It’s always interesting, and even useful, to look at how AT&T and Verizon are doing in the broadband/wireline space. Verizon has led in new home broadband technologies with its early Fios push and now with fixed wireless (FWA), and AT&T has been much more aggressive in pursuing a position as a content provider. It’s common to pick one issue or the other and use it to justify favoring one operator or the other, but I think the truth is that both operators need to face both issues, and there are barriers to that happy state in play for them both. You can see some of these differences, and issues, in their quarterly reports.
To set the stage, AT&T and Verizon have very different wireline territories, a residue of the breakup of the Bell System and the Regional Bell Operating Companies. AT&T also merged with/acquired Bell South, which added more (and different) geography, where Verizon didn’t add a lot of geography. That’s likely because Verizon’s territory is much more economically dense, which means that wireline infrastructure is more likely to be profitable for them. The two companies have followed different paths because they have this basic difference of what I’ve been calling “demand density”, which controls the ROI on access infrastructure. Verizon’s is good, but AT&T’s is much lower.
AT&T talks constantly about ways they’re saving on capex and opex, obviously because they need to boost their infrastructure ROI. They’ve been the most aggressive of all the Tier One operators in adopting open-model technology, changing their network, using smaller vendors, you name it. That’s not going to stop, and in fact I think it’s likely to ramp up over the next two years because of Wall Street concerns about their ability to sustain their dividend.
Cost management, as I’ve said in the past, is essentially a transitional strategy. It vanishes to a point; you can’t keep relying on it because it’s impossible to lower costs indefinitely. At some point you have to get top-line revenue growth, and AT&T has recognized that with its various media/content moves, the latest of which is the WarnerMedia move. Unlike AT&T’s cost management strategies, though, it’s media deals haven’t paid off for them so far (which of course is what’s behind the DirecTV and WarnerMedia stuff).
Verizon, as I’ve noted, has the advantage of a geography whose demand density matches those of traditionally broadband-rich countries. With a much higher potential ROI on infrastructure investment, they’ve had little pressure for aggressive cost management, and similarly little pressure to acquire content companies. Their demand density has not only contributed to their aggressive Fios fiber plans, but also to their taking an early and strong position with 5G mm-wave (5G/FTTN) technology.
Generally, high demand density not only means dense urban areas, but wide-ranging and rich suburbs. That makes it much easier to deploy mm-wave technology where you can’t quite justify fiber. In effect, the demand density gradient from most dense (urban) to least (rural) is less pronounced for Verizon. They also have a competitive consideration; the biggest cable company (Comcast) is a major player in their region and CATV has a favorable pass cost, much lower than fiber. A mm-wave position is a way of keeping the Comcast wolf from the door.
Demand density also helps in the mobile space. Operators with wireline territories tend to do much better with mobile services within that territory, even if they offer broader mobile geography. Verizon always does well in national surveys of mobile broadband quality, and their success with 5G mobile service raises the chances that they’ll eventually offer 5G broadband as a wireline alternative in rural areas where mm-wave isn’t effective.
Given profitable wireline broadband, there’s less pressure on Verizon to embrace its own streaming. They do have Fios TV in linear form, and they offer a streaming box, but it supports other streaming services. Verizon sold off Verizon Media, which was not “content” in the sense of AT&T’s deals, and that suggests strongly that they’re not in the market for video/content assets. I don’t think that’s going to change, because they can make a go of their wireless and wireline businesses.
Right now, AT&T and Verizon are perhaps more competing on strategy than on sales, given that for network operators, the planning horizon is very long. Verizon is a network player, and AT&T is more and more like Comcast, a broadband-and-media player…or they’re trying to be. Not only is there a strategy difference today, there may well be a bigger one emerging…the edge.
Edge computing is really mostly about metro deployment of compute assets. Yes, there are stories about putting compute resources way out toward the real edge, but that’s mostly associated with function hosting for 5G. If you’re really going to sell edge computing on any scale, you need a population of prospective buyers who are packed into an area compact enough that latency can be controlled within it.
Think for a moment about the economic realities of edge computing. An investment in “telco cloud” by an operator is very much like an investment in wireline broadband infrastructure. You plop down a resource and it has, in its spot, a market radius it can serve. The more prospective revenue lives within that market radius, the more profitable any investment will be. More profit means lower risk, a larger bet you can make. If an edge model emerges, it will be far easier for Verizon to realize it because they have extraordinarily dense metro zones spread throughout their wireline footprint.
For AT&T, edge computing can offer comparable returns to Verizon’s only in some major metro areas; their population is much more spread out. They have a lot of smaller cities that are going to present a challenge in terms of profitable edge deployment. I think AT&T may see public cloud partnerships in 5G hosting as less of a long-term risk because they can’t yet see a long-term option for deploying their own cloud. Why not grab some benefits from a partnership when no roll-your-own is on the horizon?
This presents a challenge and an opportunity for vendors. What would a profitable metro model look like? How could you evolve to it from your current position in both 5G and metro networking? Would it scale to smaller cities, and could you network metros together, both to improve the breadth of latency-sensitive services and to better serve communities whose “edge” doesn’t touch enough dollars to permit deployment of a pool of hosting with economy of scale?
The cloud, and the network, are evolving. The players in both spaces are demonstrating that they understand that, and they’re also struggling to understand how to deal with it. The way this critical technology fusion works out will decide the future of a lot of services and a lot of vendors.
