Verizon and AT&T are both sitting on a set of figures, which luckily, investors continue to completely misread. Both represent conundrums, both fixed and wireless, for each of the two giant US operators. No wonder both of them appear to be after the same 5G prey in the form of a bidding war around Straight path.
Verizon’s numbers came out as we closed our last issue, with a fall in post-paid subscribers it took most of the flak. But while Faultline Online Reporter is rarely interested in the wireless aspect of its results, it is the fixed line business where Verizon is seen as hapless. Wirelines revenue fell 0.6%, and now makes up just $7.9 billion of its business, and yields a tiny proportion of its net income, around $283 million.
The only numbers which went up were the FiOS internet connections, a rise of 35,000 only, despite it being able to offer 100 Mbps speeds and above throughout its fiber footprint, it continues to lose customers overall in broadband. It lost 1.2% against this time last year to 7.01 million connections. And while this is little more than keeping broadband prices as high as the market will take them, in video Verizon has no plan. It’s FiOS video customers fell 13,000 to 4.7 million, and it also lost 624,000 fixed line phones.
The answer to all of these problems, Verizon would have you believe, is fixed wireless, and in its case, not even of the 5G standardized variety, but a proprietary design of its own making. It plans to replace broadband lines with fixed wireless connections in the last mile (few 100 feet), which will scale to 1 Gbps and be cheaper to install than fiber to the home. This will, of course, fix everything. It will mean it starts to win the broadband war after 10 years losing out to cable. It will mean it will have the bandwidth to deliver to video over more of its network, and it will mean that economies in broadband delivery will allow it to price fixed line phone connections low enough that it will stop losing them. Not, it won’t. Its fixed wireless is un-tried and un-scalable and unlikely to be the answer, but everyone is too impressed by Verizon to say so.
Verizon deliberately leaked rumors of there being even more mergers in the background before its grand plan came to fruition, but this all turned out to be about the company secretly stalking Straight path communications, a company rich only in spectrum assets, with virtually no revenue and little cash, but a hefty chunk of fixed wireless spectrum in 28 GHz and 39 GHz, great for both backhaul and 5G access spectrum. The only trouble is that Straight Path already had agreed a deal with AT&T. Well this week a mystery bidder has trumped that offer and the smart money says that this is Verizon. Given the complete lack of any other assets other than spectrum for fixed wireless, there would only ever be AT&T and Verizon in the running, or someone who plans to buy the assets and then sell them to these two companies. So far the bidding is up to $1.8 billion, a rise of $200 million on AT&T’s first agreed bid, and it may well go higher.
But this type of bidding war, whomever it goes to, is still a risk. Both companies are now beginning to show signs of saturation in their wireless activities and the need for a strong 5G showing is palpable.
Other details in the Verizon results show a numbing 57% increase in LTE data use, but of course not a corresponding increase in revenues, and a sustained picture of Go90 as a lightweight phone based video service, with each viewer averaging 30 minutes of use on it per day – but still no subscriber numbers revealed by Verizon. The fact than only 20% of this traffic is carried on Verizon’s network gives lie to Matt Ellis, Verizon CFO, claiming that his 2017 priority is to leverage Verizon’s “network leadership”. Clearly with 80% of its delivery over WiFi, Verizon should be doing more with WiFi.
It is a confused message. Total revenue for Verizon was $29.8 billion in the quarter, and it had a net income of $3.6 billion. By comparison AT&T’s quarter was $39.4 billion, a fall from 40.5 billion this time last year. Its net income was a comparable $3.5 billion, but that’s where the similarity ends.
AT&T’s growth is predicated on buying DirecTV and its Mexican cellular assets bought a few years back. Wireless subs in Mexico rose 39% over this time last year, but DirecTV is showing less fruitfulness.
Video customers were 25 million, down 1.2% or 233,000, with by far the most of these in the Entertainment Group, of which DirecTV makes up the majority. Much is the same with broadband lines. AT&T breaks out IP lines – the old U-Verse lines – at 14.1 million, a rise of 4.8%, and DSL at just 1.59 million, a fall of 30.9%. It has a total of 15.7 million broadband lines, off just 0.4%. Voice lines are down to 19.2 million, off 10.4%. AT&T has reached a total of 4.6 million fiber lines, and says it will add another 2 million in 2017. Curiously it was Verizon which, of the two, moved to fiber soonest, and now AT&T is accelerating rapidly here, at a time when fiber is far cheaper and when there are lots of technology options for the last few yards to the home.
While both companies have for years rested on their cellular operations, and that, for the most part continues to be how the investment community values them. So AT&T loosing 353,000 mobile subscribers, it is a similar story to Verizon’s falling cellular numbers. Both responded to T-Mobile’s unlimited data plans in the quarter, stemming far greater losses to their German owned rival, but no wonder both are trying flat out to resurrect their ISP credentials with fixed revolutionary wireless technologies. It had better work or starry eyed investors will tear them to pieces. In fact whichever one of them wins the hand of Straight Path, the other is likely to be seen as disadvantaged in the coming war and suffer share price falls.