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Want to Know What Verizon and AT&T Really Tell Their Investors?

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Hint: It's not what they tell the regulators or the public.

We've said this before, and we say it again: Verizon's and AT&T's current state and federal plan, called the "IP transition," is nothing more than another way to game the system by telling the regulators what they want to hear.

The truth is that the real reason that we are having a "transition" is to add more to the corporate bank accounts (read: more ways to charge you more) without those pesky regulators watching. In fact, we shouldn't be we sitting here talking about a "transition"; we should be talking about the market takeover and calling for investigations.

Let's see what Verizon's and AT&T's executives told investors at various events about the companies' future plans.

(Note: I'm all for capitalism, but that assumes a free market with competition. Verizon controls the wires and can simply raise rates or "kill the copper" or force customers onto other products that they own and control. That's not a competitive market.)

'Kill the Copper' and Force Customers Onto FIOS -- Because It Makes More Money

It started in earnest in New York and New Jersey after the Sandy storm in October 2012. Verizon refused to fix the utility customers' copper-based services after the storm, leaving tens of thousands hanging for months or forcing them onto inferior wireless services, as they did to customers in Fire Island, N.Y. It now appears that this failure to restore customers' original service after an emergency was nothing more than Verizon's corporate plan to make more money.

Lowell McAdam, Chairman and CEO of Verizon Communications, speaking at the Citi Global Internet Media and Telecommunications Conference in January 2013, said that Verizon's new "mantra" is "Don't fix the copper wires":

When we had the impact of Sandy, our mantra was you will not fix copper. So if copper got into any kind of a damaged situation and FiOS was in the vicinity, or we could run FiOS down an adjacent street and get into there, we would cut the copper out of service.

And why do it? Well, upselling -- that is, having the customers buy more products from the companies' own affiliates.

Now what is the reason we want to do that? Well, when a customer goes, even to FiOS digital voice, they very quickly see the difference on copper, and we have seen the ability to sell up.

We note that in April 2013 we met with a room full of not-happy people from the E. 9th Street Block Association in Manhattan, who had been out of service for six months since Sandy and couldn't get FiOS. And Verizon had lied to each one a number of times, claiming that they would repair their service. (Here's one flyer that was handed out about this situation.)

While the natural disaster gave Verizon the opportunity to implement this master plan, McAdam had been talking about this throughout 2012. In June 2012 he stated that killing the copper was a "pot of gold":

But the vision that I have is we are going into the copper plant areas, and every place we have FiOS, we are going to kill the copper. We are going to just take it out of service, and we are going to move those services onto FiOS. We have got parallel networks in way too many places now, so that is a pot of gold in my view.

And at the September 2012 J.P. Morgan analyst conference, McAdam said that moving the customers to FiOS makes the company more profits:

And we're going to move them off of copper and onto the FIOS, which helps the FIOS profitability as well as removes all the expense associated with that copper plant. So we're going to move forward with that.

And in October 2012, right before Sandy, McAdam claimed that this plan was designed because "there is nice upside there." The company would make more money because it would be "upselling" the customers on other Verizon services, and because converting them saved the company money on maintenance. In fact, this all helped deliver the "best shareholder value contribution." Here's McAdam on Sept. 7, 2012:

So we certainly start where we've got parallel networks. And we have a lot of those in place. And we're attacking them from the top down based on maintenance activity or based on the ability to sell into that customer. We see after a customer moves over to FIOS, we may sell them the regular digital voice service and then move them over on the Internet side. And then you move them over on the TV side. So there is nice upside there. So we look at it from maintenance-cost perspective as well as a revenue-potential perspective. And then you do get to a point where, in a geography, if you've got nine out of 10, let's say, customers on a street that are on FIOS, you're just going to cut the 10th one over and then decommission all of the copper. So we factor all of that into the analysis and come up with the best shareholder value contribution.

Verizon also admitted that it stopped selling DSL and was forcing customers onto FiOS -- and again to make money and upsell customers:

On Wireline margins, just a couple things here to talk to. Number one, we did have the FiOS-to-copper migration, which impacted our short-term results. But we've talked that this is a strategy that we are deploying. It is better for us long-term to get most of these customers off of our copper network to our FiOS network, as you saw that we are -- stopped selling our naked DSL in FiOS-covered area. And we started to convert a number of customers in this quarter over to our FiOS network from a voice perspective.



Now, a couple things here that this will launch. Number one, we will see a long-term benefit in our repairs and maintenance decrease over time. We will also get the upsell capability to start selling these voice customers on better speeds of FiOS and better experience, and also then into the linear TV product that we have to offer. And what we are seeing is the minimal number that we converted last year during our trials, we are starting to see a 30-percent sale upgrade on those customers. But it does take us three to six months to convince those customers to upgrade. So this is a longer-term type strategy.

And in April 2012 McAdam pointed out that when the company wanted more money, they simply printed it by increasing the prices:

In addition, going into the future, you are going to see -- you may have already saw -- that we are starting to do some price-ups in strategic areas. We've already started that in April, but over the next two quarters, we're going to have several price-ups in our FiOS packages. In addition, we are going to rebundle certain of our packages to better bundle our content in order to make it more profitable, based on the tier that you pick for us. The other thing is that there are other revenue streams coming down the pike, like home monitoring control, that will contribute to the overall ARPU of our FiOS platform.

Isn't it nice when a company simply prints more money via raising rates? It clearly shows that there's little, if any, serious competition.

On a May 30, 2013, Nomura analyst conference call, Francis Shammo, Executive Vice President and CFO of Verizon, said pretty much the same thing -- that once you convert customers to FiOS, you can sell them more. However, he noted that this shouldn't be done too quickly, as the customer will think they are have been "gamed":

The side benefit of doing it, though, is what we are seeing is once we put that OMT on the side of the house and give you voice and give you the basic speed of FiOS, after a couple of months, they are choosing to buy up in the speeds, because now they are realizing this unbelievable fiber product that they have on the side of their home. So they are buying up into those tiers, and we see that most people are buying up to the 50-megabit plan.



Then what happens is, six to eight months after that, you then market it to them, because what we found is you can't do it too soon, because then they think they are being gamed somehow. So six to eight months later, you start to approach them on, "Hey, by the way, we think we can save you money on your cable bill by taking FiOS TV." And what we are seeing is about a 35-percent to 36-percent take rate now on those copper customers who just had voice and DSL. Once they come over within a year, they become a triple play on FiOS.

The Plan: Don't Fix the Copper; Push Them Onto Wireless

Verizon also decided that instead of fixing the copper, it would force customers in "more rural areas" to be put onto wireless services. McAdam stated in June 2012:

And then in other areas that are more rural and more sparsely populated, we have got LTE built that will handle all of those services, and so we are going to cut the copper off there.

At the September 2012 J.P. Morgan analyst conference, McAdam said moving the customers to wireless makes the company more profits:

And in many areas we're also taking customers that aren't performing well on copper and we're moving them over to the wireless technology. So that improves our cost structure significantly and streamlines all those ongoing maintenance costs.

Wireless LTE Is Not a Substitute for FiOS for Video

Verizon knows that wireless, even their LTE product, doesn't replace wireline broadband networks for video. McAdam stated in June 2012:

I mean we want to shift as much onto FiOS or onto the fixed network where we can and then provide -- use that capacity to provide those higher-demand services like video. I don't expect anybody to sit in their home watching video over LTE. I want them to be able to watch it on their tablet anywhere in the house using the WiFi network.

And this admission means that Verizon's plan to halt their FiOS deployment will harm every customer outside the "footprint," which could be as much as 50 percent of their territories.

Shammo also made this same point in May 2013 and also noted that Verizon was making "headway" with regulators:

[T]here is a different solution rather than building infrastructure to some of these what I would call more rural areas, and it's really with using the LTE technology, the Fusion technology from a broadband perspective. And we still have some work to do with regulators, but we are making headway here, and I think that's the route that we will take.

And Verizon has no interest in having the wireless company compete with the wireline company. In September 2012 McAdam said:

[Y]ou won't see Verizon trying to compete against FIOS with LTE. That's not in the cards here until you have an unlimited supply of spectrum. And I don't think that's coming anytime in my career.

And, again, Verizon admitted that wireless simply will never get to the high speeds that FiOS offers. Mike Rollins, a Citigroup analyst, asked at the January 2013 event:

The question that comes off of the ability to watch video in a quality way on a wireless device then gets to: What is the ability for LTE to displace the DSL or the low-end high-speed Internet offerings and your ability to have a true replacement product with LTE? How pervasive could that be?

McAdam responded that wireless won't be as fast as wired:

Well, the low-end stuff I think will always fall away, but I say this to our management team: I think as we leapfrog, wireless sort of nibbles away at the lower end of the wireline side. But if you take a look at FiOS, this year we went from -- well, two years ago we were at about 50 megabits of throughput into the home. We are at 100 broadly now, and we have just introduced 300. So if you looked at that progression, will wireless do 300 megabits? Probably not in my career. At some point it surely will, but not in my career, and so I think this sort of leapfrogging is what we should expect going forward.

AT&T Is, of Course, Doing the Same Thing -- Driving Profits Is the Goal

As I pointed out, AT&T's IP transition is about more profits, not technology changes. According to AT&T's press release on Nov. 7, 2012:

Driven by Project VIP and assuming a stable economy, AT&T expects that during the investment period:
  • Earnings per share will grow in the mid-single-digit or better range, with an opportunity for stronger growth going forward.
  • Consolidated margins will expand.

In fact, this is really about multiple new billion-dollar business opportunities. AT&T states:

Project VIP Supports New Growth Initiatives -- With business customers, AT&T expects Project VIP will strengthen its ability to pursue multiple new billion-dollar business opportunities in four key growth areas: strategic network services, cloud, security and mobility solutions.

The takeaway point about all the companies' actions, it would appear, is that it's not a technology "transition" but just another way to force customers to pay more, or to get regulatory favors. If they said, "Well, we want to upsell the customer, raise their rates, and shut down the copper services they use and replace them with wireless, which can't compete with wired upgrades in terms of high speed, all to make us more money," would we be sitting here discussing a "transition," or would we be calling for investigations?

What a sham.

Thanks to Jim Rosenthal, Fire Island resident, who assisted in the research used in this blog post.