Cities Seek Alternatives as Verizon Halts Further FiOS Expansion

Municipal broadband, stimulus funding and Google’s fiber projects are among alternatives some cities are looking at as Verizon backs away from further FiOS expansion and concentrates on completing current commitments, experts told us. Cities probably won’t make quick decisions to pursue their own fiber buildouts, but Verizon’s pause in seeking new franchises will prompt them to raise the possibility again, said lawyers who represent cities in these matters. Baltimore and Boston are among the major cities likely to consider the idea, they said.

After six years of FiOS negotiations that went nowhere, Boston has turned to projects like municipal Wi-Fi, community broadband through the stimulus program and most recently the Google fiber testbed, said Mike Lynch, the director of the Office of Cable Communications. Mayor Thomas Menino guided citywide municipal Wi-Fi plans that have produced neighborhood Wi-Fi pilots, Lynch said.

Menino has asked Verizon several times to bring FiOS to all of Boston, Lynch said. The mayor has offered the possibility of the city’s using an informal, expedited franchising process with the telco, “a counterpoint to the erroneous perception that cable franchising is somehow burdensome,” Lynch said. Since 2004, Verizon has refused to work with a large number of cities and towns in Massachusetts because it “doesn’t like the obligations of state cable law [that requires] a cable franchisee build out the entire community they agree to serve within six years of signing,” he said. “The mayor has asked us to continue to work with Verizon, advocating for the introduction of FiOS in Boston.”

Alexandria, Va., has been looking at possibilities such as Google’s fiber project and the stimulus program since Verizon decided it wouldn’t seek a video franchise (CD March 16 p10), said Rose Boyd, the director of citizen assistance. Baltimore officials couldn’t be reached immediately for comment.

More cities likely applied for Google’s 1 Gbps fiber network (CD March 26 p2) than would have otherwise because Verizon isn’t expanding FiOS, lawyers representing municipalities said. “It certainly accelerated interest in the Google” request for information, said Tillman Lay of Spiegel McDiarmid. “But since Google is only going to do deployments in one to three markets, it’s not going to have” much effect. The company said it received applications from more than 1,100 communities.

Cities may not have many options, said Jeff Arnold, deputy legislative director of the National Association of Counties. Overbuilding cable service is very costly, he said. The Google option is fine for broadband but doesn’t offer bundles the way FiOS can, Arnold said. “We have always asserted that if a video provider serves part of a community it should serve all of it,” he said. “In the case of Verizon not serving a city like Alexandria, that’s their choice not to serve any of the community."

Instead of continuing to expand into new communities, Verizon’s FiOS business has reached a phase where the primary focus is completing and marketing the networks where the company has agreements, a spokesman said. The company has almost finished its initial deployment plan, he said. It still plans buildouts in additional markets, he said. There are about a dozen markets, mainly in New York, Massachusetts and Pennsylvania, where the company is discussing video franchises with the aim of offering FiOS TV in addition to voice and Internet services, he said. In some major cities where the company hasn’t been able to offer FiOS, “we hope there will be opportunities going forward,” the spokesman said.

Many communities without FiOS broadband and subscription-TV service seemed to be under the impression they would get it soon, said three municipal lawyers. They said Verizon may resume FiOS buildouts if communities do pursue overbuilds that could take market share from the company’s regular broadband service. “They're going to have a hiatus and continue building again,” predicted a lawyer with municipal clients. “If we take them at their word, the bottom line is they got more franchises faster than they can keep up with."

"I think there was the expectation and the hope that if FiOS was successful, they'd keep building” to most areas where Verizon has landline operations, said lawyer Ken Fellman of Kissinger & Fellman. “It leads to why local governments and state governments” think, “Maybe we should take matters into our own hands.” Verizon’s stopping new buildouts underscores that competitors haven’t always built new wireline facilities to compete with incumbents, he said. “What that tells the country is if we want very high-speed fiber connections to every home in the United States, we cannot rely simply on the private sector to do it,” said Fellman, who’s the president of the National Association of Telecommunications Officers and Advisors. “I don’t begrudge Verizon. They made a business decision."

Bernstein Research analyst Craig Moffett expects capital spending on FiOS to decline, which could mean additional spending on other businesses, such as wireless. That’s already been well telegraphed to the market, he said. “Obviously, wireless is today a more fruitful place to invest that the legacy copper business.” Backing away from further FiOS expansion doesn’t mean less spending on FiOS this year, the Verizon spokesman said. The carrier still plans to meet its goal of 18 million connected households by year-end, he said, adding that the company will use all the $22.9 billion investment designated for FiOS. “We won’t be redirecting funds for FiOS to other areas,” even as the company moves into services such as LTE, he said.

Verizon is on pace to hit its 18 million homes passed -- the same deadline it had set back in 2004-2005, Stifel Nicolaus analyst Chris King said. “This isn’t news.” Moffett said, “At the end of the day, FiOS hasn’t really changed the trajectory of a still-declining wireline business.” It’s not clear that the rate of decline has slowed, so the case for expanding FiOS isn’t compelling after $22.9 billion has been spent, he said. “We've always argued that FiOS wouldn’t come close to earning its cost of capital,” he said. “It looks like Verizon has reached the same conclusion."

A “sharp deceleration in growth” in the telco-TV business and cable’s moderating video subscriber losses will have heavily capitalized incumbents struggling to retain share of a competitive market, Moffett said. He forecast modest subscriber gains could arrive by 2012, in time for an expected requirement that cable, telco and satellite providers share their set-top box space with competitors.