The decelerating sub growth of FiOS video service, coupled with rising programming costs, will present issues of scale for Verizon (NYSE: VZ) if things don't turn around, according to Jefferies analyst Mike McCormack.
"Given the pressures related to content costs, and the meaningful network investment for video delivery, we question whether FiOS video becomes a margin headwind as scale diminishes," he said to investors in note released Thursday morning.
"While we doubt the content rate card changes with the recently closed Frontier transaction, there is still a loss of 1.2 million FiOS video subscribers, further driving sub-scale economics, in our view."
FiOS sub growth on the video end slowed to an addition of 178,000 subscribers in 2015, down from growth of 387,000 in 2014. But Verizon also lost 1.2 million FiOS pay-TV customers in the sale of wireline assets to Frontier Communications.
Further, Verizon's push into multi-dwelling unit residences has generated a lot of growth on the broadband end, but not so much in terms of video.
Meanwhile, pondering a range of issues, McCormack also wondered if Verizon might exercise more collaboration between FiOS video and the company's mobile video platform, Go90. The analyst bases his thoughts on the belief that younger consumers like traditional long-form TV programming, they just don't typically pay for it.
"Armed with the view that the younger demo is still very interested in an abundance of traditional content, we see a clear benefit from leveraging FiOS content in a combination with short form content aggregated by the AOL team," McCormack said.
"We believe the generation targeted by Go90 is more enamored with form factor (no set-top/grid guide), with a clear preference for portable/mobile devices, as opposed to recreating the content into short form while doing away with the most popular traditional content," he added. "Of course it likely is becoming more problematic to be paid directly by a demographic conditioned to find/take shared/stolen content, though we suspect an advertising-driven model could also prove troublesome. We believe Verizon should be seeking an OTT platform that marries traditional."
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