Showing posts sorted by relevance for query Verizon frontier. Sort by date Show all posts
Showing posts sorted by relevance for query Verizon frontier. Sort by date Show all posts

Monday, October 28, 2024

Build Versus Buy is the Issue for Verizon Acquisition of Frontier

Verizon’s rationale for acquiring Frontier Communications, at a cost of  $20 billion, is partly strategic, partly tactical. Verizon and most other telcos face growth issues, and Frontier adds fixed network footprint, existing fiber access and other revenues, plant and equipment. 


Consider how Verizon’s fixed network compares with major competitors. 


ISP

Total Fixed Network Homes, Small Businesses Passed

AT&T

~70 million

Comcast

~60 million

Charter

~50 million

Verizon

~36 million


Verizon has the smallest fixed network footprint, so all other things being equal, the smallest share of the total home broadband market nationwide. If home broadband becomes the next big battleground for AT&T and Verizon revenue growth (on the assumption mobility market share is being taken by cable companies and T-Mobile from Verizon and At&T), then Verizon has to do something about its footprint, as it simply does not have enough ability to compete for customers across most of the Untied States for home broadband using fixed network platforms. 

And though Frontier’s customer base and geographies are heavily rural and suburban, compared to Verizon, that is characteristic of most “at scale” telco assets that might be acquisition targets for Verizon. 


Oddly enough, Verizon sold many of the assets it now plans to reacquire. In 2010, for example, Frontier Communications purchased rural operations in 27 states from Verizon, including more than seven million local access lines and 4.8 million customer lines. 


Those assets were located in Arizona, California, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, Wisconsin and West Virginia, shown in the map below as brown areas. 


Then in 2015, Verizon sold additional assets in three states (California, Texas, Florida) to Frontier. Those assets included 3.7 million voice connections; 2.2 million broadband internet access customers, including about 1.6 million fiber optic access accounts and approximately 1.2 million video entertainment customers.


source: Verizon, Tampa Bay Business Journal 


Now Verizon is buying back the bulk of those assets. There are a couple of notable angles. First, Verizon back in the first decade of the 21st century was raising cash and shedding rural assets that did not fit well with its FiOS fiber-to-home strategy. In the intervening years, Frontier has rebuilt millions of those lines with FTTH platforms.


Also, with fixed network growth stagnant, acquiring Frontier now provides a way to boost Verizon’s own revenue growth.


For example, the acquisition adds around 7.2 million additional and already-in-place fiber passings. Verizon already has 18 million fiber passings,increasing  the fiber footprint to reach nearly 25 million homes and small businesses​. In other words, the acquisition increases current fiber passings by about 29 percent. 


There also are some millions of additional copper passings that might never be upgraded to fiber, but can generate revenue (copper internet access or voice or alarm services, for example). Today, Frontier generates about 44 percent of its total revenue from copper access facilities, some of which will eventually be upgraded to fiber, but perhaps not all. 


Frontier already has plans to add some three million more fiber passes by about 2026, for example, bringing its total fiber passings up to about 10 million. 


That suggests Frontier’s total network might pass 16 million to 17 million homes and small businesses. But assume Verizon’s primary interest is about 10 million new fiber passings. 


Frontier has estimated its cost per passing for those locations as between $1000 and $1100. Assume Verizon can also achieve that. Assume the full value of the Frontier acquisition ($20 billion) was instead spent on building new fiber plant outside of region, at a blended cost of #1050 per passing. 


That implies Verizon might be able to build perhaps 20 million new FTTH passings as an alternative, assuming all other costs (permits, pole leases or conduit access) were not material. But those costs exist, and might represent about 25 percent higher costs. 


So adjust the cost per passing for outside-of-region builds to a range of $1300 to $1400. Use a blended average of $1350. Under those circumstances, Verizon might hope to build less than 15 million locations. 


And in that scenario Verizon would not acquire the existing cash flow or other property. So one might broadly say the alternative is spending $20 billion to build up to 15 million new fiber passings over time, versus acquiring 10 million fiber passings in about a year, plus the revenue from seven million passings (with take rates around 40 percent of passings). 


Critics will say Verizon could do something else with $20 billion, to be sure, including not spending the money and not increasing its debt. But some of those same critics will decry Verizon’s lack of revenue growth as well. 


But Verizon also sees economies of scale, creating projected cost synergies of around $500 million annually by the third year. The acquisition is expected to be accretive to Verizon’s revenue, EBITDA and cash flow shortly after closing, if adding to Verizon’s debt load. 


Even if the majority of Verizon revenue is generated by mobility services, fixed network services still contribute a quarter or so of total revenues, and also are part of the cost structure for mobility services. To garner a higher share of moderate- to high-speed home broadband (perhaps in the 300 Mbps to 500 Mbps range for “moderate speed” and gigabit and multi-gigabit services as “high speed”), Verizon has to increase its footprint nationwide or regionally, outside its current fixed network footprint. 


One might make the argument that Verizon should not bother expanding its fixed network footprint, but home broadband is a relative growth area (at least in terms of growing market share). The ability to take market share from the leading cable TV firms (using fixed wireless for lower speed and fiber for higher speed accounts) clearly exists, but only if Verizon can acquire or build additional footprint outside its present core region.


And while it is possible for Verizon to cherry pick its “do it yourself” home broadband footprint outside of region, that approach does not offer immediate scale. Assuming all else works out, it might take Verizon five years to add an additional seven million or so FTTH passings outside of the current region. 


There is a value to revenue Verizon can add from day one, rather than building gradually over five years.


Thursday, September 5, 2024

Verizon Flips Assets: Selling then Buying Frontier Communications

Asset flipping in any business is not unheard of, but Verizon’s history with Frontier still seems instructive. In 2010, for example, Frontier Communications purchased rural operations in 27 states from Verizon, including more than seven million local access lines and 4.8 million customer lines. 


Those assets were located in Arizona, California, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, Wisconsin and West Virginia, shown in the map below as brown areas. 


Then in 2015, Verizon sold additional assets in three states (California, Texas, Florida) to Frontier. Those assets included 3.7 million voice connections; 2.2 million broadband internet access customers, including about 1.6 million fiber optic access accounts and approximately 1.2 million video entertainment customers.


source: Verizon, Tampa Bay Business Journal 


Now Verizon is buying back the bulk of those assets. There are a couple of notable angles. First, Verizon back in the first decade of the 21st century was raising cash and shedding rural assets that did not fit well with its FiOS fiber-to-home strategy. In the intervening years, Frontier has rebuilt millions of those lines with FTTH platforms.


Also, with fixed network growth stagnant, acquiring Frontier now provides a way to boost Verizon’s own revenue growth. The acquisition means Verizon’s FTTH  connections will jump from approximately 7.4 million to 9.6 million, a gain of about 23 percent in one fell swoop. And since home broadband is the primary revenue growth driver for fixed networks these days, that matters. 


source: Verizon 


There are other takeaways. As in the mobile communications business, where Verizon and AT&T, for example, had been focusing on urban footprints and customers, market saturation has forced both firms to plumb rural areas and customers as well as the mobile virtual network operator business and prepaid accounts, where the main focus had been postpaid branded accounts, market saturation has forced the major providers to search in new areas for growth. 


As a byproduct, Verizon might, in some cases, be able to leverage its new fixed network assets to support its mobile network as well (fiber backhaul, for example). 


It is possible there are other strategic considerations as well. T-Mobile, which started out with zero share of the fixed network home broadband market, now is growing based on its use of fixed wireless services provided by its mobile platform.


But T-Mobile is making its first steps towards adding some amount of fixed network access provided by cabled networks as well. For example, T-Mobile has partnered with EQT, a global investment firm, to acquire Lumos, a fiber-to-the-home platform.


T-Mobile also formed a joint venture with KKR, another global investment firm, to acquire Metronet, a leading fiber-to-the-home provider. That acquisition also will expand T-Mobile’s fixed network home broadband market share.


And while it has seemed unlikely that T-Mobile would contemplate moves such as acquiring Frontier Communications or other firms such as Brightspeed itself, that outcome--at least regarding Frontier--is closed. 


On the other hand, the pressure to grow footprint to grow market share remains intact. Brightspeed does appear to have substantial overlap with Verizon’s new fixed network footprint, but duplicated assets might be sold. 


And Verizon appears to face little danger of antitrust action were it to acquire additional fixed network assets, given its modest coverage of U.S. homes. By some estimates, prior to the Frontier acquisition,   

Verizon homes might have numbered less than 25 million, possibly as low as 20 million. 


That is far fewer than top Verizon competitors might claim. 


Comcast has (can actually sell service to ) about 57 million homes passed. AT&T’s fixed network represents perhaps 62 million U.S. homes passed. 


Charter already passes more than 32 million locations, including homes and businesses. 


CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to.


The point is that additional Verizon acquisitions of fixed network assets, to reach more U.S. homes, might not pose antitrust issues. The Frontier acquisition adds between five million to 10 million potential new fixed network locations (not all upgraded for FTTH, yet, and including business locations). That potentially increases Verizon’s “locations passed” footprint by as much as a third. 


Using Verizon’s recent assertion that, after the Frontier acquisition, Verizon will reach 25 million homes, Verizon would still have some ways to go before it passes as many homes as AT&T, Comcast or Charter, its larger fixed network competitors. 


Frontier is said to have a network reaching 15 million locations, including homes and businesses. A reasonable guess is that at least 10 million of those locations are homes. 


Most of those locations are arguably not good candidates for FTTH investment, which is why firms such as Verizon and Lumen sold off rural footprints in the past. 


If Verizon’s “homes passed” footprint, after the acquisition, is only 25 million, there remains room to add more homes by acquisition.


Brightspeed’s network seems to pass about 6.5 million locations. Most are homes, but not all. Assuming 90 percent are residential, that implies less than six million locations are homes. So even adding Brightspeed assets would only bring Verizon up to perhaps 31 million or so homes, still far less than reached by AT&T, Comcast and Charter. 


The point is that the strategy of selling off rural assets and re-acquiring them later, once a critical mass of FTTH passings and accounts have been created, seems a logical strategy. Verizon’s cost to acquire the Frontier footprint (not customers, but network passings) is north of $1,000 per location, and possibly in the $1500 per passing range. 


Many observers expect that the former Frontier FTTH passings will double within a couple of  years. At current take rates, that also implies a potential additional two million or more FTTH accounts being added. 


Asset flipping remains part of the connectivity business. But it is rare to see a seller reacquire its sold assets.


Monday, November 20, 2017

U.S. Internet Access: What Would it Take for AT&T, Verizon to Take 10 Market Share Points?

The largest U.S. cable TV companies have 64 percent share of internet access accounts in the United States, according to the latest data from Leichtman Research Group. But there also is an 80/20 rule at work: the firms that drive most of the activity are Comcast and Charter; AT&T and Verizon.


Charter and Comcast have 81 percent of the cable internet customers. AT&T and Verizon have 67 percent of the telco internet access customers.


Between them, Charter and Comcast got 93 percent of the net account additions in the cable TV internet access provider segment. And while AT&T gained marginally, while Verizon lost marginally, nearly all the telco ISP losses came from CenturyLink and Frontier Communications.


In other words, though cable ISPs continue to get virtually all the net gains in accounts, AT&T and Verizon are roughly flat, in terms of subscriber installed base, while it is the rural operations that are losing share to cable rivals.


There might be some larger implications. Assume Verizon and AT&T get about 40 percent share in their markets, with cable getting 60 percent. No matter what they do, how easy will it be for AT&T and Verizon to nudge up to about 50 percent share? And how could they do so?


Basically, AT&T and Verizon likely would have to be able to match cable speeds and product features, as well as offer lower prices cable refuses to match, or otherwise change the value-price bundle in some other way relevant for consumers.


Ratcheting up speeds to match cable likely is the less difficult precondition, as costly as network upgrades might be.


Gaining a sustainable pricing advantage over cable is more difficult, as AT&T and Verizon cannot control the cable reaction. And it is by no means clear that  cable competitors would accept lower market share to protect their profit margins.


Leaving those issues aside for the moment, assume that AT&T and Verizon were able, somehow, to grab 10 points of market share, in part by upgrading to gigabit speeds, with a path to 10 Gbps.


The upside from such an upgrade is about 10 points of market share in internet access. What is a point of share in the consumer market worth?


Assume an internet access account taken from a cable supplier represents about $50 a month in revenue, or an annual $600 worth of gross revenue. If so, one percent of share gain is about 945,322 accounts in the overall market.


The issue is that none of those firms operates fully nationwide, and do not compete solely with the other two firms (Comcast and Charter on one hand, AT&T and Verizon on the other).


But as a simplifying assumption, assume AT&T, Verizon, Charter and Comcast collectively represent about 72 million accounts, and that the share changes would happen only across that 72 million installed base.


In that case, one percent of share change represents 720,000 accounts. Also, since the market is a zero-sum gain, five percent of gain by telcos means five percent loss for cable, for a total net swing of 10 percent, and a new share structure with cable at 55 percent and telcos at 45 percent.


That suggests, broadly, the the upside for AT&T and Verizon, to gain five percent share of the installed base, is really about 3.6 million accounts. At $600 for each account, annually, that implies something on the order of $2.16 billion in incremental revenue for AT&T and Verizon, with AT&T gaining about 69 percent of that.


The implications of a full 10-point change in market share, resulting in a 50-50 split of the market, is $4.3 billion in annual revenue and net swing of 7.2 million accounts,  again assuming that AT&T/Verizon only face Comcast/Charter in their markets.


As a practical matter, the potential for installed base share change between those four firms likely is less than that, since none of the four firms actually faces a zero-sum situation across the cable-telco industry segment divide.


The point is that the revenue upside for internet access gains arguably is less than $3 billion in annual revenue for AT&T, some $1.3 billion for Verizon, if AT&T and Verizon were able to take half the internet access share in their fixed network markets.


Compare that to the cost of upgrading 18 million passings to get those 7.2 million new accounts. Recall that both AT&T and Verizon presently have customers on about 40 percent of passings. So it is necessary to upgrade all passings to capture half the new customers.


At $700 per passing, that implies a network investment of about $12.6 billion, plus activated account investment of perhaps another $2.1 billion, or about $14.7 billion total. Marketing or customer acquisition costs would be incurred as well.


Such customer acquisition costs can run about $2000 per new account, including direct marketing costs and the cost of promotional pricing and incentives. That could add another $14.4 billion in operating costs, for a total of $29 billion.

You might consider that a reasonable bet (spending $29 billion to harvest $4.3 billion in additional revenue). But you also can see why AT&T and Verizon are hopeful about 5G-based fixed wireless access, which might offer capital investment about half what fiber to the home costs.

ISPs
Subscribers, 3Q 2017
Net Adds, 3Q 2017
Cable Companies


Comcast
25,519,000
213,000
Charter
23,603,000
285,000
Altice
4,020,900
16,500
Mediacom
1,194,000
9,000
WOW (WideOpenWest)
730,000
2,400
Cable ONE*
519,062
(2,662)
Other Major Private Company**
4,860,000
15,000
Total Top Cable
60,445,962
538,238
AT&T
15,715,000
29,000
Verizon
6,978,000
(10,000)
CenturyLink
5,767,000
(101,000)
Frontier
4,000,000
(63,000)
Windstream
1,017,400
(8,400)
Cincinnati Bell
307,900
800
FairPoint^
301,000
(3,193)
Total Top Telco
34,086,300
(155,793)



Total Top Broadband
94,532,262
382,445
source: Leichtman Research

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