Will Verizon contract-free FiOS gambit boost subscriber growth?

Verizon says FiOS customers can pay for service on a month-to-month basis instead of signing a longer-term contract. What's unclear is whether the move will bolster FiOS growth.

Verizon on Monday said new FiOS customers can pay for service on a month-to-month basis instead of signing a longer-term contract. What's unclear is whether the move will bolster FiOS growth.

In Verizon markets---notably the New York area---cable competitors such as Cablevision have been panning the telecom's contracts and early termination fees. Verizon in a statement argued that it has always had a month-to-month option for more money.

Simply put, Verizon's move to drop contracts is part customer service, part defense and part offense. Under Verizon's "worry free guarantee" customers can pay for service monthly and get price protection for a year without an early termination fee. With this deal, Verizon is also allowing new customers to bail after 30 days with no termination fees if they sign up as part of a two-year contract.

Verizon's move aims to lure folks that are thinking about ditching their cable providers. Analysts say Verizon needs to make a move to boost subscriber growth. Wells Fargo analyst Jennifer Fritzsche said in a research note:

FiOS subscriber growth has been weaker than expected for several quarters. Eliminating contract requirements and early-termination fees should lessen the concern of customers that are considering switching to Verizon but have never previously used FiOS. We do not expect this change to impact Verizon's financials, but it may provide an incremental boost to FiOS subscriber growth going forward.

What's going on here? Verizon likely signed up a bevy of early adopters and folks that were itching to leave cable companies but needed an option. For instance, I was in that camp and dropped Comcast, which suffered numerous outages in my area, as soon as FiOS was available.

Photos: Verizon FiOS installation step by step (right)

Once that wave goes by, Verizon found a bunch of folks that were on the fence about cable vs. FiOS. Simply put, Verizon is fighting inertia. It's possible that contract-free FiOS may prime the demand pump.

In its latest quarter, Verizon added 185,000 net FiOS Internet additions with 168,000 net FiOS TV additions. Verizon ended with 3.6 million total FiOS Internet subscribers and 3 million for FiOS TV.

Timothy Horan, an analyst at Oppenheimer, has been cutting his estimates for FiOS.

For the second consecutive quarter, FiOS net additions were once again weaker at 168K for FiOS TV (vs. our estimate of 225K) and a little bit better for FiOS Internet (185K vs. 225K estimate). Thecompany continued to not be aggressive with its price promotions, and the buildout has notably slowed. The company is moving from a buildout run-rate of 3M homes passed/year to slightly less than 1M homes per year (we are now forecasting VZ to reach its target of 18M homes passed by year end 2012) as it looks to decrease capex/opex and focuses on increasing penetration in territories it already passed. We are stepping back our forecast of FiOS and we stepped back our forecast from the 900K/year range to 700K/year.

Related: Verizon's FiOS network: Payback time?


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