Verizon's DSL business is slowing drastically as the company focuses on its fiber-to-the-home deployment.

Verizon reported 56,000 net DSL additions in the third quarter, 35% less than the second quarter, which, in turn, was 64% less than the first quarter, resulting in a surprisingly steep drop over the last six months. “We're looking at 20% of what was shipping just two quarters ago,” said Teresa Mastrangelo, principal analyst for Broadbandtrends.com.

Ivan Seidenberg, CEO of Verizon, may have telegraphed the low third-quarter numbers in advance in an effort to lower Wall Street's expectations. When he was asked in September about a seasonal third-quarter DSL boost, he dismissed the notion of DSL seasonality, calling it an excuse used by sales people for poor execution.

With its DSL and fiber growth diverging, Verizon's trends seem to mirror patterns evident in Japan as that country's service providers deployed fiber. Starting in the first half of 2005, net DSL additions began to decline, crossing over into negative territory by the end of 2006 and continuing to drop as DSL surrendered to the popularity of fiber.

Mastrangelo doesn't think Verizon will ever reach negative DSL growth. Instead, she predicts more declines, followed by a plateau (possibly as low as 10,000 or 20,000 net adds per quarter). Declines likely would be stanched by a wave of new pricing promotions aimed at those remaining dial-up users, putting an end to the veritable vacuum of DSL promotion seen in recent months.

“At Verizon, there's so much focus on FiOS that the rest of the network is just being neglected,” Mastrangelo said. “All the marketing and promotional efforts are really focused on what's happening with FiOS.”

Last month the company trumpeted the launch of a new symmetrical 20 Mb/s FiOS service and showcased potential future FiOS applications. Meanwhile, Comcast reported its highest DSL conversion rate ever in the third quarter, with more than 60% of its new broadband customers switching from DSL.

Several factors suggest Verizon won't duplicate the pattern seen in Japan. Fiber is widely available throughout that country, tempting DSL subscribers everywhere to upgrade, while Verizon's fiber will only ever target about half its footprint — and today reaches only about a third of that half — limiting DSL-to-fiber conversion. The number of those conversions Verizon has seen has stayed relatively flat in recent quarters, around 40,000.

In any case, Verizon probably can't afford the kind of negative DSL growth seen in Japan, Mastrangelo said, because FiOS is not growing fast enough to compensate for the loss.

Although net additions of FiOS high-speed service were up 13% sequentially in the third quarter, Verizon's total broadband growth — DSL and FiOS combined — also has been comparatively low lately. “It's been two years since we had net additions this low out of Verizon, and now we see two consecutive quarters of it,” she said. “It's a little troubling.”

Verizon is now adding video customers nearly as fast as it is adding fiber Internet customers — about 16,000 and 18,000 per week, respectively. Meanwhile, AT&T claims to be approaching 10,000 installations a week for its DSL-based IPTV service but reported half a million total new broadband customers in the third quarter, numbers similar to Comcast's and nearly twice as much as Verizon's.

As Denny Strigl, chief operating officer for Verizon, put it last week, “We're rolling out FiOS about as fast as we can at this point.”

VERIZON/JAPANESE FIBER & DSL GROWTH

Source: broadbandtrends.com