When you announce plans to lay off 15,000 workers, about 15% of your workforce, it’s not generally a good sign, and that’s what Verizon’s new CEO has said. But, of course, what’s behind the decision at Verizon is shared with most of the telco world.
What’s behind the decision is pretty obvious, I think. Telcos in general have suffered because the ROI on their infrastructure investments has steadily declined. The consumerization of data services created by the Internet’s success is one reason. Another is the steady expansion in competition for wireless subscribers, a competition that quickly degenerated into bribing consumers with new phones because there’s little or no visible differentiation among actual mobile services. If you can’t differentiate on features, you have to differentiate on price, which is what’s happened with mobile.
I’ve blogged often about the problems with telco revenue, so just to summarize here, there is no way you can differentiate connection services in today’s market, and telcos have refused to consider elevating their service offerings. Thus, improving ROI on infrastructure investment can only be accomplished by getting more for less, which of course just transfers the burden to the vendors who supply telco gear, and which they’ll resist. So, you cut opex, the by-far-largest component of which is human cost, so you cut jobs.
What’ interesting here is that the decision is about job cuts and not how AI is going to replace workers. That doesn’t mean that Verizon won’t try to use AI to help in this transformation, but it does mean that it’s about the cuts first and foremost, not about AI. What can we learn from that?
First, I think it’s very likely that Verizon doubts that Wall Street would believe that AI cuts could be completed in 2026, the timeline Verizon has offered. I don’t believe it, for sure. The fact is that no enterprise has even suggested to me that they believe they could use AI to cut 15% of their workforce. None have even said they could cut 5%. We may, in some cases, achieve 5% or even 15% or more eventually, but the state of the art today could not achieve even the more modest cuts. Since the whole purpose of this is to appease Wall Street, it would be suicidal of Verizon to pick a path to cost reduction that the Street would reject.
Second, given all of this, it is very likely that talk of how AI will eat your job is at the least very premature, if not totally misguided. AI is a special case of automation, and automation has not, since the industrial revolution, reduced the number of jobs. Could AI do that? Perhaps, but we can’t responsibly call that today.
Third, there are obviously organizational and business decisions that can be made today to reduce workforce significantly without AI, which suggests that many, most, or even all the companies who say that AI is responsible for job cuts they’ve announced are simply using AI as a patsy for the decision to use traditional organizational optimizations to reduce jobs. “I’m helpless to save my esteemed workers’ jobs, AI is eating them right out from under me.” Instead of AI washing, perhaps we have AI muddying.
All of this is fascinating from an investment, sociological, and even technical perspective, but we have another truth it reveals that may combine all these factors and produce a more profound outcome. Verizon is essentially giving up on service revenue augmentation, and to me that means that every other operator in a major market is likely to do the same.
If there’s uncertainty at Verizon, among operators, and in the market overall regarding just how to use AI to cut jobs and their associated costs, there’s even more uncertainty about how to raise revenue. There’s also a major cultural and perhaps even regulatory impediment to even just considering the directions most likely to be successful.
On LinkedIn, someone responded to one of my earlier posts on telco services to suggest that telcos had to be, deliberately, what they always have been de facto, which is a utility. OK, that’s a reasonable suggestion providing that regulators and the financial industry treat them that way. In many countries, the US especially, we’ve removed public utility, regulated monopoly, status from most who had that status in the past. We could restore it, and perhaps at some point we’ll have to do that.
Perhaps? Surely, if cost reduction is the only remedy telcos can think of on their own. While cutting your workforce by 15% would surely offer you some profit benefit, you can’t repeat that step very often. As I’ve said, cost reduction strategies vanish to a point as the reducer vanishes. So the real question here is not how Verizon achieves this goal, it’s what they do next. If they look for another 15%, I think we can assume they’re in trouble.
How much could they achieve, and how? Here, interestingly, tech has an answer already. It’s roughly a 55% total reduction achieved by dropping wireline services completely in favor of stuff like FWA.
The largest opex component for any telco is the outside plant piece. If you have to run physical media to a home or business, it’s almost impossible to avoid the need to install something there. It’s totally inescapable that you’d have to support the connection, fix it if the proverbial cable-seeking backhoe breaks it, and so forth. With FWA, you can send everything to the customer to install, send replacement elements, and rely on the open air to carry the connection from an antenna. Mobile services are inherently more opex-efficient, and fixed services that are fixed only by making the customer end nailed to a location rather than moving about are just as efficient.
Every telco who started off as a telephony provider using copper loop plant, and who evolved their plant to fiber, has to look hard in the rear-view mirror for mobile/FWA competitors to overtake and run them over. Same with cable companies. The only solution, as Verizon has already demonstrated, is to get more into FWA. But Verizon, and almost every other Tier One and most Tier Twos, has already deployed physical access media and has customers for it. Many have promoted the gigabit potential of the media as their principle differentiator.
A company under profit pressure, or an industry of such companies, always has two options. One is to raise revenue, the other to lower costs. The former often requires some rethinking of traditional strategies and incumbencies, and threatens every employee who built their credentials on the old space. But the latter inevitably and always demands just as much disruption, or more, and to make matters worse, you can’t hope to sustain it very long. Verizon is taking a step that could buy some time to do things right, but could also be a signal of a commitment to keep doing them wrong.
