More than a third of Verizon’s 26,000 new FiOS video customers in Q2 opted for one of the new Custom TV lower-priced so-called “skinny bundles” —  which require subscribers to pay extra for some mainstay channels, most notably ESPN — the phone giant says this morning.

That’s more than Verizon expected even though Custom TV ads were “blacked out from many content providers,” CFO Fran Shammo told analysts in a conference call. In New York City and Philadelphia “we were unable to advertise the Custom TV package for 45 days.”

But some customers downscaled from the full pay TV bundle. And Custom TV subscribers took fewer channels than Verizon anticipated.

That “may have a negative impact on revenue growth,” Shammo says, although he adds that  FiOS likely will see higher profit margins from the reduction in outlays for programming.

The CFO wouldn’t comment about the suit from Disney’s ESPN, which says that its contract with Verizon precludes it from leaving the sports channel out of the most popular basic TV bundle. “We believe we’re in our contractual rights to offer what we’re offering,” Shammo says — although he adds that his company will “continue to work through that disagreement” with Disney.

Investors are watching Custom TV and other video initiatives to see how Verizon will counter its top rival, AT&T, which is waiting for federal approval for its deal to buy DirecTV.

FiOS ended Q2 with 5.8M video subscribers, up 26,000. That was way below analysts’ consensus expectation for 89,000. Shammo says that when Comcast scrapped its planned acquisition of Time Warner Cable, both companies “came back into the market pretty competitively.”

 

He added little to the public record about Verizon’s planned millennial-focused streaming video service. There’ll be “an initial launch” in late summer. It will “continue to grow over the next year.”

What will it offer? That’s still unclear. It will be “very different from what anyone else is bringing to the marketplace,” Shammo says. Verizon has been talking with major TV broadcasters and cable providers. For now, though, it seems that most of the videos will come from the Web: AOL, which Verizon just acquired, will be a big contributor, as will DreamWorks Animation’s AwesomenessTV.

Shammo says that “we have a very good lineup: news clips, sports and events.”

Verizon shares are down 2.5% in mid-day trading after the Q2 report showing net income of $4.2 billion, up 0.7% vs the period last year, on revenues of $32.2 billion, up 2.4%. The revenue number fell slightly short of the consensus forecast for $32.5 billion. Adjusted earnings at $1.04 a share beat forecasts for $1.01.

“It’s surprising to us to see the market rewarding AT&T’s defensive DirecTV protect-the-status-quo story more richly than Verizon’s bet-on-tomorrow strategy,” MoffettNathanson Research’s Craig Moffett says. While nobody knows whether Verizon’s streaming service will succeed “the wireless business is still the wireless business [and] over the next few years, we suspect that Verizon’s will prove to be the wiser approach.”