Wireless shines in Verizon’s Q3, but mmWave strategy carries risks

Verizon badly needs a strong wireless success to counteract challenges in other areas of its business such as media and broadband. In its third quarter, its strategy to launch 5G as early as possible seemed to be paying off, with strong wireless growth amid the roll-out of mobile and fully standardized 5G services, to join its initial 5G Home fixed wireless access (FWA) offering.

However, that service needs to deliver results in its own right, by Verizon’s own admission, rather than merely being a toe in the 5G waters, as it was for AT&T. It has been refined since its underwhelming launch phase, with self-installable customer equipment being a key step forward. But more needs to be done to position 5G Home as a real challenger to fiber services, and meanwhile, the pressure on Verizon’s margins and ARPU is rising.

In its third quarter results announcement, Verizon said it had now launched mobile 5G, a service it labels ‘Ultra Wideband’, in 15 markets, in its millimeter wave spectrum. This compares with 21 markets launched by AT&T, which has also started its 5G journey in mmWave bands, largely because the US operators (except Sprint with its 2.5 GHz spectrum) have such limited access to the midband airwaves being used elsewhere in the world.

Verizon has also relaunched 5G Home in Chicago, having migrated from the pre-standard equipment it initially deployed, to accelerate its build-out ,to full 3GPP standards. The speeds promised for 5G Home – from 300Mbps minimum to 1Gbps, remain the same, but the standards-based system allows most customers to self-install their CPE, which is important for their convenience and uptake, and for Verizon’s costs. The roll-out of the new CPE will accelerate in the second half of next year, when there will be new chipsets available.

“It’s a new business model,” CEO Hans Vestberg said on the results call. “Now we have it on the global standard, and now we have it on the self-install.”

Across all its networks, Verizon added 615,000 postpaid smartphone users in the quarter, and 444,000 prepaid customers. Wireless revenue for the quarter was $23.6bn in a total revenue of $32.89bn, up almost 1% from $32.61bn a year earlier. Total net income was down from $5.6bn to $5.3bn year-on-year. The consumer business generated $22.7bn in revenue and the business group $7.9bn.

Though wireless accounts for a rising percentage of revenue and most of the growth, there are what analysts at MoffettNathanson, in a client note, called “worrisome signs”. Those signs include downward trends in wireless service margins, churn and ARPU, three cornerstone metrics.

The analysts also fear the telco is losing its expensively gained reputation for having the highest quality network in the USA. They wrote: “Most ominously, Verizon is no longer the hands-down winner in the most closely watched network performance tests; the question of who has the ‘best network’ is now a much more nuanced discussion.” The “dismal coverage” reported for the FWA service has helped dent its reputation, and the analysts joined many others in criticizing the reliance on mmWave spectrum, which has very limited range and so requires huge numbers of cells to achieve broad coverage.

“The sole adherence to [mmWave] spectrum as the basis of their 5G deployment strategy” is risky, the research note read. “Without a clear near-to-medium term answer for a midband spectrum 5G coverage layer, Verizon risks falling behind. Until this problem gets solved, Verizon has arguably ceded competitive advantage, at least for a time, to AT&T, which appears better positioned by virtue of its healthy blend of both midband and mmWave spectrum, and even to T-Mobile, with or without Sprint.”