Verizon Hangs Up on Traditional Phone Business

Over time, Verizon (VZ) has shifted from its traditional landline business to wireless. The latest sign is official news that Verizon is nearly done with building out its FiOS fiber-to-the-home network. Some say it's a sign of success, but I'd disagree and call it a portent of what the company wants: to get out of the landline business and fully into wireless.

Landline (known in the business as wireline) phones were once a source of virtually unbridled revenue. Those days are long gone. According to Verizon's 2009 10-K, wireless revenue of $62.1 billion represented 57.4 percent of total company revenue, with wireline bringing in $46 billion. However, the operating expenses for both were about even, leading to wireless offering 8.8 times the operating income of wireline. That's a huge change from 2008, when wireless was 50.6 percent of revenue and the difference in operating income between the two segments was a factor of 3.6. Wireless revenue grows rapidly and becomes far more attractive. Even as recently as 2007, wireline lead wireless, at least in revenue, if not operating income.

One line of business shrinks while the other grows. Not surprising when you think of who might pay close to $100 a month for unlimited regular phone service. That has to be one of the briefest short lists in the world. Furthermore, you could attribute much of the reduction in wireline operating income to the tens of billions Verizon spent on getting fiber to consumer homes.

That number translated into about $750 a home just to wire a neighborhood, and another $600 to connect a given household to the network.

Such an expense was already an issue with Verizon's investors in 2004, and with the recession its become even less attractive. The company is also nearing (and may exceed) its initial goal of getting FiOS to 18 million homes by the end of 2010.

Look at New England, where it sold large parts of its holdings to FairPoint Communciations, which ended up going bankrupt. Running wireline service, particularly in areas that aren't large and urban, can be expensive. Last year, Verizon created a subsidiary called Spinco to hold local exchange business in 13 states and parts of California. It's supposed to merge with Frontier Communications. This is called hanging up on wireline business.

I suspect that originally Verizon saw FiOS as a way to reclaim the wireline business, compete with cable, and increase household revenue at a time when competition increased downward pressure on what plain old phone service could deliver. Now FiOS is an added "benefit" to potential buyers of the company's wireline holdings. Why build it out any more?

Image: RGBStock.com user wax115, site standard license. Image modification, Erik Sherman.