By LAURA M. HOLSON Published: July 29, 2008Verizon Communications is having a harder time pushing its television service, which competes with the big cable companies, but the company said the slowing economy had not hurt its cellphone business.
In releasing its earnings report on Monday, Verizon said it added 1.5 million new wireless customers, the same number as last quarter. It was 25 percent fewer than the two million it added in the fourth quarter of 2007, but Verizon Wireless, which is a joint venture with Vodafone, said its churn rate - the pace at which customers defect to other carriers - fell to 1.1 percent from 1.2 percent in the previous quarter. By comparison, Sprint Nextel has a churn rate of 2.45 percent. Analysts, however, were concerned about the pace at which Verizon was winning customers for its fiber optic delivery of television programming, called FiOS TV. Verizon added 176,000 customers in the last three months, compared with 263,000 customers in its first quarter. In addition, the company said it added 187,000 FiOS Internet customers.
"That FiOS is already seeing a sequential deceleration is a startling development," a communications analyst at Sanford C. Bernstein & Company, Craig Moffett, wrote in a research report.
Dennis F. Strigl, Verizon's president, was puzzled by analysts' questioning of Verizon's FiOS results.
"I'm not sure where the concern is coming from," Mr. Strigl said in an interview after the company reported its second-quarter results.
He said it cost Verizon less to acquire FiOS television customers in the second quarter than it did six months ago because the company had been offering new customers a free 19-inch high-definition television, which cost the company $200 each. (The televisions were an incentive only in the first quarter.)
Verizon began offering the FiOS service, which the company hopes will compete with the major cable companies, in New York City on Monday. But as the slower adoption rates show, Verizon is entering a hotly competitive market where customers are as jealously guarded as a seat on a crowded subway.
Verizon sued Time Warner Cable earlier this year, saying some of its rival's commercials included false and misleading statements. And Verizon has sparred with Comcast and Time Warner over marketing techniques that Verizon was using to retain customers who wanted to switch to a competitor.
In June, the Federal Communications Commission said Verizon could not talk customers out of switching to another phone service provider while waiting for their phone numbers to be transferred, a victory for Comcast and Time Warner Cable, which filed a complaint in February. "It's a natural phenomenon," Mr. Strigl said of the aggressive customer tactics. "It happened in the early days of the wireless business."
Verizon reported second-quarter net income of $1.88 billion, or 66 cents a share, a 12 percent increase compared with profit of $1.68 billion, or 58 cents a share, in the second quarter of last year. Revenue increased slightly to $24.1 billion, from $23.3 billion a year ago. Mr. Strigl said he was pleased with the results.
Verizon, like AT&T, Sprint Nextel and T-Mobile, sees data as the growth engine of its wireless business.
Mr. Strigl said more than 30 percent of the mobile devices Verizon is selling have access to the Internet, and also receive and send e-mail and text messages. By contrast, he said, "a year ago it was half that."
Verizon's expansion efforts could be thwarted if union-represented employees walk out when their contract expires on Aug. 2. (They voted last week to authorize a strike.) Verizon executives said they were confident that a resolution would be reached.
Mr. Strigl conceded that there was one area that had disappointed Verizon. The company lost 133,000 customers for its D.S.L. Internet service, which uses phone lines.
The loss had nothing to do with the flagging economy, he said. Many analysts have feared that customers tend to drop costly services when personal budgets need to be trimmed. Mr. Strigl attributed the loss to some customers switching to FiOS, while others defected to competitors. Verizon also lost 920,000 residential and business telephone lines - they now tally 38.3 million - a decline of 8.5 percent year over year. The drop was steeper among residential customers, an 11.4 percent drop compared with the same period a year ago.
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