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Verizon Communications (VZ)Stock (Telecommunications Industry, Internet Service Providers Industry, Media & Entertainment Industry, Telecom Services - Domestic Industry)
 Total operational income in 2007 amounted to $15.58B on revenues of $93.47B. Verizon's consolidated revenue is now split roughly 53/47 between the fixed-line and wireless businesses, respectively. The fixed wireline operational revenues and income for 2007 were $50.3B and $4.7B respectively, remaining relatively flat year on year. Verizon Wireless also continues to post strong growth. The three largest wireless carriers together (AT&T, Verizon, and Sprint Nextel) serve more than three quarters of the US wireless market. In recent years, Verizon has seen customer growth remain strong and margins improve as a result of its dominating market position. In terms of the important performance indicators net addition of retail customers, churn, and EBITDA margin, Verizon Wireless is the industry leader. Verizon invested $17.1 billion in its wireline and wireless network infrastructures in 2007. One of its largest investments has been its Fiber-to-the-Home (FTTH) service, FiOS. At the end of Q2 2008, FiOS internet had 2 million customers after adding 176,000 new customers in the quarter. FiOS offers triple play services and its fiber optic make up allows download speeds upwards of 50Mbps. Verizon's investment in FiOS has come at the cost of its DSL service which lost 133,000 customers in the second quarter, the first DSL subscriber loss for Verizon. However, Verizon plans to invest almost $23B by 2010 on its FiOS network and the success of FiOS hinges on whether there is enough demand for the faster speeds and greater bandwidth of FiOS to justify paying the higher price.
[edit] HistoryVerizon Communications was formed in 2000 with the merger of Bell Atlantic and GTE Corp. Verizon has approximately 41.4 million residential and commercial access lines throughout the United States. Through its wireless joint venture with Vodafone, Verizon Wireless, the company serves 65.7 million wireless customers throughout the entire United States. Verizon owns 55% of Verizon Wireless and Vodafone owns the remaining 45%. In January 2006, Verizon completed the acquisition of MCI (formerly WorldCom). The MCI acquisition provided Verizon with a much stronger presence in the commercial long distance marketplace as well as with a global long haul fiber network. In late 2005, Verizon announced it was pursuing a sale or spin-off of its directories publishing business, Verizon Information Services. The company completed this spin-off by the end of 2006.  [edit] Company OverviewVerizon Communications offers a wide array of wireline and wireless telephone and data transmission services, including Internet access and media broadcasts through its recently launched FiOS and V CAST services. The company's operations are organized in three key business groups: Verizon Wireless, Verizon Telecom, and Verizon Business. The revenue split for 2006 between these three businesses is shown in below figure.  [edit] Verizon WirelessVerizon Wireless was formed in September 1999 as a joint venture between Verizon Wireless and Vodafone. Vodafone currently holds a 45% stake in Verizon Wireless, with Verizon Communications having the other 55%. Late in 2008, the Federal Communications Commission approved Alltel Corp. to be acquired by Verizon Wireless for $28 billion.[3] Through this acquisition, Verizon will increase its market share and become the largest U.S. wireless carrier by subscribers.[3] The wireless mobile voice communication services of Verizon Wireless include basic local and long distance wireless voice services, as well as a wide range of data services. Aside from text messaging, music downloads, navigation and Internet access, Verizon Wireless launched V CAST Music in early 2006 and V CAST Mobile TV in March 2007. The company has 25 multimedia phones that allow customers to browse and download songs, and the first true mobile TV service in the nation. (See 3G concept page for additional information on third-generation wireless technology.) [edit] Verizon TelecomVerizon Telecom provides telephone services, including voice, broadband video and data, network access, long distance, and other services to consumer and small business customers and carriers. At the end of 2007, Verizon serviced 41.4 million total switched voice lines, a decline of 3.6 million lines since year-end 2006. Recently, there has been a lot of investor focus on the wireline division’s initiative to run fiber directly to the homes of many of its customers. By installing a fiber-to-the-premises (FTTP) network, Verizon hopes to better compete with cable operators with advanced data, video, and telephony products. Branded as FiOS, Verizon is offering digital and high-definition television, video on demand, and broadband with download speeds as high as 50 Mbps, not to mention voice services. Verizon passed approximately 9.3 million homes with fiber by year-end 2007 and plans to pass an additional 3 million in 2008. By 2010, the company plans to pass 18-20 million total homes with its FiOS network. Investors have expressed concern over the capital costs required to deploy a new network, but the new network will not only provide new revenue streams, will also stave off revenue declines from voice services and save on maintenance capital expenditures. Verizon hopes its investment in FiOS to be EBITDA positive by year-end 2008, and operating income positive by year-end 2009. [edit] Verizon BusinessVerizon Business, created in 2006 following the merger with MCI, offers large business customers advanced IP services, virtual private networks and managed network services. Verizon provides local-to-global reach over its secure global IP network to 94 percent of Fortune 500 companies. The company also provides managed network services to nearly every US federal government agency from the civilian and defense communities. The Verizon Business operating group was formed after the January 6, 2006, acquisition of MCI. As a result of this acquisition, Verizon now operates one of the world’s largest IP networks and the largest wholly owned facilities-based network in the world. Verizon Business capitalizes on cross selling capabilities to its enterprise customers, including offering combined wireline/wireless solutions. The primary driver for the merger was for Verizon to jump into the enterprise space worldwide, and the price paid for MCI can be theoretically justified by the expected synergies. In addition to the generic systems and corporate overhead synergies, Verizon has the ability to realize synergies by moving network traffic onto the legacy MCI network from third party networks. Synergy targets had an NPV of $8 billion at the time of the merger. [edit] Trends and Forces[edit] Bringing Fiber to the HomeVerizon is the leading provider of Fiber-to-the-Home (FTTH) with 9.3 million customers at the end of 2007, and an expected 12 million customers by the end of 2008. In comparison, AT&T U-Verse, a competing FTTH service, had only 231,000 customers by the end of 2007. The fiber connectivity offered by FiOS gives its customers speeds of up 50 Mbps, depending on their service plan. This connection speed can more than handle the growing trend of consumers using "triple play" options, which includes video, data, and telephony services. The combination of customer reach, inftrastructure size, and connection speed of the FiOS service is unmatched at the moment. However, a competing technology for cable companies, known as Docsis 3.0, threatens to offer increased competition to FiOS. Comcast is the only cable company with a Docsis 3.0 service in the US, but that service offers a 50 Mbps connection speed, the same as FiOS. In addition, Docsis 3.0 is requires much lower deployment cost than building a fiber to the home network. [edit] Maturing Market While the wireless business has been the driver behind Verizon's recent revenue growth, this growth is expected to slow down as the US market matures. Revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer. In the US, wireless subscriber growth is slowing as market penetration comes close to reaching 100%. With a penetration reaching 100%, the market is clearly maturing and delivering lower growth as a result. This is illustrated by below graph, showing the incremental penetration is decreasing quarter-to-quarter and year-to-year while overall US market penetration peaked at 77.4% end of 2006. Nevertheless, Verizon is offering broadband wireless and data services to existing customers, and the company continues to target double-digit annual wireless revenue growth. To cite one example of wireless data usage, Verizon Wireless customers sent or received nearly 45 billion text messages during the last three months of 2007. One way to grow in a stagnant market is to acquire. On June 5, 2008 Verizon announced that it will be acquiring Alltel Corp for an estimated $28.1 billion. In November 2008, the Federal Communication Commission approved the merger and the Justice Department signed off the deal.[3] The acquisition will make Verizon the top player in the US market, ousting competitor AT&T. Alltel would add another 13 million customers giving Verizon a total of 80 million, in comparison AT&T has about 71 million. The deal is expected to close by the end of 2008.[4] As part of the deal, Verizon will divest 105 markets where its network overlaps with Alltel’s. These divestitures are worth between $3 billion and $4 billion, and potential bidders include AT&T among other competitors.[5] Along with acquiring the number one spot in the U.S. among wireless carriers, Verizon will also acquire Alltel’s $22.2 billion debt.[3] In a slowing economy where consumer confidence has fallen, being number one can potentially be risky as well. Verizon must hold on to its subscribers and add more to its list in order to hedge the risk of consumers defaulting on their payments. [edit] Pricing Pressures As mentioned before, revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer. The average revenue is expressed by the industry as Average Revenue Per User (ARPU) which quantifies the average monthly revenue any customer is generating. While pricing competition has led to declining average voice revenue per subscriber among Verizon Wireless competitors -- through lower priced plans, plans that allow users to add additional units to their plans at attractive rates, plans with a higher number of bundled minutes included in the fixed monthly charge for the plan, plans that offer the ability to share minutes among a group of related customers, or a combination of these features -- Verizon Wireless ARPU showed increases throughout 2007. With a slowing subscriber growth, competition will further intensify within an already very competitive market, while Verizon plans to continue to add value to its own plans and increase ARPU through data services, such as music and video and wireless broadband Internet access. In the wireline segment, heavy competition -particularly from cable companies and VOIP providers- could continue to put pressure on prices. [edit] Line Losses and VOIP SubstitutionWireline line losses at Verizon Communications happened consistently over the last years. Several factors have been driving this trend, including increased VOIP and wireless substitution as well as line losses to the cable companies that started to offer bundled wireline services themselves. An increase in line losses has less of a material effect on revenues and earnings at Verizon now than in the past. Wireline ARPU among remaining Verizon wireline customers rose 11 percent in 2007, due to customer usage of new wireline broadband and FiOS TV services. There could be some improvement in the rate of phone customer loss as the FiOS network upgrade progresses, but currently the services aren't available to a large enough number of customers to offset the inroads the cable firms are making in the phone business. [edit] Third-Generation WirelessThird generation wireless, or 3G is a technology with the capability for high-speed wireless data transfer, making possible a myriad of additional applications such as mobile video, secure mobile ecommerce, location-based services, mobile gaming and audio on demand. For example, using 2.5G (or a slightly better version of second-generation wireless) a three-minute song takes between six and nine minutes to download. Using 3G, it can download in 11 to 90 seconds. Verizon offers 3G services currently (e.g., V-Cast) on its nationwide EVDO network. However, comparing the U.S. and most of the rest of the world to Japan and some parts of Asia, there has been slower uptake or demand for 3G multimedia services, which are used for data heavy applications such as multimedia. As a result, phone manufacturers have been hesitant to release 3G handsets. If 3G adoption does accelerate in a meaningful way, Verizon would benefit from additional fees for related wireless services. [edit] 700 MHz Auction WinIn March of 2008, Verizon won a band of spectrum that the FCC had put up for auction. This band is to be freed up by the move from analog television to digital, which uses a different method of broadcast. As a part of this auction win, Verizon had agreed to use a set percentage of it for open access, a stipulation of the auction that was championed by Google in its attempt to spread the use if its upcoming mobile software, Android. Verizon's acquisition of the spectrum C in the auction means it is now capable of offering high speed packetized communications. However, given that Verizon was already in posession of similar spectrums, the key value for the consumer comes from the open access system that will be available as a part of the auction agreement. This could potentially be a step into unchartered territory for mobile communication. [edit] Regulatory EnvironmentThe telecommunications industry is a heavily regulated market. In the U.S., communications services are subject to regulation at the federal level by the FCC and in certain states by public utilities commissions, or PUCs. With regards to wireless, the FCC regulates the licensing, construction, operation, acquisition and sale of all wireless operations and wireless spectrum holdings. With regards to wireline, The Telecommunications Act of 1996 was designed to promote competition and eliminate legal and regulatory barriers for entry into local and long distance communications markets. It also required companies to allow resale of specified local services at wholesale rates, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements, and allow co-location of interconnection equipment by competitors. It speaks for itself that in such a heavily regulated market, any significant regulatory change could have a major impact on the company or industry as a whole. [edit] Comparison to CompetitorsThe table below compares a number of key metrics of Verizon Communications with its key wireline competitors. As mentioned before, the company continues to face challenges from non-wireline telecommunications providers including VoIP, high-speed internet companies, and cable companies such as Time Warner Cable and Cablevision Systems (CVC).
All financial values recorded above were taken from each company's respective FY 2007 Annual Report or 10-K and from Google Finance. The second table compares Verizon Wireless on a number of key performance metrics to its main competitors. As is clear from the table, Verizon has seen customer growth remain strong. The comparison further shows that apart from monthly ARPU, Verizon is performing better than any of its competitors on all performace metrics. Regarding its monthly ARPU, while not being industry leader Verizon managed to post the biggest year-to-year increase in its ARPU figures.
 Verizon Communications2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
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