Verizon’s announcement it was proposing to acquire Frontier Communication hasn’t thrilled everyone, but that doesn’t mean it’s not important. While Verizon’s own announcement characterizes it as a move to expand its fiber network, it’s also been called (as it is in my first reference) a move to expand fixed/mobile convergence. Which is it, and could it be both? To figure that out we need to look at the broadband market overall, and most importantly how it’s divided.
There seem to be three ways of looking at broadband, which of course means broadband Internet. One is from the perspective of the user’s device, one from the perspective of the user location, and the third based on infrastructure that supplies the connection. What most consumers call “mobile broadband” is broadband directed at a smartphone, and “mobile” here contrasts with “fixed”, meaning delivered to a single specific location. In that location, it may support smartphones or big entertainment centers. Traditionally, mobile broadband has been delivered wirelessly, for obvious reasons, and fixed broadband via “wireline”.
The thing that’s changed the terminology gain is the use of mobile technology to support “fixed” locations. This trend has been called “fixed wireless access” or FWA, and it can be based either on leveraging mobile 5G service that also supports smartphones and mobile users, or on specific deployments of FTTN that then offer a last-mile wireless connection. To understand the Verizon/Frontier deal, we need to look at FWA carefully, because it’s the reason for the difference in how the deal is characterized, and probably the foundation for the skeptical views.
It’s fair to say that the only two things a consumer is interested in for broadband, the only differentiators, are cost and speed. When 5G was announced, everyone jumped on the story that it would transform mobile service speed, without thinking about whether a mobile user really had much of a need for high speed. But speed opened the opportunity to make some form of cellular wireless technology into a fixed broadband option. The question is thus whether that opportunity figures in the Verizon decision, or whether they’re just buying fiber customers to expand their base in that area, to rival AT&T. That seems to be what the business and financial press thinks.
And financial analysts, like the Moffett Nathison spokesperson Craig Moffett, are skeptical of the fiber-centric justification: “You would describe it as going from small to a little bit less small, but that’s about the best you could say about it,” Moffett said. “There’s simply no conceivable path where they can reach meaningful scale with fiber.”
I have to agree with this point; buying fiber customers with no means of exploiting them beyond charging for broadband makes little sense, particularly if we assume that Verizon could hardly raise prices without losing customers they’re paying to acquire. So are there other reasons?
Verizon’s press release (above) cites the benefit of extending premium services, but I’m told that the penetration of these services is low and this isn’t likely to be a real benefit. What about fixed/mobile convergence? It’s complicated.
What is fixed/mobile convergence? If it’s a technical thing, meaning something that’s implemented by an operator and visible as a feature to users, then we’d need examples of it to assess, and I submit that there are none really visible in the market. On the other hand, it might be a competitive play. Frontier customers are in someone else’s home territory (AT&T, likely) and often customers of other wireless providers. Could Verizon sell into the new Frontier base? Sure, but in theory they could do that now, and likely are doing it. The presumption I’d make is that Verizon believes that its discount policies relating to wireline/wireless combined packages would expand penetration into Frontier’s base, which is likely true. Enough truth to justify the deal? Questionable.
Then we have the service symbiosis. Light Reading says that “Verizon believes the deal will also expand its intelligence edge network strategy for areas such as AI and IoT.” If they do believe that it’s far from clear 1) that it’s a sound belief, and 2) that there’s any AI or IoT strategy to expand. I think this is a nice potential but hardly a sure thing.
So we come to FWA, which is perhaps another way of saying fixed/mobile convergence. Obviously you could feed a FWA node, including a millimeter-wave node, with Frontier’s fiber. You could also feed a standard tower, of course, but with telcos selling off their own towers to tower-share providers, it’s hard to see what benefit that could create. Could Verizon see an opportunity to expand Frontier’s reach via FWA, serving many more customers at a lower pass cost?
FWA, as a strategy, might even validate the use of towers and nodes as a part of mobile infrastructure. Yes, in isolation it may not be a strong move to set up dedicated self-owned mobile towers, but to have FWA towers do double duty could be a part of a fixed/mobile bundle. But is a “could” here really compelling? I think part of the angst the Street has for the deal may be related to concerns that there’s any real leverage, any ARPU or TAM upside to the deal beyond just buying new customers and their infrastructure. Economy of scale in operations? Perhaps. Competition? Perhaps.
There are, I think, reasons why Verizon would buy Frontier, and reasons why it might buy other fiber providers. Fiber customers are often sources of ARPU, meaning they’re good candidates for advanced services. If you can get them, and their infrastructure, at a fair price and can also capture operational economies of scale, you’ve boosted your financials. If you acquire them inside another operator’s base area, and Frontier is largely inside AT&T’s area, then you can put them on the defensive. If some of that area abuts your own base area, it’s good defense for you. All worthy of some action.
None decisive. If basic wireline and wireless broadband is commoditizing, then in the long run you’ve added commodity buyers, which is hardly ideal. All telcos need the same thing, which is a set of services that are new and refreshingly interesting, that can hold their value as traditional access and connectivity continues its inevitable slide into commoditization. The value of fiber depends on the emergence of these new services; without them all you’re doing is doubling down on the very things that are causing your business to stagnate. Verizon needs to do more, and that’s the truth.
