Verizon should sacrifice video to a third party and focus on 5G

Verizon was heralding its new 5G video production studio as a game changer just last week – a project made to look like a gimmick when, just days later, the operator revealed a gaping hole in its existing video operations to the tune of 53,000 fewer Fios TV subscribers.

How then does Verizon realistically expect to front a prolific new TV business on the back of 5G when not only have its previous attempts at over-the-top video crashed and burned, but the operator’s main video business has just experienced its heaviest subscriber losses to date?

Before drilling down to the detail, we should address the basics of Verizon’s 5G video plans, which essentially hinge on bringing on board third party OTT video services to avoid another calamity like Go90. Only this week Verizon inked a deal with Google to bundle a YouTube TV subscription into 5G wireless home and Fios internet, telephony and TV packages. Details are scarce, other than offering “unique, high value promotions to customers across platforms,” so we’ll have to wait until later this year before Verizon reveals critical nuggets like pricing and launch date.

Verizon is looking more distinct from a traditional competitor like AT&T as every quarter comes and goes. With the Fios video business visibly on the ropes, Verizon is under pressure to commit to a plan of action and it is hard to envisage any other scenario than surrendering video fully to a third party like YouTube TV.

CEO Hans Vestberg addressed these growing concerns during the company’s earning call this week, stating: “On YouTube TV, I think that what’s most important is that we are committed to support our customers with the optionality. Here, we’re creating, as we said from the beginning when we decided not to pursue our own investment in OTT, that we will have partners in order to work out our strategy network and networking strategy and give our customers optionality. And that goes also for our Fios customers. And there, YouTube TV will play a role for us.”

To the numbers now. Verizon ended the first quarter with 4.4m Fios video connections, shedding 200,000 subscribers in the year period, compared to a loss of 184,000 between Q1 2017 and Q1 2018. Given the accelerated churn rate seen in Q1 2019, more than doubling from 22,000 to 53,000, Fios video abandoners look set to approach 250,000 a year very soon. As such, a business rapidly withering on the vine makes Verizon’s entrance into 5G all the more important.

Despite video only being mentioned a handful of times in Verizon’s first quarter results materials, it did mention how capex is continuing to support the growth in video traffic on its 4G LTE network.

There were gains elsewhere in the Fios business though, as Internet connections increased by 3.4% to just over 6.1m subscribers, while Fios digital video residence connections declined by 3.4% to 3.76m. Despite hemorrhaging video subscribers, Fios revenues enjoyed a 3.6% spike in Q1 to $3bn.

Another issue for Verizon is around the economics of bundling YouTube TV, which only hiked its subscription fee to $49.99 a month a few weeks back, into a 5G fixed wireless offering. Combined with broadband, a package will rack up to a hefty monthly fee and that might deter more subscribers than it will attract.

However, Verizon has been offering three months of YouTube TV for free, as well as an Apple TV 4K or Google Chromecast Ultra device for new subscribers looking to cut the cord. So, perhaps Verizon has experienced positive early uptake of this offer, not that it mentioned as much during this week’s earnings.

First impressions, based on the crumbs here, imply Verizon is taking a much safer and less aggressive approach to its 5G plus video strategy compared to something like T-Mobile USA is attempting. Clearly the chips are high, and operators aren’t taking any risks.