, cable television programming costs have skyrocketed, but Cablevision has generally avoided raising prices fearing Verizon would poach unhappy subscribers.

Drama Surrounding Executive Changes

Internet comes last?

In 2011, Cablevision accepted the resignation of Tom Rutledge, former chief operating officer. Richard Greenfield dismissed Cablevision’s statements about his departure as “spin,” and claims the real reason Rutledge left for Charter Communications is that Jim Dolan became dissatisfied with Rutledge’s performance. But that poor performance could also be attributed to some of the company’s own decisions, particularly when it engaged in multiple battles with programmers during 2010 that forced popular cable networks and broadcasters temporarily off Cablevision lineups. Greenfield suggests the biggest impact was felt when the cable operator dropped the local Fox station right in the middle of the World Series. BTIG believes subscriber losses accelerated for these reasons (and Verizon’s aggressive marketing efforts) and helped the company see its earnings and subscriber trends hurt.

Jim Dolan has reportedly taken a more hands-on approach at Cablevision and even appointed his wife Kristin to assume a stronger role in how Cablevision markets itself to customers.

The result was a Cablevision rebranding that Greenfield criticized in September as “firmly entrenched in the past,” because it emphasizes television and phone service over broadband.

Avoiding Tough Questions

Several of the questions Greenfield wanted answered, but could not, dealt with the transformation of part of Cablevision’s service area thanks to Sandy and some of the company’s earlier missteps:

• Permanent System Loss: How many Cablevision homes in the service area will no longer exist or take years to rebuild?
• Recapture Suspended Accounts: At least 24,000 video subscribers disappeared after Hurricane Sandy. Has this number changed recently and are there plans to win these customers back?
• Verizon FIOS was back up and running in storm-damaged areas before Cablevision. How has this affected your operations?
• Marketing Missteps: Are there plans to correct the marketing deficiencies from the 2012 campaign in 2013, particularly for broadband?
• Onyx Guide and Network DVR: Neither are well-received by customers. The Onyx on-screen Guide has been slammed for not working properly, being cumbersome to use, and difficult to read. The remote DVR has been criticized for its poor quality and reliability over traditional in-home DVRs. What will Cablevision do to address these complaints?
• Why is Cablevision challenging Viacom in court over cable network programming costs when sports programming is where the real costs are?

Both Time Warner Cable and Verizon don’t think you want or need gigabit fiber broadband — the kind of service now available in Kansas City from Google Fiber.

Time Warner Cable’s chief financial officer Irene Esteves says the cable company is content delivering most of the country no more than 50/5Mbps broadband (for at least $10 more than Google charges for 1,000/1,000Mbps service).

“We’re in the business of delivering what consumers want, and to stay a little ahead of what we think they will want,” she told an audience of Wall Street investors at the Morgan Stanley Technology Conference. “We just don’t see the need of delivering [gigabit speeds] to consumers.”

Esteves says she is not opposed to supplying gigabit speeds to business customers.

“We’re already delivering 1-10Gbps service to our business customers, so we certainly have the capability of doing it,” she said.

Despite regular quarterly conference calls where Time Warner executives trumpet the growing interest in higher broadband speeds, Esteves downplayed the importance of Time Warner’s top-tier: 50/5Mbps, claiming only a very small fraction of Time Warner customers opt to receive speeds that high.

Fran Shammo, chief financial officer at Verizon agreed with Esteves during the conference, also arguing nobody needs gigabit speeds today.

“FiOS brings a very different perspective to the household with fiber to the home,” Shammo said. “We actually tested a 1Gbps circuit in New York three years ago, so our FiOS product can deliver that but we just don’t see the need yet from a household to have that much of a pipe into their home.”

Time Warner’s “low interest” 50Mbps premium tier is Verizon FiOS’ mainstream sweet spot. Verizon now heavily markets 50/25Mbps Quantum service as their best value option, charging $10 more per month to upgrade from basic 15/5Mbps service.

Windstream has announced the increased broadband investments that expanded DSL service to about 75,000 more homes and businesses and brought fiber connections to cell towers are nearly complete and the company intends to dramatically cut spending on further enhancements by the end of 2013.

Jeff Gardner, Windstream’s CEO, told investors on a conference call last week the company’s highest priority in 2013 is preserving its current dividend to create value for shareholders. Not on the priority list: improving broadband infrastructure to support video streaming services, further expanding broadband in areas it now bypasses, and boosting the quality of service it delivers to current customers.

Gardner called the company’s increased investment in 2011 and 2012 a result of “finite opportunities that provide[d] attractive investment returns.”

But most of that spending will come to an end next year.

“We expect to substantially complete our capital investments related to fiber to the tower projects, reaching 4,500 towers by the end of 2013,” said Gardner. “In addition, we will finish most of our broadband stimulus initiatives […] to roughly 75,000 new households. As we exit 2013, we will see capital spending related to these projects decrease substantially.”

That could be bad news for communities in places like Wayne County, Mo., which suffers with inadequate broadband from the company. In some areas when local broadband traffic reduces DSL speeds to a crawl, area businesses are occasionally forced to shut down for the day.

Broadband and business services now account for 70% of Windstream’s revenue, but it has come with a price: increased investment, that Wall Street considers negative to the company’s value. To satisfy analysts and shareholders, Gardner made it clear improving the balance sheet is a major priority. He said he will continue to direct excess free cash flow first to preserve the company’s shareholder dividend, and then direct much of the rest to debt repayment.

That does not mean Windstream will end all investments in its business. The company now spends 12.4% on ongoing capital investments and will continue to do so, but much of the spending will cover network upkeep and supporting more profitable business services.

“Over the last four years, our acquisitions have been very targeted on businesses that are growing in the strategic growth areas that we’re focused on, and we’ve really changed the mix very significantly here, away from the consumer business toward the enterprise space, and I think that puts us in a very different position with respect to the stability of our revenue and OIBDA over time,” Gardner added.

Windstream plans to bring back its “price for life” promotion this year.

Gardner noted Windstream is well-positioned to take advantage of the fact it has few competitors, which reduces pressure to invest and improve its networks to stay competitive.

“Our residential customers remain concentrated in very rural areas where there is less competition, which has contributed to a more stable consumer business,” Gardner admitted.

He added that those rural customers will have to rely on the company’s satellite partner Dish Networks for video services. Windstream will not build a “capital-intensive facilities based technology” to support online video. In contrast, CenturyLink has invested in Prism, a fiber-to-the-neighborhood service in several of its larger markets, to offer triple play packages of broadband, phone, and cable TV. Windstream has no plans to follow.

Despite investments in 2011 and 2012 to improve broadband service and speeds, Windstream’s DSL services have not kept up with its cable competitors.

During the last quarter, Windstream lost 2,000 broadband customers and 23,000 consumer voice lines (a 4.5% decline year over year).

To stem the tide of customers moving away from the phone company, Windstream is trying to sell value-added Internet support services, online backup, and faster speeds to maximize profitability. It will also add new customers made possible from federally funded broadband stimulus projects.

Windstream customers can expect to see increased promotional activity this year to win or keep their business:

• Covering the costs of switching from another provider to Windstream;
• A return to the “price for life” promotion, which promises stable rates as long as a customer stays with the company;
• A substantial introductory discount on satellite TV when bundled with Windstream’s own services.

Moffett

Craig Moffett, who regularly questions telecom executives about why they have not implemented consumption billing or usage caps as a broadband revenue enhancer, has exited Wall Street’s Sanford Bernstein after a decade.

Moffett is one of the most quoted Wall Street telecommunications analysts in the business and financial press, and his regular browbeating of executives for higher prices on broadband service have earned him a reputation of being pro-cap and anti-consumer.

Moffett is also one of Wall Street’s biggest critics of infrastructure upgrades, particularly Verizon’s fiber to the home network FiOS, which he called too expensive and not worth the investment. In a battle between cable operators and phone companies, Moffett regularly takes the side of the cable industry. Cable operators have enjoyed lower capital costs and have successfully raised prices on profitable broadband service, even as providers move to limit customers’ monthly usage.

The Wall Street analyst is reportedly launching his own Wall Street research firm sometime this spring and has poached several employees of Sanford Bernstein to get started.