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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.
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 will include them on the list.
Have a terrific week!
Greetings from the Southland where, contrary to popular belief, business is booming and growth opportunities are expanding. Pictured is half of the bourbon wall from Louisville-based El Toro, one of the fastest-growing start-ups in Kentucky (their current offices are in a restored distillery).
This week, we will take a look at the last quarterly earnings call from Frontier prior to their acquisition of Verizon’s California, Texas, and Florida properties, and also highlight a series of announcements made during February which point to a resurgence in wireline interest.
Before doing this, our thoughts go out to Level3 CEO Jeff Storey and his family as he continues to recover from recent unplanned heart surgery. There are many Level3 readers who are regular readers of The Sunday Brief who were equally surprised by Monday’s announcement. Fortunately, Sunit Patel, Level3’s current CFO and now interim CEO, has the deep understanding and operating experience to continue Level3’s transformation into an enterprise-focused provider. We wish Jeff a speedy recovery and look forward to his return in a few short months.
Frontier’s “To Do” List
- Close the Verizon CA, FL, TX market transaction with as few issues as possible
- Identify and implement $600 million in planned synergies as a result of the VZ transaction starting at transaction close (while minimizing customer-facing impacts)
- Expand current video products to 3-4 million additional homes in 40 markets over the next 3 years. Clearly demonstrate that video growth will be profitable and the best use of incremental capital expenditures
- Translate additional broadband capacity improvements in CT into lower customer churn and improved Average Revenue per Residential Customer
- Manage promotions to grow revenue, increase the customer experience, and reduce the impact of post-promotion churn
- Continue to translate Connect America Fund (CAF) deployments into incremental customer relationships, especially for the 100,000 additional homes planned for 2016
- Translate improved bundle capabilities into lower residential voice churn
- Grow and demonstrate the value of self-service tools
- Improve business (SMB) competitiveness as a result of the Verizon properties acquisition
- Maintain or improve leverage and dividend payout ratios. Use increased cash flow to clean up some of the debt maturities on the balance sheet
Frontier Communications reported decent earnings this week as they prepare to double their size with the acquisition of Verizon properties in California, Texas, and Florida (full earnings report is here and their presentation is here).
Included is a map that management used in their first quarter earnings report describing the company’s footprint evolution (remember, the pending acquisition doubles the company’s size). This map tells us a lot about where Frontier is headed.
First, they are following the general population and moving south and west. Los Angeles and Dallas suburbs are growing faster than West Virginia and Upstate New York (see census data here). More moving equals more (and less costly) choices than overthrowing the incumbent at existing households. Any near term upside in subscriber growth will likely come from this secular trend.
Second, Frontier’s overall footprint density is going to improve with the Verizon transaction. There are real operational and capital cost improvements from this change. Trucks have to travel less, there are more Multi-Dwelling(MDU) / Multi-Tenant Units (MTU), and lower network unit costs are possible. MTUs present a double-edged sword, because this also means that business/ enterprise offerings need to be robust and competition (not only from cable but from fiber-based CLECs such as Alpheus in Texas) will be intense. How Verizon Enterprise supports and grows these legacy connections will be one of the interesting dynamics of a post-close Frontier.
Finally, they set the stage for further clustering. Frontier’s model to date has been “buy and manage” – they have done little if any trading of properties (common in the cable industry after large transactions such as Adelphia Communications acquisition by Comcast and Time Warner Cable). It’s interesting to think about the potential for Central Florida, the Great Lakes region, and Texas from a few transactions. Texas consolidation is especially ripe for this opportunity with Windstream and CenturyLink under-indexed in their exchange presence.
As if these three dynamics were not enough, their cable competition is also involved in a large three-way merger (Tampa is largely served by Bright House Networks, who is being acquired by Charter Communications; Texas and California properties have a decent overlap with Time Warner Cable, who is also being acquired by Charter Communications). Because Bright House and Time Warner Cable are performing quite well (see TWC’s Top 10 list here), it’s unlikely that Charter will make the kinds of dramatic changes that would open up the door for Frontier. Stranger things have happened, however, and the Charter/ TWC/ Bright House transaction is still awaiting California and federal approvals.
Bottom Line: Frontier has managed to do something that other ILECs have not – grow the high speed subscriber base in the middle of speed and technology transitions. The acquisition of selected Verizon properties will improve their customer density, network competitiveness, and product diversity (particularly in the business arena). They should use this opportunity to demonstrate their operating effectiveness and to re-cluster/ re-concentrate their footprint.
Cablevision’s “To Do” List
- Get the Altice transaction approved by the end of 2Q 2016 without compromising the overall terms
- Continue to grow the quantity (2.8 million) and quality (monthly RPC = $155.88) of High Speed Data customers (Cablevision serves 3.2 million customers overall)
- Reduce customer service expenses through fewer trouble calls (down 33% in 2015) and truck rolls (down 23%)
- Improve number of Optimum Wi-Fi users (currently only 1 million or 36% of the HSD base) as well as the quantity consumed (9 GB/ month)
- Maintain competitive positioning and operating cash flows at Cablevision Lightpath (fiber-based business division)
- Respond to market need of “skinnier” video bundles while minimizing revenue write-downs
- Continue to manage capital expenditures to an $800-840 million range
- Keep churn at record-leading levels (4Q represented the lowest voluntary churn in six years)
- Improve cash burn at “other” business units (Newsday, News 12, etc.)
- Get the Altice transaction approved by the end of 2Q 2016 without compromising the overall terms
The headline said a lot more about the economic improvements in their service area than the company overall: Cablevision delivers organic customer growth for the first time since 2008. While this is a great sign, there are plenty of headwinds facing the Bethpage, NY, company. Two of their three primary products are under heavy substitution threats (current video packages from smaller, more selective varieties; home phone service from wireless substitutes), and there’s an opportunity for wireless 5G services to threaten High Speed Data by the end of this decade.
Regardless of when/ if the transaction with Altice NV is approved, Cablevision needs to continue to grow and innovate. Their out-of-home Wi-Fi footprint is the benchmark for their cable peers (see more here), and their overall revenue per customer for High Speed Data is $44.70, among the best in the industry (TWC led the fourth quarter with $48.20/ mo in Average Revenue per High Speed Data customer; Comcast close behind with $47.15/ mo.). Cablevision has historically had strong customer service/ experience metrics compared to their peers but continues to lag behind FiOS, according to last September’s JD Power survey.
Bottom Line: Cablevision is in many respects a victim of their own success. They are maintaining high product penetration in an increasingly competitive environment. And, once the Frontier transaction closes, Verizon will be squarely focused on improving operating metrics in the Northeast. Increased speeds and sponsored data opportunities represent new growth frontiers for the company or their successor. Cablevision is in danger of losing their pioneering reputation, however, because of the Altice transaction uncertainty.
Wireline is Cool Again
I never thought I would be able to use the words “wireline” and “cool” in the same sentence again. But, after AT&T’s announcement that they would be spending $10 billion in 2016 to support enterprise wireline activities (much of this for wireless fiber backhaul in Mexico), and after Verizon’s surprise purchase of XO Communications for $1.8 billion, wireline has gone from a footnote to a headline (XO network map is pictured nearby).
This is the push and pull of the dramatic rise of data consumption from today’s world: If the server is not sitting next to the tower serving the customer, some amount of transport/ backhaul/ longhaul is required. Verizon estimates in the announcement above that they can save $1.5 billion from the transaction in synergies – this is likely only the fiber leverage opportunity, and does not include Verizon’s replacement cost for the aging MCI network (XO leverages the Level3 network – see more from this recent Sunday Brief).
Without a doubt, servers are moving closer to customers (see EdgeConneX for a great example of how this is minimizing friction between cable providers and Netflix). At the same time, however, connectivity to highly-scaled cloud servers for business are increasing the need for reliable national and international connectivity.
Overcapacity was an issue for the wireline industry… in 2002. Thanks to increased DOCSIS, DSL, and Fiber deployments since then to support hundreds of millions of video-hungry broadband and wireless customers, most inter-city capacity has been absorbed. Regional capacity continues to be built out (see companies like Lightower/ Fibertech for a good example in the Northeast), but independent national backbones are largely the same as existed a decade ago: Level3, 360Networks (now owned by Zayo), and XO Communications (now owned by Verizon).
Bottom line: Wireline is cool again, as it should be. More investments will be required.
Next week, we’ll comb through additional headlines and also dive into the set top box debate. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to firstname.lastname@example.org. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Davidson Wildcats!