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.