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Verizon on M&A: Who Needs a Cableco?

Mari Silbey
5/17/2017
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Despite rampant speculation that Verizon could team up with a cable operator to improve its wireline footprint across the US, company executives are now hinting broadly that such a deal -- specifically for cable's fiber assets -- is unlikely.

As CFO Matt Ellis explains it, Verizon Communications Inc. (NYSE: VZ) remains keen on building out the reach and capacity of its fiber network. Hence the reason the telco acquired XO with its fiber rings in 45 of the top metro areas around the US, and why the company made a deal with Corning Inc. (NYSE: GLW) to spend $1.5 billion on optical equipment over the next three years. (See Verizon's Fiber Spend Won't End With Corning.)

However, Ellis clarifies that Verizon is only interested in M&A transactions if they accelerate the company's growth opportunity and add more value than an in-house alternative. And on the fiber front, cable doesn't meet those criteria. Specifically, Ellis says that there's a lot of fiber already deployed in the US, but it's not the quality of fiber that Verizon is seeking.

"We haven't seen anyone that's got the network architecture we're looking for," says Ellis, who spoke this morning at MoffettNathanson's 4th Annual Media & Communications Summit.

The statement is similar to something CEO Lowell McAdam said last month, but McAdam then complicated matters by also saying he'd be willing to talk to Comcast Corp. (Nasdaq: CMCSA, CMCSK) CEO Brian Roberts about a deal if he came knocking. (See Verizon CEO Comments Feed Merger Frenzy.)

The reason Ellis says that Verizon isn't interested in any fiber infrastructure it's seen is because the operator wants to differentiate based on the quality of its network. That's why, he adds, Verizon sold off a chunk of copper infrastructure (with Fios fiber as well) to Frontier Communications Corp. (NYSE: FTR) in 2016, and why the company is talking about deploying an almost unheard of 1,700 strands per fiber cable in its Boston buildout.

Ellis also emphasizes that Verizon sees Boston as a blueprint for fiber deployments in other areas, suggesting that the company may pursue similar One Fiber initiatives elsewhere. In essence, Verizon is looking at dense, high-capacity fiber buildouts that can be used to support a variety of applications, from business services to IoT to 5G wireless. (See Verizon Hails Boston Fios Launch but Eyes 5G and Verizon's Boston Smart Cities Pilot Begins.)


For more fixed broadband market coverage and insights, check out our dedicated Gigabit/Broadband content channel here on Light Reading.


The big question, as far as fiber is concerned, is where Fios fits into Verizon's current strategy. Ellis is less enthusiastic when talking about Fios than other fiber projects, but he does still insist that Fios "is a great business." He also makes a point to talk about the importance of residential broadband, although whether that service for Verizon will look more like Fios in the future or a fixed wireless alternative remains to be seen.

Back at Mobile World Congress in February, Verizon showed off an all-IP version of its Fios TV service, which could be delivered over a fiber-to-the-home network, or, presumably, over high-capacity fixed wireless infrastructure. It may be that the next generation of Fios fits in more with a Boston-like, advanced wireless deployment supported by dense metro fiber than it does with the FTTH model Verizon first heralded more than a decade ago. (See This Is the New Fios TV From Verizon.)

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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brooks7
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brooks7,
User Rank: Light Sabre
5/22/2017 | 11:16:27 AM
Re: VZ
 

Kb,

So, the part that was subsidized by taxpayers...are you going back to the days when Bell Atlantic and NYNEX were part of AT&T pre-split.  Because I didn't see any subsidies when they were building FiOS.  And I was pretty involved in that.  If there were specific subsides for them to build FiOS (which is what we were discussing here), why didn't anybody else do it? 

Finally, you probably have not really paid attention to my assertons that we need to create High Speed Broadband as a Universal Service (which makes it mandatory to deploy) with escalating bandwidth over time.  There is unlikely to be a change in the competitive environment, so we have what we have.  The tradeoff will be that we will have to ensure that Verizon (as well as everyone else) will get a reasoned ROI.  Otherwise, they will just exit wireline markets and then nobody will deliver service.

seven

 
KBode
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KBode,
User Rank: Light Sabre
5/22/2017 | 10:39:25 AM
Re: VZ
"If we can get past the measuring contest, perhaps we can agree on that Verizon's strategy will be that which is good for Verizon."

That's complicated by the fact that a huge part of the network in question was subsidized by taxpayers, but sure. Quicker ROI is good for Verizon. No doubt. That's not really the end of the conversation, though. 
brooks7
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brooks7,
User Rank: Light Sabre
5/19/2017 | 4:45:54 PM
Re: VZ
If we can get past the measuring contest, perhaps we can agree on that Verizon's strategy will be that which is good for Verizon.  If that is not true, then they need a new management team.  Even back in the early days of FiOS we knew (because they told us in the RFP) that they would not be doing 100% of their network.  You are right that they are focused primarily (though not exclusively) on Wireless, Enterprise, and Internet Infrastructure.

We can not expect a company to invest where it sees less profit.  That would be (as in the words of John Grisham) stupid, stupid, stupid.  We are going to either have to mandate investment (and ensure reasoned returns) or expect no change in the future.

seven

 
KBode
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KBode,
User Rank: Light Sabre
5/19/2017 | 1:08:48 PM
Re: VZ
Yes, sorry, meant Ivan Seidenberg.

"In any event, the zeitgeist of big corporations is not as you think. Strategy is constantly reexamined in light of changing circumstances."

I've been writing about them for two decades, so I have a pretty good finger on their zeitgeist. Verizon's focus will remain on 5G wireless and media (ads) for the forseeable future. That's where the money is. There's no way they shift strategies any time soon and start spending big on residential fixed line. Competition from Altice means no chance to impose usage caps and overage fees, which (myopic or not) dulls their interest in caring about fixed-line residential.

 

 
Duh!
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Duh!,
User Rank: Light Sabre
5/19/2017 | 12:07:32 PM
Re: VZ
I think you mean Seidenburg, not Whittaker.  Different companies, very different styles.

In any event, the zeitgeist of big corporations is not as you think. Strategy is constantly reexamined in light of changing circumstances.
Phil_Britt
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Phil_Britt,
User Rank: Light Sabre
5/18/2017 | 6:57:53 PM
Re: VZ
KBode is correct -- while a cable company might have some attractive assets, it would also have a lot of excess baggage that would do nothing to benefit Verizon. So such an investment would be ill-advised.
KBode
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KBode,
User Rank: Light Sabre
5/18/2017 | 2:16:51 PM
Re: VZ
Their position on FiOS has been pretty static ever since Whitacre retired. Broadband is too competitive for them on the east coast. At least competitive enough that they can't get away with imposing usage caps to get better quarterly results. So they shifted their focus a while ago, and they haven't really looked back.
Duh!
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Duh!,
User Rank: Light Sabre
5/18/2017 | 2:06:44 PM
Re: VZ
That assumes that their strategy is static.  The way I read the tea leaves, it has evolved since 2010. If you listen to the call, Ellis pretty much lays it out there.
KBode
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KBode,
User Rank: Light Sabre
5/18/2017 | 1:43:02 PM
Re: VZ
Yes. They're not really keen on FiOS. And the Boston investment has more to do with IOT and 5G than getting FiOS to people. I bet in three years you'll be seeing the same complaints about patch availability in Boston as we've seen in Philly, DC and NYC. They're no longer really interested in fixed-line residential broadband. 
Duh!
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Duh!,
User Rank: Light Sabre
5/18/2017 | 1:39:24 PM
Re: VZ
Conference audio is available via their investor page. What I hear him saying is that they're focused on fiber assets that they can leverage across their businesses. I'm also hearing him say that they're more focused on organic growth (c.f., the Corning and Prysmian supply contracts) than on M&A, because "A lot of the fiber that is out there is not really the fiber we're looking for". He also mentioned that the cash from the Frontier transaction allowed them to go into the XO transaction, and pointed out that those properties are copper-heavy (as well as being outside their Northeast bastion).

I was also hearing a more than lukewarm commitment to FiOS. FiOS revenue was up 4.7% Y-Y in Q1, and the wireless business is challenged, so it's not the ugly duckling that it once was. If Boston is the model, as he kept saying, we will be looking at FiOS footprint expansions, at least in urban markets.
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