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Verizon Communications Inc.'s Best Segment in 2015

By Daniel B. Kline - Jan 2, 2016 at 5:24PM

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The company grew in an area where most of its competitors shrank.

Nothing can stop Verizon (VZ -1.06%). At least, that's how it appears. The company has three main business segments: wireless, broadband, and pay television. All three faced significant challenges in 2015, and while broadband didn't grow as fast as some rivals, pay TV and wireless weathered the storm surprisingly well.

Still, while it's impressive that Verizon maintained its wireless market share in the face of increased pricing pressure from T-Mobile (TMUS -0.28%) and Sprint (S), that area of the business did not perform as well as the company's FIOS pay television service. Both segments were successful, but in wireless, the company merely leveraged its network -- which outranks its lower-cost rivals -- to get people to stay on board. That's easier ground to defend than keeping people shelling out big bucks for FIOS when dropping it would save them much more than switching to T-Mobile or Sprint would on the wireless side.

In some ways, FIOS Pay TV service was Verizon's best business segment in 2015 simply because it gained users at a time when the alternative (dropping cable altogether or opting for digital streaming services only) were so much cheaper.

Verizon stock was roughly flat for 2015 despite the company's solid results. Image source: YCharts.com.

A bit about cord-cutting
While the media has been predicting that consumers would abandon traditional pay television in favor of cutting the cord to replace it with cheaper streaming services, that simply has not happened. Instead, cord-cutting has been a slow trickle, with the industry losing about 125,000 customers in 2014, adding 10,000 in Q1 2015, reverting to a 470,000-subscriber loss in Q2, and dropping another 190,000 in Q3, according to research from Leichtman Research Group (LRG).

Cord-cutting is a looming threat for the entire pay television industry. It simply makes sense that people will want to spend less money when streaming services give them access to most top programs for less money. But, so far, it's more a trickle than a flood, and while many analysts expect the pace to pick up, the past two years have not shown that traditional providers should be overly concerned.

Verizon did better than most
While cable as a whole lost subscribers through the first three quarters of 2015, Verizon bucked that trend. FIOS actually gained 57,000 paying customers in Q1, 26,000 in Q2, and another 42,000 in Q3, according to LRG.

The Q3 number might be the most impressive because the closest comparable product, AT&T's (T -1.61%) U-Verse, lost 91,000 customers during that period. Of course, there are some extenuating circumstances that explain why the segment underperformed for AT&T.

"With AT&T adjusting focus from its U-verse TV service to its newly acquired DirecTV satellite service, Telcos reported their worst quarter ever in 3Q 2015," said LRG President Bruce Leichtman in a press release.

That worst quarter ever was all AT&T. Verizon gained customers in a quarter when nearly all the major cable providers lost users.

Why did Verizon do better?
It's hard to know exactly why Verizon added pay-TV customers at a time the industry is shrinking, but part of the reason might be that the company has been more flexible than some of its rivals in its packages. CFO Fran Shammo explained during the Q3 earnings call. "We continue to see interest in our Custom TV offering, which offers more choice and control at a lower price point," he said. "We expect the continued adoption of Custom TV will pressure revenue growth, but result in a higher contribution margin."

Other cable customers are dabbling in offering lower-end, cheaper packages, but Verizon is further along than the big cable companies in doing so. AT&T does not have a comparable widely available slim package.

The future is tenuous
Verizon deserves credit for holding its own in the pay television space in 2015, but there is reason to believe cord-cutting could increase in 2016. Younger users are less tied to cable and more comfortable with streaming options than their parents in a very broad sense.

Ultimately, that should lead to a slow but important change in the television business. But, when (or if) that happens, Verizon looks to be well-positioned to hold on to more of its customers than its rivals.

Daniel Kline has no position in any stocks mentioned. He is unhappy that it's finally snowing in New England. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$44.48 (-1.06%) $0.47
Sprint Corporation Stock Quote
Sprint Corporation
S
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.05 (-1.61%) $0.29
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$144.16 (-0.28%) $0.40

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