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.

High-Cost Home Broadband Subsidies Work

Very few major social problems have clear and uncomplicated causal relationships, which makes virtually impossible the task of determining whether public policies actually work, or not. 

For complex social problems like poverty, housing, crime, education, carbon reduction or traffic, it remains quite difficult to prove causal links between policies and outcomes. Basically, policies are tried without any real way of knowing whether they work. 

Contrast that with a few instances where the primary causation mechanisms are relatively clear. The causal link between smoking tobacco and various health issues like lung cancer, heart disease, and respiratory problems is well-established.

There is a direct causal relationship between alcohol consumption and impaired driving leading to accidents and fatalities.

Conditions such as scurvy (vitamin C deficiency) or rickets (vitamin D deficiency) have clear causation mechanisms related to lack of specific nutrients in the diet. Likewise, the danger of lead exposure, especially in children, is clear.

The overuse and misuse of antibiotics in healthcare and agriculture has a direct causal relationship with the development of antibiotic-resistant bacteria.

Home broadband supply now is likely one problem for which we know at least one causal relationship, namely that financial subsidies work. Since the cost of home broadband infrastructure is directly related to population density, financial subsidies are required in low-density rural areas. 

Urban households tend to have access to better home broadband than households in rural areas, rural residents might note, policymakers might agree and OpenSignal says. 

And though there are correlations between income, education and age in any market, “income levels are less predictive of reliability than density,” OpenSignal notes.

It might be noteworthy that although sharing of network infrastructure often is touted as a way of reducing the cost of home broadband infrastructure, OpenSignal studies find there is no correlation between network infrastructure sharing and either high reliability or a narrow digital divide. “Countries with limited infrastructure sharing but targeted subsidies for private rural investment mostly perform better than those relying on widespread infrastructure sharing,” OpenSignal notes.

Topography and density are key factors in the size of the divide between urban and rural home broadband experience. 

Markets with highly-concentrated populations in urban areas show small gaps between urban and rural reliability, and spread-out middle-income countries with difficult terrain show big gaps. “But a few countries with lots of medium-density areas, like the U.S., and Spain, have relatively small digital divides,” the firm says. 

In fact, the U.S. market might better be characterized as having huge low-density areas. population density has a huge impact on the cost of building new networks, mobile or fixed, but especially fixed networks.  

U.S. population density is quite thin across most of its geography, which directly affects the cost of building broadband networks, as hefty subsidies are required to reach the last one percent or two percent of remote locations. 

And the United States has a huge percentage of its land mass that is thinly settled, if at all settled. In Canada, 14 percent of the people live in areas of density between five and 50 people per square kilometer. In Australia, 18 percent of people live in such rural areas.

In the United States, 37 percent of the population lives in rural areas with less than 50 people per square kilometer.

Put another way, less than two percent of Canadians and four percent of Australians live in such rural areas. In the United States, fully 48 percent of people live in such areas.

Put another way, about six percent of the U.S. land mass is “developed” and relatively highly populated. Those are the areas where it is easiest to build networks. But about 94 percent of the U.S. land surface  is unsettled or lightly populated, including mountains, rangeland, cropland and forests. And that is where networks are hardest to build and sustain.

So it should not at all be surprising that broadband reliability is, on average, 23 percent higher in urban areas than in rural areas across all markets we analyzed,” say analysts at OpenSignal. The firm uses a 100 to 1000 point scale to measure broadband experience in a typical household where multiple devices are used simultaneously. 

The metric is based on ability to connect (uptime); ability to complete tasks and speed, latency, jitter performance. 

source: OpenSignal 

Financial subsidies for service providers in rural areas are one way governments try to close digital divides, and arguably are the most effective ways to do so. Whether in the form of subsidies for anchor institutions or per-passing or per-connection support is the clearest way to reduce the cost of rural infrastructure for suppliers. 

Beyond that, policymakers often try to encourage competition and promote deployment of alternative platforms (satellite, fixed wireless, mobile access). 

Governments can help communities create cooperatives; reduce permitting and other regulatory costs or train people to use broadband. But perhaps nothing works so well as simple subsidies, for the simple reason that population density and network cost are inversely related. 

High population density leads to lower costs; low density leads to higher costs. So subsidies for home broadband in rural areas are a relatively clear example of cause-and-effect relationships. 

Do Home Broadband Speed Rankings Really Matter Much?

Ookla’s May 2024 report on mobile and home broadband shows Singapore and Hong Kong leading the list of countries with the fastest speeds, which is not surprising at all. 

You might not have expected Chile to rank third, the UAE and Iceland in spots four and five. The United States ranks sixth, which is sort of an anomaly. Over the past half century or so, it would not have been uncommon for U.S. metrics to rank anywhere from 12th to 20th on measures of tele-density or internet access bandwidth. 

We might reasonably ask how much importance such speed rankings actually mean. One might argue the rankings generally suggest that small city-states and small countries can produce good broadband infrastructure faster and better than any large country, simply because the physical facilities are smaller in coverage area, with higher density. And network size and population density directly affect the cost of such facilities. 

Hong Kong, Singapore and other such areas will always be able to create high-performance access infrastructure faster than any continent-sized country with low population density. 

Nor, looking only at city-states and small countries, might we see clear correlations between growth and home broadband speeds. Singapore and UAE might be strong performers in that regard. But other small countries might not show the same strong correlations. It might be the case that only rarely, if ever, are home broadband and economic growth rates uncorrelated. 

But the correlations are not consistent. So it is worth speculating about how important such rankings actually are, when it comes to applying the tools and wringing business or economic value out of them. 

To be sure, lots of studies suggest there is a correlation between economic growth (gross domestic product) and home broadband availability and speed, with perhaps greater correlations related to availability than speed. 

Study	Year	Key Findings
Ericsson, Arthur D. Little, and Chalmers University of Technology	2011	Doubling broadband speeds can add 0.3% to GDP growth
World Bank	2009	10% increase in broadband penetration associated with 1.38% increase in GDP growth for developing countries
OECD	2011	Positive but diminishing returns from increased broadband speeds on economic growth
ITU (International Telecommunication Union)	2012	Broadband has a statistically significant impact on GDP growth, but effect varies by region and level of development
Rohman and Bohlin	2012	Doubling broadband speed contributes 0.3% GDP growth in OECD countries

But it might also be worth noting that there are similar correlations between gross domestic product gains and educational attainment; rule of law; capital investment; income and wealth; or infrastructure density and availability. 

And correlation is not causation. 

In fact, “causality” might even be the reverse of what we might think. 

Keep in mind that economists generally economists might generally agree there is a  “causal” relationship between growth and:

• Capital accumulation (both physical and human)  

• Innovation and technological progress (research and development; creation of new ideas)

• Macroeconomic stability helps (Low and stable inflation; sound fiscal policies)

• Openness to trade

• Quality Institutions (rule of law and low levels of corruption)

• Financial markets well developed

So we might consider education an input to future capital; innovation or technology development. We might consider home broadband another form of capital. 

But it's often unclear whether some factors said to cause growth are themselves caused by growth. Does financial development, trade openness and political stability cause growth, or does growth cause financial development, trade and political stability? We cannot really say. 

Consider “good schools,” quality home broadband, medical care or other supposed platforms aiding growth. 

It might plausibly be the case that demand for good schools and fast internet access, for example. Are the product of demand from citizens who already have the resources to pay for such quality broadband, as well as the use cases. 

Likewise, if local schools are funded by property taxes, then “good schools” might be “caused” by affluent citizens who can afford expensive housing, which comes with high property values, leading to high tax revenues to fund schools. 

In fact, one might well argue that often, the prevalence of quality home broadband, transportation infrastructure or any number of other supposed producers of economic growth might instead be a result of pre-existing strong economic growth. 

Rather than robust economic growth being “created” by quality broadband; educational attainment and other drivers, it is equally plausible that pre-existing high growth creates wealth and resources that in turn lead to the other outcomes. 

You might suspect educational attainment, for example, is correlated with stronger economic growth, and studies support that notion. But a flywheel might be at work, where pre-existing high attainment leads to more attainment; high growth reinforcing more high growth. 

Study/Source	Correlation/Finding
Georgia Tech study	0.75 correlation between years of education and GDP per capita. 1 year increase in education associated with 34.4% increase in GDP per capita.
Hanushek & Peterson analysis	Raising US student test scores to Canadian levels estimated to add $77 trillion to US economy over 80 years.
International comparison	Countries with top test scores (e.g. Singapore, Hong Kong) had ~2% higher annual GDP growth compared to average.
OECD countries analysis	Positive correlation between education expenditure at all levels and GDP, stronger over 5-10 year periods.
Developing countries analysis	Positive correlation between primary education spending and GDP growth. Negative correlation for secondary/higher education.
General finding	Education is "intrinsically linked to economic growth", influencing both personal salaries and national GDP.

Likewise, studies of transportation infrastructure also tend to be correlated with gross domestic product, but sometimes only moderately. 

Transportation Mode/Metric	Correlation with GDP	Time Period	Source/Study
Civil aviation (freight)	0.907 (high)	1990-2007	IOP Science study
Civil aviation (freight)	0.711 (strong)	2008-2017	IOP Science study
Inland waterway (freight)	0.816 (strong)	1990-2007	IOP Science study
Inland waterway (freight)	0.789 (strong)	2008-2017	IOP Science study
Road transport (freight)	0.715 (strong)	1990-2007	IOP Science study
Road transport (freight)	0.741 (strong)	2008-2017	IOP Science study
Railway (freight)	0.668 (strong)	1990-2007	IOP Science study
Railway (freight)	0.558 (moderate)	2008-2017	IOP Science study
Water transportation (freight)	0.750 (strongest)	1989-2018	E3S Conferences study
Highway (freight)	0.709 (strong)	1989-2018	E3S Conferences study
Pipeline (freight)	0.700 (strong)	1989-2018	E3S Conferences study
Railway (freight)	0.678 (strong)	1989-2018	E3S Conferences study
Civil aviation (freight)	0.593 (moderate)	1989-2018	E3S Conferences study

The point is that we cannot be very sure that faster home broadband is the result of growth or the cause of growth. Nor can we know very much about how the “quality” of broadband (speed and latency performance, for example) produces growth or is a reflection of growth.