Verizon nears Fios network completion

Verizon Communications is nearly finished building its Fios fiber-to-the-home network. And now it will concentrate on expanding its customer base, say executives.

Verizon, which began building its all-fiber network nearly six years ago, is quickly approaching its goal of passing 18 million homes in about 70 percent of its original customer footprint by the end of this year.

Verizon took a bold risk when it decided to build the Fios fiber network. Its telecommunications counterpart SBC Communications, which is now AT&T, decided to invest substantially less capital to extend fiber to the node or to the neighborhood. AT&T, which uses existing copper lines to deliver service to customers, said it would invest $4 billion in upgrading its network. Verizon committed to spending $22.9 billion.

Initially, Wall Street was skeptical about Verizon's bet. It costs Verizon about $750 per customer to wire an entire neighborhood for the Fios Fiber service. And for every customer who signs up for service, Verizon spends an additional $600 to bring wire directly to the home.

Six years into the deployment, it looks like Verizon's investment is paying off. The new network has allowed Verizon to add TV services to its lineup as well as blazing fast Internet speeds. Today Verizon offers 50Mbps download services to its Fios customers. And it can easily upgrade that service to 100 megabits per second. Meanwhile, AT&T, which announced a less expensive upgrade path, is only able to offer a maximum of 24Mbps downloads to its high-speed Internet customers.

Verizon's service has also been successful in bringing competition to many markets where only cable had been offered TV, voice, and Internet service. At the end of 2009, Verizon's Fios TV service achieved 25 percent market share nationwide, said Bill Kula, a spokesman for Verizon. Its Internet service has reached 28 percent penetration nationwide. In the next couple of years, Verizon hopes to bump that penetration up to between 35 percent and 40 percent for both services, Kula added.

And in markets where Verizon's Fios service has been around the longest, insiders report penetration rates have exceeded 50 percent for Fios high-speed Internet and are approaching 50 percent for Fios TV.

But as Verizon nears the completion of its initial goal, the company is taking a breather from construction. Executives have explained that the building phase of the network is essentially winding down. It is focusing now on finishing up TV franchises in markets where it has been working out agreements, and it's continuing to build out networks in markets it has already announced. For example, Verizon is continuing to lay fiber in parts of Washington, D.C, New York City, and Philadelphia. But it has no plans to start new deployments in cities, such as Baltimore or downtown Boston, Kula said.

"As we get closer to the end of the year, you'll see a greater focus on sales and marketing for Fios and less on engineering and construction," Kula said. "This is the reverse of what it was in the beginning, when we were focused on building the network. Back then we weren't doing as much marketing because we were just trying to build out the service."

Kula said that in areas where Fios already exists, the company will continue to compete aggressively on bundled pricing. It will also offer cash back incentives from $75 to $200 as well as offers of new Netbooks for customers who sign up for the service for the first time.

Previously, Verizon had offered new Fios TV customers a free 19-inch high-definition TV.

There are indications that new customer wins are slowing. Verizon added only 153,000 new Fios TV subscribers in the fourth quarter of 2009.This was about half of what the company had added during the same quarter a year earlier. At the end of 2008, Verizon had added 303,000 new Fios TV subscribers.

In total, Verizon ended 2009 with 2.86 million Fios TV subscribers and 3.43 million Fios Internet subscribers. Most customers take both services, but some Internet subscribers don't yet have access to TV services.

The Federal Communications Commission has applauded Verizon for its investment in fiber. The FCC has put together a 10-year National Broadband Plan to encourage affordable broadband service for every American. And there is no question that the FCC would like to see companies, like Verizon, investing even more in building new infrastructure.

Verizon hasn't ruled out deploying more fiber in the future. The initial plan for Fios covers about 70 percent of Verizon's traditional telephone customers. This means that 30 percent of Verizon's customers won't get Fios. Kula said these customers can expect continued investment in DSL broadband service as well as wireless broadband investment. Verizon is currently building a 4G wireless network using a technology called LTE, or Long Term Evolution.

But there is no guarantee that Verizon will target areas of the country where it doesn't offer Fios with its LTE services. Verizon Wireless, which is owned by Vodafone and Verizon Communications, has said it will launch the 4G service in 25 to 30 markets by the end of the year. Executives at Verizon Wireless have indicated that the rollout will look similar to the deployment of services for 3G wireless. If this is the case, it's likely that 4G wireless broadband will initially be deployed in dense urban areas, many of which also have Fios service.

Verizon has also been selling off its wireline assets in rural areas. Almost a year ago, Verizon announced plans to sell local phone lines in 14 states to Frontier Communications in a deal valued at $8.6 billion.

As part of this deal with Frontier, Verizon is selling some of its existing Fios deployments. Initially, Verizon deployed Fios in 16 states. Now, Fios service in four of those states--Washington, Oregon, Indiana, and South Carolina--will go to Frontier. In total, Verizon will lose about 750,000 potential subscribers through this transaction. Kula said that Frontier has agreed to continue servicing existing Fios subscribers.

Verizon has reiterated that it never planned to deliver fiber service to 100 percent of its wireline territory, which covers 32 million potential customers today. (After the divestiture of assets to Frontier that number will be 27 million.) But the popularity of the Fios service, and the strong competition that comes with it, will certainly leave many customers in areas where Fios has not been built disappointed.