Verizon's changing strategy adds Netflix acquisition to rumor mill

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jimo

At last week's UBS Global Media and Communications Conference in New York, Verizon (NYSE: VZ) CEO Lowell McAdam sprinkled a few early Christmas gifts around for journalists looking for stories at a time of year usually reserved for articles looking back at the past year.

In the spirit of giving, the blogosphere is continuing that altruism. The latest story/rumor, of course, is that Netflix (Nasdaq: NFLX) is on the telco's wish list, more on that below.

Verizon last week said is was ending its wireless LTE partnership with DirecTV (Nasdaq: DTV), in lieu of deals with several cable companies--including Comcast, Time Warner Cable and Bright House--to license some of their collective wireless spectrum not currently in use in exchange for the cableco's to begin marketing Verizon's phone and FiOS products.

McAdam, meanwhile, said Verizon is planning to "wind down the FiOS spend," slowing its FiOS infrastructure build out, focusing on increasing customer density in the area's it's already wired.

Combined, those comments lead some observers to posit that the company was, long-term, planning to exit its FiOS TV business, focusing all of its business on wireless telephony, in essence declaring FiOS TV dead, spin-off bait waiting to happen.

That, of course, is bunk. Here's more of what McAdam said about FiOS:

"The theory is that all boats will rise. FiOS will not be disadvantaged in any way. We think the FiOS platform is the strongest platform, and each partner can take the core product and do some innovation on top of that if they choose to," he said. "I think FiOS will have a bunch  of very good products that will come than if we had tried to do them on our own... I think that there will be very strong competition between the different players."

McAdam also acknowledged that Verizon had, at one point, taken a look at online video service Hulu when it was up for sale earlier this year, saying that online video was a market the company was interested in getting into. (Verizon last week also was rumored to be (a.) in the hunt for Coinstar's Redbox, and/or (b.) planning to launch its own online video service, à la Netflix.)

Here's more of his thoughts on OTT: "I think the jury's out, but I do think there is a place for over the top here... it will be part of our strategy. There's lots of speculation about what we're going to do and what we're not going to do, it's all just speculation," he said. "We've looked at alternatives, when Hulu was on the market we kind of looked at that, and we'll continue to look at different alternatives. But I think there will be a place for over the top...  I think that model has yet to be determined and I hope we'll be a big player in determining that. I don't think (OTT) replaces (broadcast) 100 percent. I do think that the traditional FiOS broadcast will continue for a long time, but I think over the top can be complementary.

"It's one of those things that I want to be positioned to transition and take advantage of it but I don't think it's one or the other."

McAdam said Verizon has some FiOS markets that are over 50 percent penetration, but most are in the 20 percent range. Those, especially those with MDUs, would be targeted for growth (you can get an example of that with what Verizon is doing in Washington, D.C.). And, he said, look for Verizon to move al of its products to FiOS in the next four years, starting in 2012, and to convert in-home distribution to Wi-Fi and off coax.

If the company can move all its services to FiOS, he said, take other pieces of the network down and get rid of copper, it "changes your approach" and makes FiOS pay off more quickly. And, he said, look for Verizon to combine its current four IP backbones across the U.S. into "one much bigger pipe which will be much more efficient."

So, FiOS, including FiOS TV, is integral in Verizon's strategy moving forward.

As for the Netflix rumor, which has been an early gift for investors who've seen the stock pop over the past two days, it's likely going to end up being a piece of coal.

Despite one investment banker suggesting a deal could be finalized by Easter, there are reasons for the deal not to happen. The biggest, perhaps, is that Netflix's current market cap of $4.17 billion, is just about the same as the amount its committed to license content, $3.5 billion.

"Netflix has said it owes more than $3.5 billion over the next several years - that's right, about equal to Netflix's current market value - to buy the rights to TV shows and movies, and Netflix continues to strike new entertainment-content agreements,"  the Wall Street Journal's Shira Ovide wrote. "And if a deep pocketed owner buys Netflix, you better believe the TV-and-movie companies will be demanding an even bigger pound of flesh."

A Netflix deal with Verizon? Sugar plums dancing in CEO Reed Hastings' head, I'm afraid. Humbug.--Jim