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Verizon Touts Cable MVNOs, Yahoo Deal

Verizon Communications added about 36,000 Fios TV customers in the third quarter, reversing a loss of 41,000 video customers in Q2 spurred by a six-week strike over the summer, while it tried to calm  investors worried about its wireless resale agreements with cable operators and its pending $4 billion purchase of Internet icon Yahoo.

The Fios TV growth was expected – analysts’ consensus estimates were for 28,000 additions. The telecom company also added about 90,000 Fios Internet subscribers in the third quarter, outpacing analysts’ expectations of 62,000 additions.

Verizon chief financial officer Fran Shammo, who announced his intention to retire at the end of the year, fielded questions from analysts about its wireless Mobile Virtual Network Operator (MVNO) agreements with Comcast and Charter. Comcast said it activated its MVNO deal last October and plans to have a wireless product by the middle of next year. Charter Communications, which had Verizon MVNO rights via its purchase of Time Warner Cable in May, said it too has activated those rights.

The MVNO deal are the result of the 2011 sale of wireless spectrum by SpectrumCo (which included Comcast, Time Warner Cable and Bright House Networks).

An MVNO would allow Comcast and Charter to basically resell Verizon’s wireless service under their own brand. It would also allow them to utilize the Verizon wireless infrastructure for a hybrid cellular-WiFi offering.

In a research report just prior to Verizon’s release of Q3 results Thursday, MoffettNathanson principal and senior analyst Craig Moffett wondered if the MVNO deal gave an advantage to the cable operators, by allowing them to offer a similar quality service at a reasonable price.

Moffett continued that it is more likely that the MVNO deal could lead to a later alliance between cable and Verizon.

“Wouldn’t the simplest reading instead be that the MVNO agreement speaks to building bridges, not moats?” Moffett wrote.       

An alliance could have obvious advantages – Verizon could profit from cable’s imbedded wireline infrastructure and the cable companies could benefit from Verizon’s best in class wireless service.

Shammo, in what is likely to be his last quarterly earnings call at Verizon, said its eyes were open when it did the deal severbal years ago.  

“This is a wholesale agreement, and as Lowell [McAdam, CEO] and I have repeatedly said we would do the agreement again today if we had to. It’s a good agreement for V W— it’s a wholesale agreement,” Shammo said. “I can’t speak to the economics of what they’re going to do. The wireless pie continues to grow, everyone wants to get a piece of this pie, [and] the industry itself will continue to grow around that pie. It’s not like I believe the industry with the carriers will lose share to anyone. I just think there’s going to be more opportunity for growth.”     

While the wireless pie gets bigger, analysts and investors are wondering whether the purchase price of Yahoo may shrink. Verizon agreed to buy the Internet search icon in July for $4.8 billion, but that was before Yahoo revealed it had been the target of a massive data breach. In September, Yahoo said more than 500 million accounts had been hacked, including customer addresses and passwords. The scope and cost of the breach is still to be determined, but some have speculated it could result in Verizon shaving as much as $1 billion from the purchase price.

Shammo reiterated Verizon’s earlier statement that it believed the breach could be a material event, but said the companies’ lawyers were just starting to look into it.

“We are still evaluating what it means for this transaction. This was an extremely large breach that has received a lot of attention from a lot of different people. We have to assume it will have a material impact on Yahoo,” Shammo said, adding that lawyers had their first call about the matter Oct. 19.

“From what I understand, that's going to be a long process," Shammo continued. “Unless Yahoo comes up with different processes, it’s going to take some time to evaluate this. Until then, we haven’ t reached any final conclusions around this issue.”