There is a confidence emanating from the Verizon management team, which to us, is simply not justified. Throughout the MNO world it seems to be well understood that in order to have a good wireless network, you need good wireline connections to backhaul it and it should have WiFi offload support. And yet Verizon’s broadband strategy is in tatters, as its 2016 figures, just out, show.
Verizon is today down to just 7 million broadband lines, but of course it has a network of fiber across the US, and where it does not have fiber, it can attach through the AT&T network to insert MNO backhaul traffic into its core.
Its plan for a long time has been to have the best cellular network, substantially ahead of AT&T’s network and of higher quality and greater reach than the 3rd and 4th US networks T-Mobile USA and Sprint. But the only reason for having that is so that it can have a better reputation for cell phone service, and especially data for Apps, so that it gathers more net adds each year. It may have got churn down to its lowest level for years, and it may have driven down capex, but Verizon trails T-Mobile dramatically in net adds, and its pay TV and broadband sales are grinding to a halt.
In response, this week Verizon has reached into its product locker and come up with a massive upgrade to its broadband initially for Boston and Norfolk, VA markets. It will offer FiOS Instant Internet service with two way speeds of 750 Mbps. This is a clear attempt to increase the penetration rate of the 14 million homes which are passed by Verizon fiber – both for consumers and businesses. But at $150 or $170 for a triple play, its pricing may be beyond the reach of many customers.
In comments made as Verizon revealed its results, it talked up its $1.8 billion acquisition of XO Communications as adding to its fiber footprint with additional metro rings in 45 out of the top 50 US markets and we agree that’s a good move. But it needs to leverage that for better broadband.
Verizon’s main merger activity has been to drive advertising on OTT and mobile video, which is delivered over its cellular network, with more than two years of deals to acquire technology firms, content rights, CDN players and advertising know how. And yet it did not reveal subscriber numbers for its Go90 mobile TV service. Instead it told us that the average daily usage of Go90 was 30 minutes per viewer, which will never stand up against DirecTV Now, and it admitted that Go90 made up less than 20% of traffic surfed on the Verizon wireless network. What we read into that is that customers instead use WiFi in their homes and at work to view Go90, making Verizon’s complete failure to build a WiFi offload strategy a major weakness.
The only bright spot Verizon could point to were the number of finance deals it had on phones, instead of offering device subsidies to customers. Despite needing to invest heavily in its network, especially its wireline assets, it said that it hoped capex would be down at the $16.8 billion level for 2017.
Almost as if to underline that, it laid off 155 workers on the same day from its Go90 operation, partly because when it acquired the assets of Vessel in October, there was an overlap of some of the skills. Vessel was closed down, but its technology and content are likely to emerge as part of Go90 in the near future, although celebrated founder Jason Kilar will no longer be part of the operation. Vessel CTO Richard Tom has become CTO for Verizon’s digital entertainment efforts, including Go90, so was Vessel something of an acqui-hire.
Other news from Verizon was that IoT revenue has reached $243 million, and revenues were down 5% at AOL to $532 million. It seems odd that a brand-new activity has a run rate close to half the size of an acquired mature business. Maybe it should have just done IoT, but even more aggressively.
But all we can see is how Verizon has bungled its decade old fiber to the home FiOS strategy and how revenue growth at FiOS has slowed to a crawl, rising just 4.2% to make up $2.9 billion in the quarter. Overall operating income is falling, net income is flat. This is a company in need of fresh ideas.
And that’s a management issue – no matter what the new US President allows Verizon to do or not to do, it has to take good decisions next or it will inevitably become moribund.
While it is hard to make clear comparisons, due to the sale of some 2 million customers to Frontier last year, Verizon is best represented by the table included.
The Frontier homes were mostly ADSL broadband, but some 235,000 of them were FiOS internet customers and just 59,000 were FiOS TV customers. But since they have gone, Verizon has lost 47,000 more homes in the quarter, on what is mostly a brand new fiber network, as there are hardly any ADSL connections left in its footprint (1.4 million).
In cellular, Verizon has added some 11.4 million net adds in 4 years, while T-Mobile will have managed 25.5 by the time its fourth quarter numbers are in. More than double.
That’s a distant second place, but it is the unhealthy position it finds itself in on WiFi and broadband lines that worries us the most. It has no offload strategy and is focused on invading 5.0 GHz WiFi spectrum and introducing 5G really early as its “plan.”
Which is why it is no surprise that another “plan” is being talked about, one which analysts prefer, where a merger happens between top wireless company Verizon and No. 2 cable operator Charter, which a few US finance analysts this week have described as “unlikely, but possible”.
At Faultline we have moved from the camp that thinks that Verizon CEO Lowell McAdam has been having a joke at everyone else’s expense, mentioning these ideas to the media. Instead we are moving into the camp which says McAdam has no idea of what to do next and is clutching at straws.
A merger with Charter would give it access to close on 21 million fixed line customers and all the bandwidth that goes with that. And Capex for fixed line could fall accordingly. But it would dilute Verizon shareholders to death, with another acquisition which proves that McAdam doesn’t know what to do next.
Telecoms is simple. If you build the best network, people use it. If you need to acquire businesses in order to get them to use it, you don’t have the best network, you are instead trying NOT to be a network operator, but something else which is hopefully more profitable. If you try to acquire content, as AT&T is planning with its purchase of Time Warner, then you have no confidence in your core business of shifting data bits and want to be in another business or rather you wish to tie one business to the other, to drive it forwards unfairly.
McAdam either wants to use the current regulatory environment to acquire some content owners, as AT&T has done, or it needs to spend more building out its cellular network, or it needs to attract every OTT video service to use Verizon Digital Media Services as its carrier. Today it has almost none and T-Mobile is laughing all the way to the bank. Verizon only has Go90 as its single anemic video service, focused purely on short form content. Not a TV replacement, more an augmentation.
Investors have begun to see through the stock, this week down 2.5% on the day and 7% over the past few days, and analysts are beginning at last to question whether it would make more sense Verizon copying AT&T’s media moves – pointing Verizon at buying Dish and then maybe Viacom – rather than trying to buy Charter or making smaller moves, like the stalled merger at Yahoo, which take it into advertising and the internet, but not into content.
In the meantime, the Yahoo deal has been put back at least one quarter and everyone realizes that Yahoo has little room for maneuver if Verizon decides to use recent hacking attacks on Yahoo to change the price on its agreed purchase. If there is no reduction of price on the Yahoo deal, it makes you wonder what the management team is up to, as on that deal it holds all the cards.
Verizon has dug its heels in and said it will not build out any more markets with fiber, but in its recent launches just this week, it boasted a partnership with the City of Boston to bring a new fiber-optic network platform to the city, replacing copper infrastructure. Maybe it will try to get into more similar partnerships to improve its appalling broadband equation.