Verizon Signals Shift in Growth Prospects to Fiber-Based Home Broadband

Some will explain Verizon's acquisition of Frontier Communications as a signal that revenue growth is shifting in the direction of fiber-based home broadband as mobile service growth slows.

Virtually all the leading U.S. telecom (mobile and fixed) or cable TV companies have grown through acquisition. In fact, some will argue that more growth has happened that way than by organic revenue growth.

So although some might criticize the debt implications or the strategy, there is a reason Verizon is pursuing an acquisition of Frontier: it is one way to gain scale in the home broadband market. And acquisition arguably accounts for most of Verizon’s growth over the past couple of decades. 

Despite Verizon’s hefty mobile market position, it lags in the fixed network area, compared to rivals.  And that matters to the extent that high-speed home broadband is a significant growth driver, as AT&T recently indicated.  

Consider that although all telcos trail the two leading cable providers (Comcast and Charter) in national market share (those two firms have at least 63 percent national share, Verizon has just nine percent share compared to AT&T at 23 percent share. 

That is a result of the smaller fixed network geographic footprint Verizon has, relative to AT&T, Comcast and Charter. 

ISP	Subscribers (millions)	Market Share (%)
Comcast (Xfinity)	32.1	32.6
Charter (Spectrum)	30.4	30.9
AT&T (Fiber)	22.6	23
Verizon (Fios)	9.2	9.3
Lumen (CenturyLink)	4.8	4.9
Cox	7	7.1
Altice USA	4.7	4.8
Other (including smaller ISPs)	1.6	1.6
Total	98.5	100

U.S. internet service providers compete on a geographic basis and not all providers face all other providers. Comcast and Charter, both cable companies, generally do not compete head to head. Neither do AT&T, Verizon and Lumen Technologies. 

But sheer numbers of homes and other locations passed vary as well, with Comcast and Charter passing the most U.S. homes. 

ISP	Estimated Homes Passed (Millions)
Comcast	60
Charter	55
AT&T	30–35
Verizon	15–20
Lumen	10–15
Frontier	10–15
Altice USA	8–10
Windstream	6–8

ISPs also generally count small business broadband accounts within their “home broadband” totals, as well. 

ISP	Estimated Homes & Small Businesses Passed (Millions)
Comcast	65–70
Charter	60–65
AT&T	40–45
Verizon	20–25
Lumen	15–20
Frontier	12–15
Altice USA	10–12
Windstream	7–9

Also, differences in “homes and businesses” passed by any single ISP’s network long have mattered for assessments of the degree of competition. For example, when looking at telco fiber-to-home competition for cable hybrid fiber coax networks, the actual degree of competition has been shaped by the huge cost of upgrading telco copper access networks to fiber. 

That has limited the actual degree of competition between telcos and cable companies for decades, as it rarely is the case that a given telco has FTTH deployed ubiquitously in all its geographies. 

ISP	FTTH Homes & Small Businesses Passed (Millions)	Total Homes & Small Businesses Passed (Millions)	FTTH as % of Total Passings
AT&T	25–30	40–45	60–67%
Verizon	17–20	20–25	80–90%
Lumen	5–7	15–20	25–35%
Frontier	6–8	12–15	50–53%
Windstream	3–4	7–9	35–45%
Consolidated	1.5–2	4–5	30–40%

Traditionally, the “best” data we have had on the market share positions of cable and telco competitors has come from Verizon areas, as that is were FTTH facilities are most-ubiquitously deployed. And in those areas, Verizon has been able to gain a bit more than 40 percent market share, while the local cable operator has been able to hold on to 45 percent to 55 percent of the market, with other independent providers holding generally single-digit shares but growing. 

In a growing number of markets third-party providers have targeted areas where telco FTTH is not available, and in such areas have generally been able to garner up to 20 percent share. 

In some instances, where a cable company mostly competes with a municipal fiber network, and the local telco has no appreciable residential and small business fiber coverage, the municipal provider tends to get 20 percent to 30 percent market share. 

Provider Type	Estimated Market Share (%)
Cable Company	60–70%
Independent ISP	20–30%
Telco (non-FTTH)	5–15%
Other ISPs	2–5%

The degree of “other ISP” market share is shaped by the coverage area selected by the attacking independent ISP. Generally speaking, such ISPs will choose portions of an incumbent’s territory to operate in, rather than overbuilding an entire city or town, for example. 

As in the case of telco-cable competition, that necessarily restricts the degree of head-to-head competition across an entire market area, and is reflected in the lower take rates we generally see when a cable company competes against any fiber provider that does not cover the whole local market. 

So Verizon's acquisition of Frontier suggests greater emphasis by Verizon on growint its high-speed home broadband business using fiber-to-home capabilities.

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.