Even a hit Droid phone won't fix Verizon's woes
Shares of BlackBerry maker Research in Motion (RIMM) got hammered yesterday after analysts said that the Droid might become a major competitor in the business market, where Apple (AAPL)'s iPhone has largely failed to gain ground. And Droid handset-maker Motorola (MOT) has seen its shares surge, partially around anticipation that the operating system may give it a hit phone after a long drought.
But investors should temper their expectations of Verizon Communications, the carrier behind Droid and the country's largest wireless operator. Even a highly popular Droid may mean less for the company's bottom line than it may seem at first glance.
For starters, while AT&T (T) has the exclusive deal for the iPhone, a host of other carriers will sell the Droid OS. That means the marketing dollars that Verizon puts into its phone will help boost its rivals, too. And when it comes to profiting from the Droid, nearly half of the income will go to Vodafone Group (VOD), the global wireless giant that holds a 45% stake in Verizon Wireless.
Unfortunately, Verizon has no partner to share the woes of its landline business. Like other traditional phone businesses, Verizon's is getting eviscerated as customers ditch landlines for cellular counterparts. The unit's operating income margins fell to 3.8% in the third quarter, compared to 8.6% a year ago.
So while Verizon has to split its $15.8 billion in third-quarter wireless revenue with Vodafone, the $11.6 billion generated from its shrinking wire-line unit remain firmly on its balance sheet.
Gambling on FiOS
While rivals like AT&T have chosen to patch up their ailing landline businesses with relatively low-cost technologies, Verizon has doubled down instead. It's spending $23 billion to roll out FiOS, its state-of-the-art fiber optic network capable of delivering TV, super-high-speed Internet, and digital phone services.
Greeted by rave customer reviews -- and backed by aggressive Verizon promotions, like free HD TVs -- FiOS gained got off to a roaring start. But it showed an ominous drop in growth in the third quarter, when new additions dropped to 191,000, from 300,000 the previous quarter. At an annualized rate, that's far below the million customers Verizon has said it wants to add every year.
A new wave of reports about the painful process of installing FiOS is throwing another wrench into the FiOS buildout, leading Verizon to consider curbing its ambitions among a sharp consumer-led recession.
Landline Business Limping
Building out FiOS may be even tougher as Verizon sets its sights on major urban areas like New York City, where the company has to negotiate hookups with each apartment building landlord. A FiOS stall would put further pressure on Verizon's limping landline business.
So while the buzz around Droid grabs headlines, investors should take listen to the warning of analysts like Craig Moffett at Sanford C. Bernstein, who wrote in a research note last week that the ailing landline business may make Verizon "unlikely to return to meaningful growth after the recession finally comes to a close."