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Verizon still can’t justify expanding its FiOS service

Four years after Verizon Communications decided to stop expanding its FiOS TV service to new markets, the telecommunications company still isn’t showing any interest in expanding its fiber-optic footprint into new communities, including Buffalo.

“Really, nothing’s changed,” said John Bonomo, a Verizon spokesman, Monday.

The reason is simple: Installing the fiber-optic cables that the FiOS service requires and hooking them up to the homes of potential customers is expensive, and it takes a long time for the company to recover that investment through the monthly payments it receives from its FiOS customers.

The company also is facing a strong headwind from the expanding trend among consumers for cord-cutting – doing without traditional landline or cable television service, or both. Many younger consumers, especially those younger than age 30, have never had wired phone or TV service, a group that Verizon executives call “never cords.”

And the company also faces competition for FiOS customers from other cable providers, such as Time Warner Cable in the Buffalo Niagara region.

Four years ago, about the time it was deciding to put the brakes on its FiOS expansion, Verizon served nearly 60 percent of the households in its service territory. Now, it’s less than 40 percent, according to Michael Hodel, a Morningstar Inc. analyst.

Put it all together, and analysts said the high cost of expansion – Verizon has spent more than $23 billion to build out its FiOS network – makes it hard to justify spending billions more to push into even more communities beyond the 183 municipalities the company now serves in New York, including 10 in the Buffalo Niagara region. In New York, Verizon said it costs about $750 per house to bring FiOS service to a neighborhood, plus an additional $600 to run the fiber into the home of a consumer who wants to purchase FiOS service.

“Losing customers will make it difficult for Verizon to earn a solid return on FiOS network spending or justify network upgrade spending beyond where FiOS already exists,” Hodel said.

“Cable companies and wireless substitution continue to steal residential customers in large numbers, despite Verizon’s network-upgrade efforts,” Hodel said in a note to investors. “The firm will likely need to win customers back to generate a decent return on its investment in FiOS.”

Verizon executives have reached the same conclusion, focusing their attention instead on finding ways to attract more customers to its FiOS service from among the 18.5 million homes that now have access to its upgraded network. About 15 million of those homes have access for Verizon’s FiOS TV service.

“At this point I think we are happy with what we have,” said Fran Shammo, Verizon’s chief financial officer, during an investment conference last month. “I’m not going to build beyond the (footprint) that we have today.”

In the Buffalo Niagara region, Bonomo said, Verizon is focusing on building out its fiber-based network within the local communities that already have FiOS service, where a total of about 176,000 households have access to the company’s services. “We’re right smack in the middle of that process,” he said.

That’s the backdrop as Assemblyman Sean Ryan, D-Buffalo, and State Sen. Timothy Kennedy, D-Buffalo, hold a community meeting to discuss bringing Verizon FiOS television and Internet service to Buffalo and other local communities at 6:30 tonight in the West Side Community Center, 161 Vermont St.

The legislators argue that residents in Buffalo and other communities without FiOS should have access to the same services as residents of Hamburg and other parts of the Buffalo Niagara region.

In Buffalo, only consumers in small parts of South Buffalo and North Buffalo have access to FiOS, while it is readily available to consumers in West Seneca and Tonawanda, Kenmore, Orchard Park, Lackawanna, along with parts of Amherst and other communities.

“I know a lot of communities have FiOS envy,” Bonomo said. But Verizon still isn’t planning to expand its FiOS footprint, he said.

Instead, Verizon’s focus is on winning more business from within those 18.5 million households nationwide that already have access to the company’s FiOS service, either by persuading existing customers to sign up for a wider range of services or by getting other consumers to switch to Verizon from other providers.

“We have to generate more cash within the wireline business. And then once we do that, when I feel that FiOS has finally returned its cost of capital, then we can look at expansion,” Shammo said.

So far, those efforts have been showing some signs of success. Verizon ended last year with 6.1 million customers for its FiOS Internet service, up almost 12 percent from the year before, and 5.3 million TV subscribers, up 11 percent from the end of 2012.

And the company is continuing to work toward building out its FiOS network within the communities that already have that service. Fewer than 1 million subscribers from within Verizon’s FiOS footprint across the country still were served by old-fashioned copper telephone wires at the end of last year. The company switched 330,000 customers within that FiOS footprint from copper to fiber-optic connections, and Verizon executives have said they expect to convert a similar number this year.

“That helps the cost structure of the wireline business,” Shammo said.

With a growing core of consumers opting to go without pay TV or landline phone service, a growing focus among companies from Verizon to Time Warner Cable and Comcast is on providing broadband services to households, since consumers without those services often rely on the Internet for access to television programming, movies and phone services.

Comcast, for instance, has about 21.7 million broadband subscribers, a figure that would be augmented by 11 million Time Warner broadband customers if their $45 billion merger goes through. That would dwarf Verizon’s 6.1 million broadband subscribers.

“I think you are going to continue to see broadband grow faster than TV,” Shammo said.