The Story Behind Verizon's 5G Secret Weapon
As Verizon began mulling 5G requirements about five years ago, the company decided it didn't want to rent someone else's fiber for backhaul. Like Apple, Verizon wanted to be "vertically integrated." Meaning, the company wanted control over everything from the 5G antenna to the wires that connect that antenna to the nation's Internet backbone.
At the time, Verizon already owned a sizable fiber network, branded FioS, for "last mile" connectivity from Verizon's core network to homes in select cities around the country. But this was different. Verizon wanted to own a "transport" fiber network in dozens of additional markets, one the company could use to move data from 5G and other services from deep within a city to nearby Internet connection points.
To address its fiber hunger, Verizon first sought to buy existing fiber lines. As noted by the analysts at Wall Street research firm Cowen, Verizon had previously eyed a purchase of cable giant Charter Communications, but couldn't make the terms of that deal work. Instead, the company spent $1.8 billion for XO Communications in a deal that closed in 2017, giving Verizon 1.2 million metro miles of fiber across 45 of the nation's top 50 markets.
But that wasn't enough. Verizon then decided to begin building its own fiber in the locations where it believed it would need it the most.
"In many of these markets it's better for us to build" fiber than to buy it, Verizon CEO Hans Vestberg explained in comments at a recent investor conference.
Launched in 2016, Verizon's "One Fiber" program today stretches across 60 major American cities and, by one rough estimate, involves as much as $30 million in spending per month.
The N stands for 'network'
"Back in 2015 is kind of when we kicked off the idea of One Fiber," said Verizon's Kevin N. Smith, who jokes that his middle initial stands for "network." Smith today is Verizon's VP of technology planning and development, and was one of the lead executives who developed the operator's "One Fiber" strategy.
Smith said that five years ago, Verizon's enterprise and wireless businesses often purchased access to third-party fiber lines in the same city without much coordination. "It was a purpose-built circuit for that particular business use that really was only sized for their own use," he said. That strategy mostly worked in 4G, but it wouldn't make sense in a 5G world when Verizon would need to connect hundreds or thousands of 5G small cells all over a city to some kind of fiber network.
As Verizon's One Fiber strategy began to take shape, the operator started lining up its fiber suppliers. In 2017, Verizon announced it would buy 12.5 million miles of fiber per year through 2020 from Corning for a whopping $1 billion. Verizon's Vestberg said Corning built a factory devoted to servicing Verizon's fiber needs. Verizon also announced a separate $300 million purchase agreement with Prysmian for around 10 million miles of fiber.
Verizon also began seeking out public-private partnerships with cities around the country that would give the operator access to the local permits and rights of way it would need to actually get fiber lines into the ground in cities around the country. Verizon has so far announced public-private partnerships in cities including Boston and Sacramento, and Verizon executives have said that the operator is working on dozens more.
And to conduct the actual, physical work of installing fiber into neighborhoods around the country, Verizon has contracted with massive network construction companies like Dycom and Black & Veatch. Indeed, Dycom recently reported that Verizon is its second-largest customer, having grown its business with Dycom almost 50% over the past year.
One Fiber meets Verizon 2.0
Earlier this year, Verizon restructured its operations in a program called "Verizon 2.0." The restructuring split the company between its consumer and business sales efforts, and merged its wireline and wireless network operations into one organization. In fiber, that network organization now oversees Verizon's existing East Coast ILEC fiber footprint that stretches from Virginia to Massachusetts, but is also expanding fiber into a growing number of cities outside that footprint. Verizon's out-of-ILEC fiber buildout effort now covers more than 60 cities -- a massive undertaking.
To put that into context, Google Fiber never expanded beyond around a dozen cities.
It's difficult to nail down the specifics on Verizon's fiber buildout. The company boasts that it's deploying 1,000 miles of fiber per month, and "that number will get bigger," Smith said. However, he declined to list all the markets where Verizon is building out fiber, naming only cities including Boston and Seattle.
Further, it's not clear how much money Verizon is spending on the program. The company said it will spend between $17 billion and $18 billion on capital expenses in 2019, up slightly from the $16.7 billion Verizon spent on its network in 2018. The company doesn't provide insight into that number though; it includes everything from fiber to 5G. But Recon Analytics analyst Roger Entner estimated that one-third of Verizon's capex figure is attributable to fiber -- which isn't a surprise given that Entner said fiber networks can cost up to $30,000 per mile to install.
What is clear, though, is that Verizon is investing for the long term. Smith said the "strand count" in Verizon's fiber buildout stretches up to 1,728, and doesn't fall below 864 on major routes. Each strand is slightly thicker than a human hair, and represents a discrete fiber optic connection. The more strands you deploy the more capacity you have, and Verizon's "strand count" is on the very high end of what most providers typically deploy.
As a result, Verizon is looking to put its fiber to a variety of uses. The operator said it will use its fiber to backhaul its 4G and 5G operations, and will also sell it to big enterprise customers as well as small and midsized businesses that are within reach. And Verizon said it will also wholesale the network to other telecom companies. "This now opens that opportunity," Smith said.
Just last month, Verizon announced that the NBA bought Verizon's fiber services to transmit video from 29 different arenas.
Outside of its ILEC footprint, Verizon historically has rented access to fiber from the likes of AT&T, Crown Castle and Zayo. And it will likely continue to do so for the foreseeable future in many markets.
But Verizon's One Fiber program -- including its promise to sell wholesale access to its network to other telecom companies -- threatens to upend some of those relationships. For example, Verizon recently inked a partnership with the city of San Diego to build fiber and small cells there, prompting analysts to question whether that would impact Crown Castle, which already sells fiber and small cells in San Diego.
"We certainly don't expect that we're going to be the sole provider," Crown Castle CEO Jay Brown answered during the company's recent quarterly conference call with analysts, according to a Seeking Alpha transcript of the event. Brown said the company is still seeing a major opportunity in the space, but doesn't expect to maintain the kind of market share it currently enjoys.
Verizon's One Fiber program also has implications for Comcast, Altice USA, Charter and the rest of the nation's cable providers -- companies that have strongly argued that they see a business in providing the backhaul for 5G. "It is clear that the cable operators will at the very least seize the opportunity to become backhaul providers, as they are winning LTE small cell opportunities today. Cable has the strategic asset, driven by the Fiber Deep programs and DOCSIS 3.1 (suitable for 5G backhaul), as well as the network breadth for edge computing, content caching, and low-latency applications," wrote the analysts at Wall Street research firm Cowen, estimating that 5G backhaul could eventually grow into a $1.5 billion market annually.
But Jennifer M. Fritzsche at Wall Street research firm Wells Fargo warned that Verizon's 5G Home fixed wireless Internet service is just part of Verizon's bigger move against the cable industry. She wrote that One Fiber could reduce Verizon's need to backhaul its 5G traffic across cable networks. "If you can't beat them -- join them… and do it with a much bigger [strand] count (1,700 to be exact)," she wrote.