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


Tuesday, September 3, 2024

What AI Market Structure Will Emerge?

In what sorts of markets does rapid market share growth really matter for the long term? In what markets is it possible to shift share positions once markets are mature? When should firms focus on specialties and niches? When is an aggressive growth strategy called for, and when is it ill advised?  


When and why should leaders shift to profitability rather than growth, in growth markets? When will business leaders reach the limits of their growth strategies and have to consider becoming asset sellers?


The "Rule of Three" is a concept in business strategy originally introduced by the Boston Consulting Group that might inform business leader decisions of these types. 


The rule suggests that in mature, competitive markets where there are barriers to entry; economies of scale or are capital intensive, three companies tend to dominate, with the largest player holding 40-50 percent of the market, the second-largest holding 20-30 percent, and the third-largest holding 10-20 percent market share.


The concept is useful for strategists and market researchers as it suggests reasonable strategy possibilities, such as whether it makes sense to undertake disruptive actions to gain share, and if so, what rational possibilities for gains could occur. 


The other corollary is that profitability also tends, in such markets, to correspond to market share. 


So the rule suggests the importance, in capital intensive industries, of taking advantage of barriers to entry; economies of scale and industry segment leadership, especially when young industries are emerging. 


Hence the importance of rapid growth and share gains in software, some types of hardware, connectivity services, commercial aircraft manufacturing, search or cloud computing,  for example. 


Such Rule of Three markets generally are not susceptible to disruptive attacks, once the pattern is set. If one assumes market share is roughly correlated with profitability, then the market leader will have twice the profitability of provider number two, which in turn will have twice the profitability of provider number three. 


A 40-20-10 pattern could hold, with the balance held by numerous other specialty firms. That advantage in profitability contributes to all other efforts to maintain market leadership on the part of the leader, and also limits the possible range of actions by providers two and three to compete. 


Pricing attacks might generally fail for the simple reason that the market leader can simply match any price reductions attempted by the smaller providers. A firm with 10-percent margins could easily see zero margin, which is not sustainable. And a firm with a 20-percent margin that is sliced in half could not easily sustain such outcomes for too long, much less a permanent halving of profit margin. 


That also tends to be true of attempting value attacks (bundling, for example), which often can be matched by the market leader. 


The Rule of Three does not apply to fragmented industries, though. Consider the U.S. fast food market, where brand matters; product segments are diverse; barriers to entry are quite low and economies of scale might not be decisive. 


Brand

Share

McDonald's

43.80%

Starbucks

9.60%

Chick-fil-A

8.60%

Taco Bell

6.60%

Wendy's

5.70%

Burger King

5.40%

Dunkin'

3.70%

Subway

3.40%

Domino's

3.20%

Chipotle

2.80%

Sonic Drive-In

2.40%

Pizza Hut

2.30%

KFC

2.10%

Panda Express

1.50%

Arby's

1.40%


And though lots of markets--consumer and business--are concentrated, many are not. Concentrated industries are more likely to resemble the Rule of Three pattern, while fragmented industries tend not to show the pattern. The exceptions are that some segments of fragmented industries might well show a quasi-Rule of Three pattern.  


Athletic footwear might provide one example of a Rule of Three pattern, even within a larger industry category (fashion and apparel) that might be fragmented. 


Market Type

Industry

Market Characteristics

Example Companies

Concentrated

Consumer




Soft Drinks

Dominated by a few large companies.

Coca-Cola, PepsiCo


Smartphones

High market share held by a few players.

Apple, Samsung


Athletic Footwear

Leading brands control most of the market.

Nike, Adidas


Credit Cards

Few major issuers dominate the market.

Visa, Mastercard


Fast Food

A small number of chains dominate.

McDonald's, Starbucks, Chick-fil-A

Concentrated

Business




Commercial Aircraft

Duopoly structure in many regions.

Boeing, Airbus


Operating Systems (PC)

Few companies dominate the market.

Microsoft, Apple


Cloud Computing

Concentrated among a few major players.

Amazon AWS, Microsoft Azure, Google Cloud


Professional Services (Big 4)

Dominated by a few global firms.

Deloitte, PwC, EY, KPMG


Search Engines

One company holds a massive market share.

Google

Fragmented

Consumer




Restaurants

Highly localized, many small competitors.

Local and regional chains


Fashion and Apparel

Wide range of brands, trends, and niches.

Zara, H&M, many independent brands


Home Improvement

Multiple large and small players.

Home Depot, Lowe's, Ace Hardware


Organic Food

Numerous small and regional producers.

Whole Foods, Trader Joe's, local farms


Craft Beer

Many small, independent breweries.

Local craft breweries

Fragmented

Business




Marketing Agencies

Numerous small firms, specialized services.

Local and regional agencies


Construction

Many small to medium-sized firms.

Local contractors, regional builders


Logistics

Highly fragmented with many local operators.

Local trucking and shipping companies


Real Estate

Numerous small firms, localized markets.

Local agencies and independent agents


Consulting

Many small and specialized firms.

Local consultants, boutique firms


The U.S. home broadband market provides another example. Looking at all providers, the Rule of Three does not seem to hold. But within the category, looking only at legacy telcos, the pattern does seem to hold. AT&T has 15- to 18-percent share; Verizon seven to 10; Lumen two to four. 


The caveat is that AT&T, Verizon and Lumen do not actually compete head to head in most markets. In fact, market share corresponds to homes within the respective provider service territories. In contrast, where AT&T, Verizon and T-Mobile compete head to head across virtually all markets, shares are roughly equal. 


So even if mobile service is highly capital intensive, mature, with high barriers to entry, there seem to be offsetting factors, even when brand preference might be relatively stable. At some level, the regulatory context might prevent any of the providers from amassing too much more share. And most observers would likely agree that offers are highly competitive. 


ISP

Share

Comcast (Xfinity)

27-30%

Charter Communications (Spectrum)

23-26%

AT&T

15-18%

Verizon (Fios)

7-10%

Cox Communications

6-8%

Altice USA (Optimum, Suddenlink)

4-5%

CenturyLink (Lumen Technologies)

2-4%

Frontier Communications

1-2%

Mediacom

1-2%

Windstream

1-2%


Likewise, the Rule of Three seems to apply in the U.S. cloud computing “as a service” industry. Some will point to Microsoft’s share as deviating from the expected pattern. But real world markets often do not perfectly match what theory tells us to expect. 


Also, Microsoft’s revenue in the “intelligent cloud” segment historically has included productivity software, for example. But Microsoft has gradually been realigning revenue reporting to better reflect performance of the “cloud computing as a service” activities that compete head to head with Amazon Web Services and Google Cloud. 


The point is that Microsoft cloud computing revenue has for some time not been an easy “like to like” comparison with AWS or Google Cloud “computing as a service” revenues, as Microsoft once included other revenues, such as game platforms, within intelligent cloud.


Company

Market Share

Amazon Web Services

32.00%

Microsoft Azure

22.00%

Google Cloud Platform

10.00%

IBM Cloud

6.00%

Oracle Cloud

4.00%

Salesforce

3.00%

Alibaba Cloud

2.00%

Other Providers

21.00%


On the other hand, Microsoft, in removing productivity software subscription revenue from intelligent cloud, has added advertising revenues to the intelligent cloud category. 


The upshot is that there should be a temporary resetting of Azure market share, in a downward direction. 


The Rule of Three might be relevant early in a concentrated industry’s emergence as well as once the market share pattern is established, as it suggests disruption will be highly unlikely. 


The rule will be less useful--or break down--under some circumstances, such as when a major technology disruption threatens the legacy business model; when governments decide to regulate or deregulate an established industry; when some innovation enables non-traditional suppliers to enter a market or when consumer preferences change significantly. 


Economic downturns, new business models, supply or distribution chain disruptions or cultural or societal shifts could, in principle, be disruptive to established industries. Auto manufacturing might provide an example, as consumer shifts in preference for higher-mileage vehicles; sport utility vehicles rather than sedans; trucks rather than passenger vehicles; or hybrid and electric vehicle demand occur. 


As the artificial intelligence market grows, business leader strategies might well turn on expectations about whether the Rule of Three actually applies, as if so, where in the business.


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