24/7 Wall St. interviewed Ivan G. Seidenberg, the Chairman and CEO of Verizon (VZ), recently. The conversation covered Verizon’s major plans, the global telecom markets, and the effects of the recession. This is the one in a series of 24/7 Wall St. interview with large company CEOs to examine the future of business and industry as the world economy recovers.
24/7: The economic downturn has been so deep and widespread that many large companies are finding that, even in a recovery, some parts of their businesses have been changed permanently even if GDP growth returns to 5% or 6%. Are there parts of Verizon where that is true?
Mr. Seidenberg: No matter what the economy, some parts of our business change permanently every few years. That’s the nature of the communications industry, due to advances in technology and changes in customer demand. The larger point is that, overall, we believe our industry is healthy and strong, and Verizon has great opportunities for future growth across markets.
Specific to the economy: yes, we’ve seen — and continue to see — impacts. Very little job creation is occurring even today. I am the chair of the Business Roundtable, and just this past week we met and no one among the CEOs I spoke with is seeing job formation. For Verizon, that has translated into a particular softness in business markets, where the cumulative effect of unemployment has reduced volumes and usage-driven products.
When you step back and look at our business in relation to the economy, I think that two points emerge.
First, I would note that throughout the whole economic downturn, key areas of Verizon’s business have continued to perform well. Although growth has been somewhat slower than in the past, it has still been solid growth. I’m referring to the excellent growth in wireless data; in FiOS broadband and video, which is driving growth in consumer wireline revenue; and, even within the business/enterprise market, the continued growth in sales of Internet Protocol and other strategic services.
Secondly, Verizon remains especially well-positioned to take advantage of new growth areas as the economy improves. We have many revenue growth opportunities in wireless data, including new opportunities with applications and content, and in fixed-line offerings centered around video. In terms of customer growth, we’ve recently told the Street that we expect to add a net of more than 1 million Verizon Wireless customers per quarter and more than 1 million Verizon FiOS customers a year.
24/7: Wall St.’s biggest concern about Verizon seem to be that its landline business is dropping rapidly and cellular revenue growth will slow because most people in the US have wireless phones. These analysts predict that the new cellular world will be one in which the four largest American providers will spend most of their marketing efforts on taking business from one another. Are there reasons that those concerns are not likely to be accurate?
Mr. Seidenberg: I have a very bullish view of the new wireless market. As I said at the CTIA convention this past spring: wireless is about to enter a new era, where wireless will connect everything — not just people-to-people, but also people-to-machine and machine-to-machine. In this model, there is literally no limit on the number of connections that can be part of the mobile grid: cars, appliances, buildings, roads, sensors, medical monitors, someday even inventories on supermarket shelves… all of these have the potential to become inherently intelligent, perpetually connected nodes on the mobile web.
This is significant because it challenges the conventional wisdom about the growth potential of the wireless industry. I call it the “100 percent” ceiling – the idea that 100 percent penetration of the population is the upper limit of growth for an industry. Countries like Sweden and Italy have shown that you can go beyond 100 percent even in today’s wireless business model, as customers start to use more than one mobile device. That’s happening here in America, too, as we keep going past 90 percent penetration to 100 percent and more.
But even that is a too-limited view of the future. If we think in terms of the complex web of wireless connectivity that next-generation technology will bring about, then the opportunity to explode past the 100 percent ceiling to 300 percent, 400 percent, or 500 percent is not only possible … it’s probable.
I also told investors recently that Verizon is in a unique position when it comes to access line losses for traditional copper-wire telephone services. The reality is, there’s been a fundamental shift in the way customers choose to access voice services. They are often choosing wireless, and Verizon Wireless benefits from this. In addition, as wireline services become more data and video-centric, we’ve been in the forefront of building out a very robust fiber optic broadband network. We now offer landline speeds and services that are best-in-class and improving all the time, and customers are responding very positively to our FiOS offerings. We are taking share from cable, and the average revenue per customer from our wireline business has been going up at a very healthy rate for some time, even during the economic downturn.
24/7: There is a debate about whether wireless customers buy handsets and subscriptions from providers more because of the connection quality of the network than the features of the handset. Does the perceived strength of the network play a significant role in a world where handsets like the Blackberry and iPhone appear to be the major draw for new customers?
Mr. Seidenberg: The quality of the Verizon Wireless network has always been our No. 1 selling point, and we expect that to continue into the future. Network reliability and wireless broadband capabilities will even be more important to customers as time goes by — especially as the hot new devices get more sophisticated. Our business model is to continue to emphasize the superiority of the Verizon Wireless network. We couple that with a wide range of handset offerings so that customers have a great deal of choice when it comes to price and functionality — and they know they are getting real added value from our network on whatever device they choose.
24/7: Verizon is having success with adoption of its FiOS product, which must be hurting the cable companies. Does that mean there is likely to be a price war as they work to keep their share of the TV and broadband markets?
Mr.Seidenberg: We are indeed very pleased with our progress with FiOS. We are gaining scale. As of the end of the second quarter, we had 2.5 million TV customers and 3.1 million subscribers to our high-speed FiOS Internet service. TV penetration is up to 25% and Internet is 28%. FiOS ARPU — the average revenue per customer — totals more than $135 per month. Recognition of FiOS as a high-quality service has spread quickly, and demand remains strong.
We don’t see a price war for the kind of services we offer because we are not simply providing basic cable access services. We are focused on taking advantage of our superior fiber network and creating new revenue streams. By innovating, we are constantly introducing new FiOS features and functions, and this enhances the value proposition for our customers. We are focused on offering customers unique, integrated voice, data, video and wireless services, and we have many new offerings in the pipeline, so we are confident of our success in this area.
24/7 : The laws that cap how much of the cable market any one company can have may change. One analyst even suggested that Comcast and Time Warner Cable merge. If cable companies can grow rapidly through M&A, does it affect the growth of FiOS? Does Verizon have a position on the issue of whether cable companies should be able to expand beyond the level that current regulations allow?
Mr. Seidenberg: I have long said that robust competition in a market creates innovation for customers, which greatly expands the size of the revenue pie for those companies willing to invest in long-term success. We saw that in the wireless industry, and we will see this again in the permanent changes — to get back to your first question — that the cable industry is now beginning to experience. Regarding the FCC order you are referring to, back in February we filed a brief in support of Comcast in this case — so we have no objections on this issue. Verizon is a catalyst for change in the cable industry, and I’m not as concerned about the size of my competitors as I am about their ability to keep up with our innovations.
Douglas A. McIntyre