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from: The Inquirer

FiOS: Nearing Full Speed
Posted on Sun, Feb. 24, 2008

By Bob Fernandez
Inquirer Staff Writer

Two years ago, Gus Gadonas saw the Verizon lineman stringing fiber-optic FiOS wires through his neighborhood in East Pikeland Township, Chester County. He ordered the new FiOS high-speed Internet service right away.

Last year, Verizon Communications Inc. ran a special $100 rebate for customers who added FiOS TV. Gadonas leaped at that offer, too.

The Internet was super-fast, he said, and the TV service was an alternative to Comcast.

"The only complaint is that I don't think their on-demand product is up to snuff with Comcast," said Gadonas. "They don't offer enough selections. They're getting better."

Verizon, the New York telecom giant taking on Comcast Corp. for high-speed Internet and video customers, does not disclose the total number of FiOS connections in the Philadelphia area, where it is now available in parts of 182 towns.

But the company, which is wiring communities in 13 states, including New Jersey and Pennsylvania, said it signed its one-millionth TV customer in January. It launched the service in 2005.

That pace means Verizon hooks up 3,425 new FiOS TV customers each business day and already calls itself the nation's 10th-largest cable company - a threat to Comcast's core franchise of 24 million subscribers.

TV is big business, as Verizon realizes, and the company is pouring $23 billion into FiOS fiber-optic lines to deliver it to homes. The service initially had been conceived to upgrade its customers' Internet service and, indeed, there are 1.5 million FiOS Internet customers.

One concern among public officials, though, is that Verizon is targeting wealthier suburban towns with FiOS, widening the so-called divide between technology haves and have-nots.

Comcast executives have acknowledged that FiOS is doing some damage. They told Wall Street analysts in a Feb. 14 conference call that the Philadelphia company lost 180,000 video customers in 2007 and anticipates losing more video customers in 2008.

In some markets, Comcast also faces new video competition from AT&T Inc., but Stephen Burke, the company's chief operating officer, said Verizon was the big puncher. Comcast would boost budgets for marketing and customer service, he said.

While it lost video subscribers, Comcast officials note, the Philadelphia company added 2.5 million phone customers in 2007 and 1.7 million high-speed Internet customers - many of them taken from phone companies such as Verizon and AT&T.

Virginia P. Ruesterholz, president of Verizon Telecom, a division with $32 billion in annual revenue, said that FiOS would focus on adding TV connections in apartment buildings and condo complexes in 2008.

Verizon recently ended a promotion that gave customers a free 19-inch high-definition television for signing up for its "triple-play" package of FiOS TV, Internet and phone service.

Verizon thinks it has a competitive advantage over Comcast in customer service, Ruesterholz said.

So far, FiOS has been a suburban business, leading to some criticism by political leaders for avoiding cities.

Pennsylvania State Rep. W. Curtis Thomas, (D., Phila.) said it appeared that "Verizon is following the marketplace" as it expands FiOS town-by-town.

This should be a concern for cities and rural areas that are bypassed by the latest technology, Thomas said. "We do not need Verizon or anyone else deciding who will benefit from this new technology," he said.

The average household income in the towns wired for FiOS in the Philadelphia area so far was $80,250, according to an Inquirer analysis of 2000 Census data and the list of communities where FiOS TV is available. The average income in the 157 towns without FiOS was $49,086.

Ruesterholz said the company had applied for video-franchise licenses in New York and Washington, but has not gotten them yet. Video hubs, or regional television-distribution facilities, in Pittsburgh, Philadelphia and Harrisburg "show that our investment is not just suburban," she said. Verizon has not formally asked for a franchise in Philadelphia.

Comcast officials note that FiOS TV customers do not get free channels for local government and education. They believe that as FiOS grows, the shine could wear off its customer-service reputation.

Industry experts refer to FiOS as "fiber-to-the-home," which leads to faster Internet speeds. Comcast says its own network contains 125,000 miles of fiber-optic wire, and the company is offering a higher-speed Internet service, sold as Comcast Blast. "Competition is nothing new, and we love our competitive position," said Comcast spokesman Jeff Alexander.

One of the nation's largest wireless companies, with hundreds of thousands of miles of copper phone lines, Verizon talked of entering the TV market in the 1990s. It even gave a test run of a service in Toms River, N.J., in 1993.

But it was not until earlier this decade that it got serious about FiOS TV and about spending $23 billion on the fiber network. The company estimates that FiOS will save Verizon $5 billion in network efficiencies, giving FiOS a total cost of $18 billion between 2004 and 2010.

Verizon disclosed in late January that the company lost $260 million in the fourth quarter on FiOS, which means that the cost of installing the FiOS lines, marketing, advertising, and other costs exceeded revenue from FiOS customers. FiOS should earn a profit by 2009, Verizon said.

By the end of this year, Verizon expects FiOS to pass 12 million homes. The FiOS penetration rate, or the number of homes with FiOS divided by the number of homes the FiOS fiber-optic wires pass, is 20.6 percent for high-speed Internet service, and 16 percent for TV, the company said.

Verizon's goal is to boost the rates to 30 percent for Internet and 25 percent for TV. FiOS' TV penetration in the Dallas area is 30 percent, Ruesterholz said.

In Pennsylvania and some other states, Verizon has to slug it out town-by-town for video franchises to offer TV service.

The tiny borough of Hulmeville in Bucks County jumped to the front of the line in Pennsylvania and signed a video franchise in 2006.

William J. Keaton, local manager in Verizon's Levittown Work Center, dispatches technicians to install FiOS or fix copper phone lines in Bucks and Montgomery Counties. His 17-worker crew devotes about 60 percent of its time installing FiOS. "The stuff sells itself," he said.