The following articles provide a good overview of AT&T’s Domain 2.0 efforts. Please note that these efforts will be updated periodically to reflect major partner updates:
- The original Domain 2.0 whitepaper from November 2013 is here.
- The following recent announcements are linked here:
- Discovered after the TSB was written was the Chris Rice blog post posted on the AT&T Technology blog (Aug 21). It is appropriately titled “Setting the Record Straight on Our Cloud Strategy.” That is here – definitely worth reading.
- RCR Wireless interviews with Dr. Margaret Chiosi on NFV and workforce impact. Part 1 is here and Part 2 is here.
- Good overview article from Fierce Wireless called “Why AT&T, Verizon, Ericsson and the rest of the industry is embracing SDN and NFV” is here.
- While lengthy, one of John Donovan’s greatest defenses of Domain 2.0 in 2014 is here, complete with some very direct language in the Q&A (starts around minute 25). We wish John the best in his retirement.
Greetings from Lake Norman/ Davidson, North Carolina where everybody is working (including the neighbor kid, Caleb, pictured with the Editor and yours truly). This week, we’ll look at two studies that examine data usage, and try to deftly explain AT&T’s efforts to improve their cost structure and competitive cloud position. But first, a follow up from last week’s column.
Follow-up Idea to the Apple Card TSB
I did not anticipate the overwhelming response the Apple Card TSB would receive (Craig Moffett did a mid-week post on the concept and CNBC picked it up here). I have had about a dozen in-depth conversations on the Apple Card TSB this week with several of you and I think we have come up with the ideal suggestion for Apple: 2x Daily Cash towards your monthly phone payment. So, if you get 2% back from using Apple Pay (say $2 on a $100 grocery purchase), that would become $4 towards your monthly phone installment. There could also be an incentive to pay the phone installment first or sooner.
This promotion would reward existing Apple users with a new phone just from using Apple Pay (or buying other products from the Apple family, or just using the physical card), and would be a way for existing Android users to make the switch to Apple for a discount (or to lessen the blow of being underwater from a low trade-in value). The opportunity to “earn” your way to a free iPhone increases Apple Pay (or card) usage, which increases value, etc. And, customers would have the ability to worry less because their phone is never locked to a wireless carrier. Not that the marketing department at Apple needs any help, but if this ends up being the incentive, you heard about it first in TSB.
There’s a Deeper post on the Apple Card that might be very useful for those tracking the topic closely. Thanks for all of the ideas and please keep them coming.
Two “A Ha” Reports This Week Generate Minimal New Insights
Meanwhile, we had two “a ha” reports come out this week. The first was a supposed “scoop” from the Wall Street Journal that customers were being duped by their internet service provider (AT&T, Comcast, Time Warner Cable, others) into paying more for higher throughput speeds and receiving nothing in return. This was not a passing consumer interest story, but had substantial article placement, a video, and even a podcast to support it. (Both the video and the podcast take more time to analyze the complete array of things that could contribute to slower speeds in the home, such as interference or neighborhood congestion, and, inadvertently, make a very strong yet indirect case for paid prioritization).
At TSB, we seek first to understand, but at the end of the day, it’s very difficult for us to have as much excitement as the Wall Street Journal did about possible overpayment for the following reasons:
- The consequences of paying too much for home broadband are not substantial. Analyzing whether customers are over-insured on their home or auto insurance is likely to have 10x more impact than the $10-20/ month being paid for a premium tier. Consumers should spend their time wisely.
- Pursuing an alternative to your current speed (buying a premium tier) usually carries no contract and can be immediately evaluated. Most ISPs do not have a change fee.
- The sample size used in the article is not large enough to make a national conclusion (34 multi-streaming tests with a majority made in New York City is good to know, but not conclusive that Charlotte or Phoenix or Tampa customers will have the same experience).
Bottom line: There’s nothing wrong with 1Gbps speed even if you don’t need it. There’s also nothing wrong with buying the nearby Dodge Challenger SRT Demon (840 hp – don’t we all need one?) if you can afford that. Faster Internet speeds from your ISP could help, and so could a new Access Point or Cable Modem.
The second study that came out this week deserves more attention because of its sample size and implications to the industry. The University of Massachusetts and Northeastern University used a mobile app called Wehe to track the Internet usage patterns of 126,249 mobile users over several months (over 1 million samples). The summary (which is not surprising to most cellular users) is that average speeds for popular sites such as YouTube and Netflix are slower than expected. Here’s a summary chart of the findings for AT&T and Verizon (June 11, 2018 is the day that Net Neutrality rules were made optional) :
What this shows for Verizon is precisely what we discussed in last week’s TSB: 480p customers get consistent YouTube data throughputs at 1.9 Mbps, and 720p customers receive YouTube data throughputs at 4.0 Mbps. This is consistent with their advertised plans (why NBC Sports and Vimeo are not included in the throttle was probably the topic of several Verizon Wireless staff meetings this week). I am sure if they were to upgrade a device to 1080p throughout, they would have a third tier that shows around 8-9 Mbps. For the record, AT&T has disputed the findings and CTIA in 2018 issued a statement disputing the findings.
Bottom line: If you want video resolution that matches the maximum capabilities of your smartphone, you might have to pay more. To last week’s comment, this could be a differentiation point for one of the challenger carriers (e.g., T-Mobile resuming their un-carrier ways and making 720p or 1080p the new “basic” video viewing tier).
AT&T’s Herculean Lift
Condensing AT&T’s Network and Business strategies into one TSB is a challenge because of the breadth of problems they are attempting to solve. Unlike the AT&T of the 1990s (more focused on communications innovations like the Internet and mobile), this generation’s AT&T is much deeper and comprehensive (focusing on information delivery, relevance, timeliness, analysis, and action).
It’s important to remember that AT&T as we know it today is really a 12+ year-old company. BellSouth was formally acquired at the end of 2006 and with that came the formation of “The new at&t”, replacing Cingular Communications. That was followed by a substantial network integration project which ended in 2009. While we think about AT&T as a legacy brand, the common platform that we see today is only a decade old.
Since 2009, it’s been a wild ride for wireless:
- 4G LTE services have been introduced and run their product life cycle (with network traffic growing 40-60X over the decade)
- Smartphones and tablets have become the primary source for information retrieval and entertainment
- Many-to-many communication has become a global standard thanks to social networks
- Commerce and mobility are inextricably linked
- Wireless Machine-2-Machine (screenless) devices have produced an enormous amount of data and dramatically improved utility and productivity
As we discussed in a TSB a few weeks back, mobile growth contributed to fiber infrastructure growth. More towers and small cells spawned additional conduits, trenches, and pole attachments. All of this data needed to be stored and processed, and server farms led to cloud computing sites and eventually hyperscale data centers. The infrastructure and mobile landscapes changed dramatically with LTE network demand.
What didn’t change as quickly were the network operating systems and business processes that determined the efficiency and profitability of AT&T. Integration was the exception rather than the rule, data needed to solve customer problems was available to some departments and not to others and obtaining merger synergies by negotiating better rates with the same menagerie of vendors (often with extended terms) made breakthrough change harder to achieve. Growth was hindered by incompatible product roadmaps and the quantity of equipment required to accommodate data growth was becoming untenable. Something had to give.
In 2013, AT&T began the painstaking process of separating computer processing from separate software development/ integrations for each of its network vendors with the introduction of Domain 2.0 (see whitepaper here). The picture below from the whitepaper summarizes AT&T’s direction and provides a good roadmap for their recent Microsoft, IBM, and Dell announcements:
Routers (Cisco and Juniper being AT&T’s main providers) and optical infrastructure (Ciena and Cisco) were the first focal points of Domain 2.0, and it manifested itself in the creation of a mobile packet core. Key Domain 2.0 vendors as of the end of 2015 were Cisco (via their Tail-F Systems purchase), Ericsson, Nokia (with Alcatel/ Lucent), MetaSwitch (private UK-based company), Affirmed Networks (Evolved Packet Core or EPC), Amdocs, Juniper, Fujitsu, Brocade, and Ciena. There will be others as this new platform makes it much easier to attract new entrants.
Being able to separate operational instructions (core optical equipment and routing functions – the “do this/ do that”) from monitoring, alerting, and change management functions, and then standardizing the structure of the latter across the vendors mentioned above is no small task. All of that had to be done (or at least close enough to completion) to have the Microsoft/ IBM and Dell announcements. Here’s a brief summary of what each does:
The IBM agreement takes the AT&T Business’ internal application infrastructure and moves it to the IBM cloud (this will be a consolidation from multiple providers). As a reminder, IBM’s acquisition of Red Hat allows it to service hybrid cloud configurations. Much of the NFV Infrastructure Cloud will move to IBM. In turn, IBM runs a very large cloud business for third-party customers (top part of the diagram). This moves the network closer to IBM’s (particularly AI or Artificial Intelligence) software.
It makes a lot of sense moving internal application infrastructure to IBM given the strong network relationship the two companies have had for two decades.
The Microsoft agreement takes non-network infrastructure applications and moves them to the cloud. Microsoft is another very large cloud provider but also the developer of Windows, Bing, Office 365, Skype, and Xbox software (Microsoft’s IPTV platform, Mediaroom, was sold to Ericsson in 2013). It gives Microsoft an easy path to both Mobile Edge Computing (MEC) and low latency network APIs. Unlike the IBM agreement (which appears to have a heavy AT&T Business focus), the Microsoft agreement appears to be more open-ended. Xbox wins in a 5G world that’s also tied to AT&T Fiber homes. So does Skype on mobile, desktop, and tablet applications. More video and less latency demand a different way of thinking about network management. Microsoft will help push the product envelope in the home and in the workplace.
The Dell agreement brings the Austin-based company into Airship (an organization governed by the OpenStack Foundation), described as “a collection of loosely coupled, but interoperable, open source tools that declaratively automate cloud provisioning and life-cycle management utilizing containers as the unit of software delivery.” AT&T needs more network edge capacity flexibility and is engaging Dell to help them (via Airship) improve network server delivery. More details on the agreement can be found in this Fierce Telecom article.
Bottom Line: AT&T’s July and early August announcements show their early hand cloud and edge technology partners. They have been at the leading edge of Network Function Virtualization (NFV) and Software Defined Networking (SDN), and are finally bringing together all of their infrastructure platforms into a common architecture. This is the most efficient (really the only) way to enable rapid, profitable local growth. It will be interesting to see how other carriers (specifically Verizon) follow AT&T’s lead.
Next week, per many requests, we will be discussing the role of Citizens Band Radio Services (CBRS) in the communications landscape. Please note that next week’s TSB may not be delivered until Sunday evening due to the Labor Day holiday.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a terrific week!
The following articles provide a good overview of the Apple Card and the possible role it could play in the disintermediation of traditional wireless carrier phone payments. Please note: This is an emerging trend and not a “done deal” and it’s likely that this thread will be updated several times in the next few months. Look for more when Apple launches their next generation of iPhones, likely in September:
- The Consumer Financial Protection Bureau’s (CFPB) report on the state of the consumer credit market is discussed in this week’s TSB. Very useful information, although it’s a bit dated (2016). Link to full report is in the article and also here.
- Link to the actual announcement of the Apple Card last March is here. Apple Pay/ Apple Card discussion starts at 23:59.
- CNBC article from August 9 describing the fact that Apple was offering the Apple Card to as many current Apple users as possible. Goldman Sachs is applying many learnings from their Marcus (consumer banking) product to make the Apple Card as broad as possible.
- Ken Segall’s blog post “The Ghost of Apple Card Past” that is referenced in TSB is here.
- Bloomberg article that explores Apple Card’s Terms and Conditions and reports that Apple may have additional financing options in mind with this product.
- Wall Street Journal review of the Apple Card (detailed and thorough). A subscription may be required.
- To get an idea of where Apple Card could go, have a look at the current My Best Buy financing options. Remember – Best Buy is not a manufacturer – Apple should be able to provide even better offers.
- Mastercard CEO Craig Vosburg CNBC interview on the Apple/ Goldman Sachs/ Mastercard relationship is here.
- CNBC article quoting yours truly as well as Craig Moffett on the impact the card could have on the carrier community is here.
Greetings from Davidson, North Carolina, home of Davidson College Athletic Department Fan Fest 2019. This picture pretty much captures it all – fellowship, family, food trucks, and fall sports.
Before going into this week’s topic, a quick note of congratulations to interim CEO Robert (“Bob”) Guth on the announcement to sell Continuum Communications to TDS Broadband for $80 million. While the transaction is still subject to voter approval in November, the removal of a large debt burden from the towns of Mooresville and Davidson is significant. It’s also a terrific deal for TDS who also owns Baja Broadband (Utah) and Bend Broadband (Oregon). Based on the Wikipedia summary here, it’s also the first property purchased in North Carolina since they left the state in 2015. Welcome back to the Tar Heel state, TDS, and kudos again to my good friend Bob for his diligence and perseverance throughout the sale process.
In other news, local Davidson start-up Lucid Drone Technologies will be participating in the Y Combinator Summer Pitch Competition as a finalist on Monday. Andrew Ashur, David Danielson, and Adrian Mayans have built quite a company over the past year, and, as an investor and advisor to Lucid, I am pleased with the initial product adoption and their overall business model. TechCrunch should be covering the company in an upcoming article. Best wishes to the team as they pitch to thousands on Monday.
The Apple Card – A Wolf in (Titanium) Sheep’s Clothing?
In May, Tim Cook described the Apple Card (which is backed by Goldman Sachs and MasterCard) as “the most significant change in the credit card experience in 50 years.” At first blush, however, the card’s benefits (Titanium physical card, great category spending notifications, GPS/ map coordinates for every purchase made, interest cost implications of not paying the full balance every month, etc.) appear to be more visually appealing than anything else. A beautiful user interface is the expected result for any Apple product. The question now becomes “How will it change the trajectory of Apple’s sales and increase market share?”
Without a doubt, increased Apple Card users will reduce any churn to Android. In a remarkable return to Apple’s hardware/ software verticalization, new Card users cannot pay their bill from the Web, only through their Apple Wallet application (or through a Goldman Sachs customer care representative if their phone is stolen). Note: Apple Wallet is only found on devices that run iOS. From the latest Consumer Finance Protection Board study (using 2016 data), about 40% of the general purpose credit card-using population (Visa, AMEX, MC, etc., as opposed to private label Macy’s or Kohl’s retail card) carries a balance every month (see nearby chart). This figure rises to 60% if the highest quality credits are excluded. Because of the iOS payments restriction, an Apple Card user with revolving card tendencies will need to remain an Apple customer until the last payment.
Interestingly enough, last week’s teaser story from CNBC on the Apple Credit card described Apple’s push into lower FICO scores (and appropriately smaller credit limits). This would reinforce the idea that card usage (% of total cardholders using the card every month) to engender brand loyalty is an important objective of the Apple Card.
Will current Apple customers sign up for a no annual fee, low interest rate card? If brand loyalty is any indicator, the answer is yes. In Forbes recent ranking of the world’s most valuable brands (November 2018), Apple was #1 by a landslide ($206 billion vs. $168 billion for #2 Google). Now-Apple-competitors Visa and American Express were ranked #25 and #27 respectively ($27 and $26 billion in value, respectively). AT&T is ranked #11 and Verizon #19, but the value of both brands combined is about one third as valuable as the Cupertino king. Visa, American Express, MasterCard, Wells Fargo and HSBC are all ranked in the top 50 Global Brands, but their combined brand value is half of Apple’s.
What would entice Apple customers to use this card before others? This is where things get very interesting. As noted in a blog post in May by Ken Segall (one of the key contributors after Steve Jobs’ return to Apple in the late 1990’s, including the brain child behind the “Think Different” campaign), Apple was very close to launching a credit card in 2004 which would reward customers with free music and other amenities. Here are a few ad copies he posted:
Apple has been mum on how they would use the Apple Card to attract new purchases (e.g., would they use this to drive higher levels of Apple Cloud vs. iTunes vs. Apple TV content), but recent reporting from Bloomberg indicates that their focus may not solely be on low-dollar items.
In their study of the Apple Card terms and conditions, they discovered that Apple is considering the option of financing larger purchases over longer periods of time at favorable interest rates (the specific language in the Customer Agreement reads: “We may from time to time offer you different APRs and different terms that will apply to specified Purchase Transactions or other balances on your Account. Details will be provided at the time that these terms are offered to you.”)
This sounds innocuous enough, until it’s coupled with Apple’s current (February 2019) activity with Ant Financial in China, where they are offering 0% a.p.r for up to 24 months to qualified customers (more on that in this Reuters article). According to Reuters, “Users buying products worth a minimum of 4,000 yuan worth from Apple would qualify for interest-free financing that can be paid over three, six, nine, 12 or 24 months.” (4,000 yuan is ~$575). Bottom line: Apple could be contemplating using the Apple Card as an alternative to traditional carrier-based device financing.
Here’s one possible timeline/ outcomes scenario :
- Apple announces their new series of iPhone devices in September 2019. Like the iPhone XR, XS, and XS Max, the new devices are multi-carrier (note: it’s likely to be announced iPhones will not have millimeter Wave radios included). It is also highly likely that new iPhone devices will include eSIM technology which greatly eases switching between carriers.
- As a part of the announcement, they offer an additional monthly payment incentive to existing iPhone customers who upgrade their iPhone using the Apple Card (this would be classified as a specified Purchase Transaction described in the Customer Agreement above)
- Monthly installment payments are now made to Apple, not to AT&T, Verizon, or T-Mobile
- Service on iPhones will be handled through existing Apple and Best Buy stores (see recent announcement here). Reminder: 70% of the US population lives within 15 miles of a Best Buy store.
- In order to compete with Apple’s new financing offer, the carriers will have to increase their trade-in and port-in incentives. Cost Per Gross Add (CPGA) rises – more Buy One Get One (BOGO) offers.
- If they choose not to counter this offer, millions of new and upgrading no-contract customers will now have no monthly equipment installment payment tie to Verizon. Churn rises.
The adoption rate depends on the incentive described in point 2. Here’s a few ways Apple could make the offer attractive and still maintain strong relationships with their strongest distribution channel:
- Discounted or deferred payments. Promotion would be “Trade in an Apple 8 or greater model, finance through the Apple Card, and get up to a year of payments on us.” Assuming a 64GB Apple 8 in good condition is worth $300 today, and that the new Apple XR variant costs $799 ($33.29/ mo. for 24 months), this might be worth several hundred thousand upgrades. As is seen on other term-based installment plans, Goldman Sachs makes money if the device is not paid in full by the end of the term. Impact to carriers would be minimal as they could easily counter with BOGO or increased trade-in value offers of their own.
- Increased trade-in value on upgraded devices. Using the above example, if the trade-in value were increased to $450, the new monthly payment would be $14.54/ month for 24 months. Apple would take a lower margin on each new iPhone sold, but would presumably make additional money through the card and app store as well as increasing loyalty. This would drive up CPGA for the carriers if they decided to match the offer.
- Sacrifice higher margin features for increased iPhone upgrades. Promotion would be “Buy a new iPhone using the Apple Card and receive 2 TB (Terabytes) of Apple Cloud OR Apple Care on us for as long as you own the device.” This is currently a $9.99/ month product (Apple Care plan would exclude loss/theft option) but both are high margin products. Apple does not publish their Apple Cloud product stratifications, but the incremental cost between 200GB and 2TB is pennies per month. Carriers would not be happy with this one as they make very good profits from providing device protection. But providing cloud storage would be a lot more attractive than the next option.
- Increased device storage. Promotion would be “Buy a new iPhone using the Apple Card and receive the 512GB version for no additional charge.” The retail difference between the cost of the iPhone XS 64GB and 512GB versions is $400 (the cost to provide the extra Gigabytes is less than $40). There are lot of puts and takes to this promotion, but for Apple, it would greatly increase the use of premium apps like Apple Music which provide the ability to download favorites for offline viewing/listening. This would (gradually) increase the use of offline content for videos which would reduce streaming data tonnage. Long-term, this could be bad for the carriers (but it would instantly increase the use of the Apple Card for equipment installment purchases).
There are many other angles that Apple might consider (e.g., cross-promotion with the Apple Watch, iPad, Mac and other products), but there’s no doubt that the Apple Card is a wolf in (titanium) sheep’s clothing to the carrier community. To prevent a competitive free-for-all, the carriers need to rethink their pricing strategies (including 24 and even 36-month service plan contract discounts).
As a reminder, we will be posting a Deeper blog on Tuesday which will include a bibliography of all of the articles discussed in TSB and a few that we did not have time to consider. If you would like a copy of either the Top 10 Trends (the Apple Card introduction was one of them) or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll send as soon as possible.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and will include them on the list.
Have a terrific week!
The following articles provide a good overview of the role fiber plays in the telecommunications ecosystem today (there’s some good details on Google Kansas City and Louisville setbacks as well):
- An RCR Wireless article that details Verizon’s “integrated engineering process.” It also has some details on the fiber deal with Corning.
- Corning (Bob Whitman) and Verizon (Glenn Wellbrock) conversations from YouTube part 1 and part 2.
- Altice press release announcing first homes on Long Island to receive 960 Mbps symmetrical speeds for $80/ month.
- Google missing their deployment goals for Kansas City, KS and Mission Hills, KS
- Telecompetitor AT&T Fiber penetration article in which they talk about doubling market share. The map see in the article (AT&T Fiber cities) is here.
- Cincinnati Bell 2Q investor penetration showing that AT&T’s goal of achieving 50% market share is entirely possible with the right content bundles (they are at 44% without the content – see page 7).
- Blair Levin’s and Larry Downs Harvard Business Review article on Why Google Fiber failed and how it’s really a success in disguise. Rationalization gone awry. This might have been the case if their more recent deployments had not damaged their brand.
- Local (Louisville Courier-Journal) coverage of Google’s decision to pull out of the Louisville market is here.
- Google’s plans to expand their Webpass (60 GHz wireless hub and spoke) service for Multi-Dwelling Units Austin is outlined here.
- The Dallas Morning News rant on Frontier’s failures is a classic and outlined here.
Greetings from Davidson, North Carolina, where the hazy days of summer will soon give way to the bustle of orientation. There’s plenty to cover in this week’s TSB, and our main topic will be on the importance of fiber in the telecom industry. But first, a brief comment on Verizon’s wireless pricing changes.
Before diving into commentary, a quick reminder that we will be posting a “Deeper” section for each TSB on the website. Here is the Deeper section from last week’s TSB (State AG’s case against the T-Mobile/ Sprint merger). We usually post these by Tuesday evening.
Verizon’s Bouquet of Plans – Something for Everyone?
When Verizon announced their pricing plan changes on Friday, August 2, the collective response was “Why?”
A deeper inspection of each change explains Verizon’s strategy. They are continuing to lead with a plan that includes no fixed allotment of high-speed data (the Go Unlimited legacy plan was changed as well to “Day 1” deprioritized data). Verizon also put a stake in the ground: the minimum rate for any individual 5G plan (or first line in a multi-line scenario) is $80/month. Why one would purchase a Start Unlimited plan for $80, and forego a fixed allotment of high-speed data (and Hotspot capabilities) offered by the Do More Unlimited (50GB, 15GB can be Hotspot) or Play More Unlimited (25GB) is a head-scratcher. Bottom line: the 5G pricing tier starts at $80/month with no 4G LTE premium data allotment.
The other interesting development (outside of the $5/ line/ month across the board price decrease) is the continuation of 720p HD video streaming on Verizon’s best plan. Customers can get 1080p 4G LTE streaming for an additional $10/ month (total cost of $100/ month with taxes & fees versus T-Mobile’s 1080p Magenta Plus plan which includes 50GB of premium data as well as taxes and fees for $85/ month or AT&T’s 1080p Unlimited & More Premium plan which includes 1080p but only has 22 GB of premium data allotment for $80/ month). It baffles me that Verizon sells devices with amazing screen solutions like the Samsung Galaxy Note 10 (3040 x 1440 pixel screen – Quad HD+) and the Apple iPhone XS Max (2688 x 1242 pixel resolution), advertise (and win) speed test awards, yet limit video streaming to ~5-8 Megabits/ second. In the past, the argument was that smartphone resolutions weren’t good enough to tell the difference, but manufacturers have caught up and 5G adoption is still several quarters away for most wireless customers.
Bottom line: There are likely no broad implications to the wireless industry from Verizon’s recent pricing changes. This should not trigger a response from AT&T, T-Mobile or Cable (although making Full HD (1080p) standard on all pricing plans would be a very un-carrier move for T-Mobile). It’s likely that if AT&T were to change their pricing plans as a part of a broader 5G announcement, they would align monthly rates to speeds (e.g., Cricket Wireless is cheaper but download speeds are capped). Big Red is in a holding pattern until they can fully deploy 5G (more on that below).
Fiber Always Wins (Until it Doesn’t)
While I was running Access Management for Sprint ($3+ billion annual expenses at the time), we would frequently discuss fiber opportunities: bankruptcy-driven system purchases, sub-duct IRU availability (sometimes packed with fiber), joint builds with other carriers, fewer fibers with Dense Wave Division Multiplexing, etc. Our motto, developed by our lead engineer, was “Fiber Always Wins.” Fiber drove our investments, first connecting to the incumbent Local Exchange Carrier (LEC), then to commercial buildings, data centers, wireless switching centers, small cells and cell towers.
Meanwhile, Verizon was building their FiOS network which at peak (2015, prior to the sale of former GTE properties to Frontier) passed 20 million homes. While the current number of homes passed is not published, most analysts peg the post-Frontier total at 15.5-16.1 million homes. Given Verizon’s current FiOS internet count of 5.84 million, they have approximately 37% share, with about 5-10% subscribed to copper or wireless alternatives and the remainder (50-55%) subscribing to cable. FiOS comprised 87% of the total 2018 Consumer Markets division revenue.
Verizon’s FiOS fiber experience and the acquisition of XO Communications led to the formation of the One Fiber initiative (2019 RCR Wireless article on Fiber One is here which includes details of Verizon’s multi-year purchase agreement with Corning). This cross-company cataloguing and joint planning is reshaping how Verizon invests billions of annual capital dollars nationwide. As a result, as they stated in their most recent 10-K, “We expect our “multi-use fiber” Intelligent Edge Network initiative will create opportunities to generate revenue from fiber-based services in our Wireline business.”
Bottom line: FiOS fiber deployments throughout the Northeast are extremely valuable and provide Verizon with a time-to-market advantage. Nationwide, the fiber that is being deployed for 5G will improve wireline/ Ethernet/ cloud competitiveness. One division feeds the other.
Customers love FiOS. The nearby American Customer Satisfaction Index (ACSI) Internet Service Provider satisfaction survey results clearly show that both Verizon and AT&T (U-Verse fiber now passes more than 12 million homes) are preferred over cable. Notably, Verizon’s lead over Altice (Long Island cable provider) is back to seven points. This is one of several factors driving Altice to deploy fiber to the home (the only US cable company to commit to a 5 million home buildout).
Similarly positive results can be seen from the most recent J.D. Power Residential Wireline Survey, with Verizon taking top honors for both Internet and Television service. Fiber speeds result in higher spending per household, and the long-term maintenance costs for fiber have been proven to be much lower than copper.
When does fiber not win? Overbuilders using fiber are having mixed results. The most heavily marketed competitive fiber provider over the past ten years, Google Fiber, has been a dud – there’s no two ways about it. Experts like Blair Levin and Larry Downs (Harvard Business Review article here) believe that Google was using the Fiber effort simply to prod incumbents to accelerate their broadband deployments, but that’s inaccurate – they are still investing, expanding, and trying to be a disruptive broadband provider in their markets.
Google Fiber is generating the majority of Alphabet’s “other revenues” ($162 million in 2Q) and contributes in a small part to the content commitments needed to make YouTube TV affordable (Google TV customers are less than 75,000 and YouTube TV likely has more than 1 million paying subscribers). Analysts estimate that Google Fiber probably serves no more than 475,000 broadband subscribers today, with 20% of those in their first market – Kansas City. Google’s efforts to expand in Louisville using nano-trenching (two inches into the asphalt as opposed to six for micro-trenching) failed miserably and, as a result, Google Fiber ceased operations in Louisville last April (CNET article here). Their acquisition of Webpass, which uses 60GHz spectrum to transport wireless data between fiber-fed buildings, is finally beginning to expand beyond their legacy markets to Austin (see blog post here).
Google Fiber would best serve its shareholders by either a) selling the asset or b) initiating efforts to wholesale fiber to wireless providers and business-focused managed service providers. The value of deployed fiber in highly desired suburban neighborhoods would be welcomed by a variety of telecommunications companies.
Which brings us back to Verizon. Could they have a joint build and/or fiber swap relationship with Google? At least enough to enable Webpass (through Verizon’s XO communications asset) to expand rapidly to 60/80/100 markets? That would shake things up considerably, and multi-dwelling units are not a target of Google’s 5G initiative. It isn’t lost on most telecom industry followers that Google decided not to initiate any builds in Verizon’s legacy Northeast telco territories. Given their fairly strong corporate relationship (Pixel, YouTube TV), why not deploy together?
While Google was busy doing their initial rollouts, Frontier was acquiring the former GTE properties from Verizon. They did this in two primary transactions:
- In 2009, Frontier announced the purchase of 4.8 million access lines from Verizon (all former GTE except for West Virginia which was a legacy Verizon asset) for $8.6 billion (~$1800/ line). Verizon received $5.3 billion in Frontier stock from the transaction – the remainder was in cash and assumed debt;
- In 2015, Frontier completed the purchase of GTE properties by purchasing the assets of California, Florida, and Texas (which included 1.6 million FiOS Internet and 1.2 million FiOS TV subscribers) for $10.5 billion ($9.9 billion in cash and $0.6 billion in assumed debt).
At the end of 2016, Frontier’s service territory looked like this (5.4 million customers including 4.1 million broadband lines spread across 29 states):
Since that time, the rest of the broadband industry has continued to grow, but Frontier has managed to lose 1.1 million customers (> 20% of its base) including 0.5 million broadband customers (> 12% of the base) in a mere 10 quarters. Customer churn is rising and currently exceeds 25% on an annualized basis. Even though the fiber base is being upgraded to 10 Gbps capacities, the FiOS base continues to lose customers.
We talked at length about Frontier’s woes in the TSB titled “What’s Changed Over the Past Three Years?” Last week’s stock performance (down an additional 27%) has significantly narrowed Frontier’s options.
Bottom line: When does fiber not win? When it’s the secondary/ tertiary focus of the company (Google), and when it’s hampered by the pressures created by aging copper plant (Frontier).
Billions of dollars of value have been created from fiber deployments, and local exchange providers (AT&T and Verizon) should be able to leverage previous fiber deployment for small cell and other high-bandwidth deployments. Fiber wins… most of the time.
Next week’s issue will explore the industry implications of Apple’s new credit card (CNBC teaser article here). If you would like a copy of either the Top 10 Trends or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll get you a copy.
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Have a terrific week!