Verizon Fixed-Line Divestiture?

It might never happen, and wouldn't happen soon, but Goldman Sachs Group analysts think Verizon Communications might actually split in two, divesting all of its fixed-line assets to become a pure-play mobile operator.  

That would clear the way for some eventual combination of the wireless company with another partner. In recent years, Verizon's growth has been lead by its Verizon Wireless unit.

In many ways, such a decision would be driven by the simple economics of the landline business. By about 2016, it is conceivable that only half of U.S. households will be buying fixed line voice services. If you assume there are two dominant suppliers in most markets, and that market share is split evenly (it will probably be more like 60-40 or 70-30), then no single contender will have more than about 25 percent of homes passed as customers.

If you know anything about the economic of capital-intensive networks, you will sense the problem. A supplier builds a network reaching every location, then is able to generate revenue from only a quarter of the locations. That means 75 percent of the investment is simply stranded, unable to produce revenue.

That also means the 25 percent of users have to pay for all of the capital investment. And where the per-customer investment is that high, retail prices would have to be three to four times higher than if nearly everybody bought the product.

There are other products, though, including video entertainment, broadband access and other smaller revenue contributors that could include advertising and other services. That is a primary reason revenue will not fall as much as penetration would indicate. 

It also would be reasonable to point out that few companies have Verizon's assets or problems. AT&T, for example, has vastly more scale in terms wired network customer base, and in a scale business, that makes a difference. 

Also, Verizon's smaller footprint means it has a larger "out of region" opportunity than does AT&T, for example, in terms of "wired network services." In wireless services, AT&T and Verizon compete virtually head to head in all  U.S. markets. 

But Verizon has been signaling for some time that it might have new plans based on its new fourth generation Long Term Evolution mobile network. With some limitations, Verizon Wireless would be able to provide broadband access, voice and messaging to most consumers across the United States using only the 4G mobile network. Verizon Fixed-Line Divestiture?

Verizon already has business agreements with DirecTV to provide video entertainment, meaning Verizon Wireless could provide a quadruple play using only its wireless assets and business deals with other suppliers. Resale deals with leading cable operators

The challenging news here is the growing disconnect of sorts between the costs of a fiber to home network and the revenues that can be generated from deploying such a network, under competitive conditions.

That suggests we might once again hear calls for rather-substantial changes in regulatory framework that would somehow better "rationalize" competitor access to fixed networks. At some point, structural separation, robust mandatory resale and cable operator inclusion in such a framework will be on the agenda.

As important as facilities-based competition has been, there is a growing disconnect between investment cost and revenue opportunity for landline fiber networks, at a time when revenue growth is moving to a "mobile first" pattern.

Any future Verizon "divestiture" would be the first indication that matters are reaching a potential tipping point. Certainly there are continuing reasons to ponder the economics of the fixed network business.

By 2016, U.S. household  voice penetration will be about 52 percent, according to Pyramid Research. And that will be the highest penetration rate in the world.

In the Asia Pacific region fixed-line voice will be used by 24 percent of households.

In Western Europe, 21 percent of households will have a voice line. Revenue, on the other hand, will grow, in aggregate, on the strength of broadband access services.

“According to our estimates, global narrowband line penetration of households decreased from 45 percent in 2007 to 37 percent in 2011, and it will decline to 27 percent by 2016,” says Sylwia Boguszewska, Pyramid Research senior analyst.

Fixed services in every region are losing ground fast to mobile services, with mobile data capturing an increasingly substantial share of total telecom revenue, she says.

In 2007, U.S. voice penetration was about 97 percent of households, and seems to have peaked about 2000.

So penetration will have fallen in about a decade and a half. Those sorts of changes seem to be more common these days, as the volatility of the business reaches new heights.

Nor would that be the first such change, at about that time frame. In 1997 long distance revenue represented about half of fixed line network revenue in the U.S. fixed-line market.

By 2007 long distance had fallen by half. At the same time, and over the same time period, mobile services had grown to represent half of industry revenue.

And it is revenue, more than service penetration or usage, that seems to be important. Pyramid Research also suggests that fixed line revenue will be stable, or even grow slightly, as penetration falls.

That will be due in part to new revenue sources such as video entertainment, one might argue, and higher spending for broadband access and related products.

At the same time, it has over the last decade also been clear that the enterprise customer segment has become more crucial, not only for Verizon Communications but for most other tier-one service providers. Verizon Fixed-Line Divestiture?

Some skeptics will note that such ideas, which spawn transactions, always get speculated about because there are firms that make a good living advising clients about such transactions.

While true, it also is true that the fundamental industry drivers change quite dramatically over time. In 1999, tehre still were "Personal Communications Service" and "Cellular" segments of the wireless business. These days, the term is never used, because there no longer is any distinction between what used to be thought of as "PCS," and "cellular" service. U.S. telecom in 1999

In 1999, there still was an independent "long distance" industry. There was a company named "WorldCom."

A company known as "America Online" had a $125 billion market capitalization. Other Internet service provider firms, including "@Home," had market valuations of $100 billion.

In 1999, reasonable people would have argued that newer contestants in the "local" telecom business, namely competitive local exchange carriers, had a bright and substantial future.

Cable TV companies did not provide voice services at a significant level. But AT&T owned TCI, the biggest U.S. cable company. As I recall, US West owned Media One, another leading U.S. cable company.

Against that backdrop, it might have appeared that the former "Baby Bells" would have a hard time competing. Just a bit over a decade later, many of the "upstarts" have disappeared. The differences between leading cable TV companies and leading telcos are mostly of a regulatory sort, rather than any fundamental differences in product line.

The point is that if, barely more than a decade ago, the largest U.S. long distance company could own the largest cable TV company, if the wireless business was still thought of as having distinct personal communications service and cellular segments, if whole segments of the business can virtually disappear (long distance), then all sorts of other changes are conceivable.

Verizon deciding it has to get bigger on a global basis, and get out of the landline business, is not unthinkable.