US service provider Verizon’s failure to reach a new contract with two unions has resulted in an indefinite strike that started August 7. Amid picketing at Verizon offices, the company has reported over 90 cases of attempted sabotage to their network since the action began. The strike includes 45,000 wireline workers in a few Eastern US states (out of a total employee count of 196,000), including those working on ongoing FiOS rollouts, the largest FTTH deployment in North America.In response, Verizon has temporarily replaced the striking workers with tens of thousands of management employees, retirees, and others who are now providing network repairs, customer service, billing, back-office support, and other critical functions. A prolonged strike would cost Verizon dearly in lower FiOS connections and possible loss of subscribers, but in the long run it’s Verizon’s workers that have the most to lose.
Last week, Verizon’s FiOS FTTH services achieved a big boost in credibility: The FCC released a report that put FiOS in the lead among all major US broadband service providers in measured actual Internet speeds versus advertised speeds.
According to the report, FiOS consistently provided the highest speeds, which were also higher than advertised. This is a major validation of Verizon’s strategy of going with FTTH and delivering what it actually promises to customers.
Verizon had planned to deepen FiOS penetration throughout 2011, especially in New York City, where its fiber passes tens of thousands of buildings already. Those plans are now at risk, and if the strike continues we will lower our forecast for sales of North American FTTH ONTs and ONUs (optical network terminals and units), which are heavily dependent on Verizon’s deployments.
Lower-cost FTTH models will eventually require fewer wireline workers
Verizon claims that its substitute workers have been able to address the majority of repair and customer service commitments, including 91% of incoming calls on August 10. While this appears to be a good backup plan (the supply pool of retirees looking for work will only grow), it is obviously not sustainable for a long period of time. Managers need to get back to managing, not repairing networks. So it would be logical to expect Verizon to back down after a few weeks.
But no matter how this dispute is resolved, consider Verizon’s longer-term plan for its FiOS network. One objective of rolling out a PON on fiber was to reduce maintenance costs – a significant portion of which are labor costs (truck rolls) – associated with the copper network. As more subscribers shift to FiOS, maintenance needs should diminish further.
The bulk of capex spending in the ongoing FiOS rollout has also gone to labor costs for deploying the outside plant and installing connections (which took 8 hours per home during the initial deployment phase in 2006).
Verizon has passed more than 16 out of the 18 million households it promised, suggesting the initial rollout is almost over. While some deployment, connection, and maintenance work will continue, spending intensity will diminish over time as the company reaches plan.
In addition, for the next FiOS upgrade cycle, Verizon will benefit from lower-cost operations models. Options may include advanced management capabilities such as remote provisioning, plug-and-play installation of equipment reducing the need for truck rolls, and outsourcing some functions to equipment vendors. Indeed, for the 14-state territory that Verizon sold to Frontier, equipment vendor Adtran is providing both equipment and turnkey services, including installation. Verizon cannot afford to ignore such cost-saving strategies when applicable; the costs associated with the strike will make these options even more attractive.
Changing wireline business and tough economic conditions don’t favor worker demands. The reasons for the strike include new requirements for union employees to contribute to their healthcare insurance premiums, and the elimination of company pension contributions – benefits that Verizon’s non-union employees do not have. Verizon is hardly alone among US companies in considering such plans in an environment of fast-rising healthcare and retirement costs.
Verizon workers have complained about tough and sometimes dangerous outside plant working conditions and excessive management compensation. Yet the striking workers, with demands for benefits that the general public can only dream about, don’t stir much sympathy. The sabotage incidents reported by Verizon (cut fiber lines, stolen electronic equipment, tampering with a heating system) don’t endear them to customers either.
Verizon’s business is changing. Apart from the cost-reduction factor above, the company is facing continuing landline losses, while its revenues and profits continue to drift to its wireless business. Verizon’s new CEO Lowell McAdam (who came from the non-union wireless business) has taken a tougher stance, and things may be very different in the future.