Verizon Earnings Edge Higher -- 3rd Update

By Ryan Knutson And Chelsey Dulaney 

Verizon Communications Inc. is feeling the bruises of a fight it picked with content companies.

Growth in subscribers for its FiOS video service fell 74% in the second quarter from a year ago while it added only half as many new customers for its FiOS Internet service. The growth rate was the slowest in six years, according to research firm MoffettNathanson LLC.

At the same time, Verizon cut its full-year revenue forecast as the carrier is slashing prices amid growing competition for mainstream wireless subscribers. Shares of Verizon fell more than 2% in recent trading.

The slowdown for its FiOS services comes after Verizon launched so-called skinny bundles that provide fewer TV channels and allow customers to purchase select content packages of particular content categories like sports, kids or pop culture, instead of buying hundreds of channels in bulk.

The new service drew anger from content companies. ESPN sued Verizon for allegedly breaching their contract, a claim that Verizon is disputing. And Verizon said advertisements for the new service, called Custom TV, were blocked in big markets like New York and Philadelphia for 45 days, which crimped its ability to sign up customers.

"Given the disputes that we had in Custom TV, we also were blacked out for many content providers in advertising this product," Verizon Chief Financial Officer Fran Shammo said during a call with analysts. "It took us out of market."

Also an aggressive customer-acquisition campaign from Comcast Corp. and Time Warner Cable Inc. following their failed merger earlier this year also hit growth, according to Mr. Shammo.

Mr. Shammo said interest in Verizon's skinny bundles exceeded the company's expectations with one-third of gross customer additions choosing the skinny bundle, and some existing customers migrated to it as well. Verizon added net 26,000 FiOS video subscribers in the three months ended June 30, and a net 72,000 subscribers to FiOS Internet service.

Meanwhile, Verizon added 1.1 million new postpaid wireless subscribers, or 21% fewer than it did a year ago. Verizon again leaned heavily on tablets for growth in the latest quarter, continuing a recent trend for the industry. The company said it added a net 852,000 tablets and a net 321,000 of the more lucrative handset customers.

Postpaid churn, or the rate at which customers canceled service, edged down to 0.9% from 0.94% a year earlier. Verizon said it was its lowest churn rate in three years.

Verizon, the first big telecom company to report its earnings for the quarter, has faced tougher competition as rivals like T-Mobile US Inc. and Sprint Corp. have offered generous deals and paid subscribers to switch.

Overall, Verizon's net income edged slightly higher to $4.23 billion from $4.21 billion a year earlier. Revenue grew 2.4% to $32.2 billion.

Write to Ryan Knutson at [e-mail] and Chelsey Dulaney at [e-mail]

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