Verizon has apparently done a good job designing and building its “FiOS” bundle of digital TV, super-fast Internet access, and phone service: It took the top spot in Consumer Reports’ February triple-play rankings. For Verizon (VZ) investors, though, it looks like a liability.
Sanford Bernstein analyst Craig Moffett takes a detailed look at the economics behind Verizon’s $23 billion (projected costs) FiOS investment. Not pretty:
We estimate the full cost of FiOS to be approximately $4,000 per connected subscriber (and that before the not inconsiderable Subscriber Acquisition Costs currently being incurred). In contrast, the present value of all components of incremental contribution, including cost savings, incremental revenues, and avoided capital spending, amount, in aggregate to approximately $3,200 per customer, yielding a negative return of almost $800 per subscriber.
The best Moffett can say about FiOS is that excluding the enormous costs of laying new fibre to “pass” homes, FiOS may return $1,300 per subscriber. And you could argue that investors have already priced that into the stock, and that much of that money has been spent. Except, Moffett points out: Verizon, which has “passed” 9 million homes, still has another 9 million to go: “We remain years away from justifiably viewing the FiOS infrastructure build as fully behind us.”
Translation: If VZ won’t cut its losses and stop building FiOS, investors should stop holding VZ shares.
Business Insider Emails & Alerts
Site highlights each day to your inbox.