from: Wall Street Journal [1]

Verizon’s TV Figures Questioned

October 4, 2007
By Christopher Rhoads

Verizon Communications Inc.’s high-stakes plan to deliver a super-fast fiber-optic connection to millions of its customers has hit a possible snag: a lawsuit charging the company with overstating television subscriber numbers for its new network.

Digital Art Services Inc., an advertising company based in Great River, N.Y., alleged in the suit that Verizon committed fraud by improperly including so-called pending customers in its published number of subscribers in the New York City region to the network, called FiOS. Digital Art Services claimed the allegedly inflated numbers were used to determine advertising rates, causing it to pay more than it should have for advertising on Verizon’s network. Pending customers are those who have signed up for the network but haven’t had service installed yet. Digital Art Services is seeking class-action status for the suit.

“Verizon’s fraud in overstating the number of subscribers indisputably meant that purchasers of advertising time were paying for FiOS subscribers who did not exist,” the complaint said. The lawsuit was filed yesterday afternoon in U.S. District Court for the Southern District of New York.

Eric Rabe, a Verizon spokesman, said “if the assertion is that we overstate our numbers we certainly reject that.” He said, “This is a garden-variety business dispute initiated by a customer who wants to be released from a contract they agreed to.”

Wall Street regularly studies Verizon’s subscriber numbers to determine the progress of FiOS.

As its fixed-line business decreases, Verizon has largely staked its future on the success of the state-of-the-art fiber-optic network. Verizon plans to use FiOS, which connects fiber directly to homes, to better compete with cable companies by offering TV service and ultrafast Internet connections, several tens of times faster than prevailing Internet speeds.

Analysts and investors initially greeted the project with skepticism, concerned about the billions of dollars in costs and the years needed to complete it. During the second quarter the company announced it had signed up its 500,000th television customer on the entire FiOS network. The stock, which suffered because of the concerns over the network, recently hit a 52-week high, traded at $45.24, down 10 cents, in New York Stock Exchange composite trading.

Digital Art’s complaint also alleges the numbers Verizon reports publicly are inflated because they include pending and actual subscribers.

Mr. Rabe said the numbers in Verizon’s quarterly reports are connected customers.

Digital Art Services purchased $916,000 in advertising on the FiOS service in early 2007, relying on subscriber data provided by Verizon to an outside sales agent, Viamedia Inc., which was also named in the suit, according to Ed Szydlik, president of Digital Art Services.

Viamedia’s president, Jeff Carter, said “We don’t engage in that practice” of inflating numbers. He said he hadn’t yet seen the lawsuit.

Digital Art Services, which has about a dozen employees working on a contract basis, provides advertising services primarily for local companies, arranging for advertising time and in some cases designing the ads.

According to the Digital Arts lawsuit, Verizon said it had 115,955 customers in the New York area by the end of the second quarter. But more than 38,000 of those were pending.

The percentage of the total figure made up of pending customers increased to 33% by the end of June from 22% at the beginning of April, according to the complaint. The advertising rates, however, were determined by the total figure, it said.

“My only concern is how many eyeballs are looking at the screen,” said Mr. Szydlik. “If you think you’re getting 100, and you only get 70, there’s an issue there.”

Mr. Szydlik said he was told by Viamedia that pending customers get connected within two to four weeks, so the discrepancy shouldn’t matter. He said he discovered that many customers weren’t getting connected for months or longer. Verizon’s Mr. Rabe said new FiOS customers typically get connected within a couple of weeks.