Every once in a while something in the industry comes as a true surprise and that happened last week when Verizon announced that it was going to invest $300 million to build FiOS in Boston. There hasn’t been any new FiOS constructed for many years and the company had announced at the end of 2011 that it was done with FiOS expansion. Then the company went on to sell a lot of customers to Frontier including a big chunk of the FiOS fiber network and it looked like Verizon was inching their way out of the residential landline business.
There was never any doubt that Verizon was interested in fiber to serve large businesses and to serve its own cellular towers. And this desire was emphasized a few months ago when the company announced the intention to buy XO Communications from Carl Icahn. That will provide a vast new fiber network throughout downtowns and business districts around the country.
Verizon says that there are a few reasons it wants to build Boston. Probably first on the list is a shift in the cellular business to add smaller neighborhood cell sites. The whole industry has started the migration from relying mostly on the big cell towers to smaller cell sites dispersed where there is demand. But these mini-cell sites need fiber. And so expanding the FiOS network in Boston will give the company fiber everywhere in the City and give it a competitive advantage over AT&T for providing cellular data.
Verizon also says that it wants to get into the ‘smart city’ business and it views Boston as an attractive market to pursue that goal. Verizon announced a smart city initiative last October and is working on plans to build things like smart traffic grids in cities. Again, this kind of big dollar business requires fiber throughout a city.
Verizon also says that it would like to tear down all of the copper in Boston. Of course, Boston’s copper is not older or in worse shape than the copper in other east coast cities and this justification doesn’t seem like a reasonable reason to invest $300 million in fiber. I’m betting that management took a new look at their existing FiOS business and saw how profitable it is now that broadband penetration rates keep climbing. Broadband is a very high margin business.
It’s also my guess that Verizon might be getting more realistic about the future of its cellular business. That business has thrived for a few decades due to astronomically high prices and margins compared to the cost of providing the service. And those margins are under attack throughout the industry as alternate cellular companies are offering cheaper rates. Even the new discounted rates are high margin, but they have forced Verizon and AT&T to bring their prices down out of the stratosphere. So perhaps the company is quietly going to build up the landline data business as a way to insure future profits.
One has to wonder what this means for other east coast cities. Verizon largely built FiOS in the suburbs and to a large extent ignored the downtowns of the major northeast cities. If there was any downtown fiber built it was spotty and only to neighborhoods where the construction costs were the lowest. There certainly would be a big sigh of relief if other cities could know that they were also going to finally get a fiber network to compete with Comcast.
One thing we’ve always known about big companies is that they can change strategies at will and something they say they will never do one day can end up as a major corporate initiative a few years later. Verizon gave every sign for the last few years that it was walking away from landline networks. One has to go many pages deep into their annual reports to even see that business mentioned.
But this Boston initiative is no small deal and requires a major investment. And the reasons why this benefits Verizon are just as true for many other cities. Verizon says that one reason they are willing to do this now is that city hall in Boston was receptive to making it easier to build fiber – something that has not been true in the past. Just like many cities are bending the old rules for Google, I imagine that there are discussions going on today in many east coast cities about what they might be able to do to get Verizon fiber too.
I’d speculate that a lot of factors played into the decision to go ahead. You’ve identified some of them. Other possible influences:
Boston’s CIO has been actively driving toward a public/private partnership for a fiber access network. Verizon probably had to make a decision as to whether they are in or out.
Part of Verizon Labs and an LTE Innovation Center are based in Waltham, about 30 minutes from downtown Boston. Proximity to internal development and vendor/partner testing makes Boston a convenient testbed.
From what I understand, the copper plant in Boston is decrepit even by Verizon standards. They may be reaching a point that they can’t maintain it anymore.
The Big Dig forced them to rebuild their metro network with fiber, and they put in a lot of spare duct. Undoubtedly, asset inventory was a part of the cost side of the business case.
Many of Boston’s residential neighborhoods are mostly three family MDUs (“three deckers”), with aerial utilities. Aerial is a lot less expensive for them than underground. Housing density is at a sweet spot for PON. They built out a part of Dorchester in 2006 or 2007 as a testbed, so they have a good handle on the challenges.
GE Headquarters is relocating to the Seaport District, which is already a center of start-up activity and lots of new construction – commercial, office and residential. That neighborhood is high-density mixed use, and popular with 20-somethings. They have to do fiber construction in that area with or without FiOS.
A goodwill gesture by Verizon to the regulators and legislature has been long overdue.
The timing of the announcement – the day before what portends to be a long strike – might not be a coincidence.
I’d speculate that most (if not all) of these considerations came into the decision to make an exception to the FiOS construction freeze. Perhaps there will be other exceptions, perhaps not. Also, McAdam must not be too far from retirement, and it’s always possible that his successor will be more positive about the fixed mass-market business.
I find it hilarious that Verizon thinks that wireless will be the cheapest-and highly profitable way to make the company enormous profits. Isn’t that what all cellular providers were saying when 3G, 4G came along years ago? Turns out that was a bust. AT&T and Verizon refuse to accept that wireless is NOT and will NEVER be a substitute for wireline. They are kidding themselves to think that connecting the cellular towers to fiber will somehow be the solution for the unwanted-and still very valuable-last mile copper networks they are desperately trying to rid themselves of.
People including http://www.stopthecap.com author Phil Dampier look at me all the time and wonder why I fully am behind Frontier and CenturyLink acquiring all the copper wireline assets from AT&T and Verizon. I completely understand that many of these copper facilities have not seen any upgrades, have been badly neglected by the two telecom giants and cannot even support any generation of DSL.
But this is far more than just connecting to the internet. We have copper that connect critical systems and infrastructure. We are talking about POS systems, alarm systems, banking systems, traffic management systems, etc…many of these copper-based networks are hidden in buildings in huge swaths of the country coast to coast-and Verizon and AT&T want to simply shut it all off???? That’s insane. We CANNOT allow them to get away with this.
I never thought I’d hear myself say this, but I’m glad I lived in a Verizon-still controlled area where the only other fixed wireline competitors are Comcast and Cox. The good thing about the states of Massachusetts and Rhode Island is that their PUCs are tough. Seeing what happened in Connecticut with the AT&T/Frontier debacle and the Verizon/Fairpoint deal that led to Fairpoint imploding in the northern New England states, they will not let Verizon sell off their last mile wireline to Frontier, at least not until Verizon repairs or replaces the neglected copper facilities and key point areas with fiber or g.fast equipment, hence the $300 million Boston FIoS deal. However, after that work is completed, all that will be taken over by the smaller telecoms.
California is a very expensive state and including silicon valley. You would think an area that is densely populated in technology would have a very powerful say in how communications should be done, yet google who has so much money they don’t know what to do with it would be ferociously expanding their fiber everywhere in California, especially being so close to San Francisco. Or AT&T would be taking full advantage of the wealth out here and laying middle mile fiber upgrading service from last mile DSL, or Comcast would be laying down fiber replacing the old coaxial systems.
Not a chance.
Google is typical of the mindset of a short term gain wall street investor. They start with a project and see if it takes off. If it doesn’t bring results quickly, screw it. They abandon it. They refuse to give these wealthy areas a choice unless they get easy concessions, tax breaks in their already high profits, and what I find even more of a joke is those people who actually have google fiber service have to sign away their privacy rights so google can make even more money in more ads.
Comcast charges high prices for lackluster service in many areas they serve. And since the company has a huge monopoly in many communities in California, their incentive to improve is minimal at best.
Then you have AT&T, the finest example of pure unrestrained corporate greed I have ever seen providing utter shit service and ripping people off all while giving the world the collective middle finger.
Not only does AT&T bribe this state legislature on a regular basis, because of California’s enormous geographical size, the latest sneaky bill that the company has tried to pass under the public’s nose which essentially would have shut down all the last mile copper POTS then AT&T would have forced expensive, capped and unreliable wireless as a replacement. Not only would this have screwed very rural areas of the state, suburbs like the one I currently reside in would also be subject to this, including cities such as San Francisco which i live 7.1 miles from downtown. And with “usage caps” on sub-par already expensive DSL, what a rip off.
At least when I had Verizon, while their DSL was slow, it was overall reliable and they did not have usage based billing at all and network performance on average was ok for streaming services. It wasn’t perfect by any means.
More than likely another sell off is coming and YES it is a scam because those wireline assets are badly neglected in dire need to repairs and maintenance-all while both AT&T and Verizon took $$BILLIONS$$ from the taxpayers and pocketed the money instead of taking care of the wireline.
Here are two videos where Verizon REFUSES to fix a connection point and a warehouse where Verizon trashed new FIOS components. Take a look :
Yes, WE, you, me everyone of us was ripped off.
For the acquiring company such as Frontier unlike the telecom giants, they are taking on an enormous amount of debt. The company is depending on the taxpayers to help pay off these massive acquisitions using the FCC’s CAF II funding. And with that debt, in many areas they are unable to quickly make the necessary upgrades to improve service. Just look at West Virginia.
I used to live In the state of Massachusetts which is Verizon territory. I have screamed and my town (which is very wealthy by the way) has repeatedly petitioned Verizon to bring FIOS each time the company refusing to do so. I was stuck with last mile expensive and unreliable DSL that would crap out each time bad weather hit.
Karl Bode of http://www.dslreports.com, Steve Blum of http://www.tellusventure.com and Phillip Dampier of http://www.stopthecap.com have documented and reported time and time again that AT&T (and Verizon) wants OUT entirely of the fixed wireline business and have been going state-by-state to make that happen.
With AT&T, it is much more complicated because not only do they own and control the wireless towers for their cellular service, they also own legacy wireline, copper, POTS, and fiber backbone. Just recently, AT&T proposed a bill in California to essentially retire the copper for plain old telephone service but the problem is that many other services depend on that system to function.
AT&T CEO Randall Stephenson and Verizon CEO Lowell McAdam knows that these copper assets are still worth a lot of money. It would not make financial sense for the telecom giants to simply shut off the unwanted copper and still hold onto the properties while paying taxes for them. That also does not reflect well on any company’s balance sheet. Either you convert the assets to utilize for something else or transfer them to another company that will make use of them. In these two scenarios either way you come out making a profit. That makes sense even from a business standpoint.
Wait for the giants to have a big expense from a merger or buying a huge amount of spectrum and they will use a smaller company such as CenturyLink or Frontier like a “purchase eraser” on a credit card so that they can hide the effect that this has on earnings. Wall Street Analysts fall for it every time, or maybe they think that everyone who lives in an underserved area should move to a major metropolitan such as San Francisco, New York, Miami, LA, Atlanta, Houston or Philadelphia.
Frontier wins from this too because they can momentarily look like they aren’t bleeding customers to death by buying a fresh crop of them.
How ironic as there’s another spectrum auction coming up. This is NO coincidence.
Wireless is not and will never be a substitute for wireline. With the rise of more IOT devices and streaming video that are following the footsteps of Netflix not to mention 4K and eventually 8K, there is simply no way that wireless can handle those demands.
We need fixed wireline, Period.
All in all, internet service is going to get worse before it gets any better. We are screwed.