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.

How Should Governments Subsidize Unlimited Internet Access?

A new Federal Communications Commission inquiry on data caps does raise some obvious issues, as the action is driven by complaints by internet users about the very existence of such caps, which might be likened to rationing of a resource, says FCC Chairwoman Jessica Rosenworcel. At least so far, the concerns seem directly related to data limits related to the cost of service plans.

In the press release announcing the inquiry, the FCC included complaints such as “We can't afford $190 a month for unlimited internet.” Other cited complaints revolve around “excessive costs” or present data caps being insufficiently capacious. 

On the other hand, differing prices based on differing consumption volume is a fairly-standard principle in most businesses and industries, though some subscription services, such as linear video, satellite radio or other audio streaming services routinely operate on an “unlimited consumption” model. 

So do many mobile phone voice and texting service plans, at least for domestic usage.

As a rule, consumers seem to expect volume-related pricing for physical goods and most intangible products, whether that is water, electricity, groceries, fuel or clothing. 

And, for providers, total costs of creating and providing a service or product matter, not only the cost of one particular part of the value chain. Some observers focus only on the marginal cost of providing the next unit of consumption, not full costs (capital investment and all operating costs). 

The total cost of providing an internet access service arguably differs for large, dominant providers and smaller local providers. 

Though network Infrastructure, bandwidth and transit costs are of high importance for all ISPs, smaller, regional ISPs might tend to find that bandwidth and infrastructure costs dominate, whereas larger ISPs might find that marketing, research and development costs, and regulatory compliance may take on greater importance.

Customer premises equipment, labor, marketing and customer acquisition costs generally are of medium importance for all ISPs. 

But large ISPs might find the costs of regulatory compliance, research and development as well as energy costs to be of more significance, compared to how those issues pertain to small ISPs. 

Study Title	Date	Publication Venue	Key Conclusions
"The Economics of Internet Traffic"	2002	Journal of Economic Perspectives	Found that marginal cost is generally low, especially for peak-time traffic.
"The Cost of Internet Traffic: A Study of Residential Broadband Access"	2005	Telecommunications Policy	Examined the cost structure of residential broadband access and concluded that marginal cost is relatively low.
"The Economics of Internet Traffic: A Critical Review"	2010	Telecommunications Policy	Provided a comprehensive overview of research on the economics of Internet traffic, highlighting the challenges of measuring marginal cost accurately.
"The Cost of Internet Traffic: A Survey of Recent Studies"	2014	Telecommunications Policy	Summarized key findings from recent studies on the marginal cost of Internet traffic, emphasizing the importance of network congestion and traffic patterns.

The point is that the marginal cost of providing the next unit of capacity or consumption might not be the only measure, or the best measure, of cost and its relationship to consumer pricing. Providers can affect some of their total costs. But many fundamental costs, including network infrastructure, are relatively inelastic. 

Other costs have some elasticity, but can be hard to contain in highly-competitive markets. So the actual marginal network cost of producing the next unit of capacity might not be the best metric for assessing the “fairness” of access pricing. 

The larger issue, perhaps, are the sustainable business models allowing internet service providers to continually expand capacity, providing the needed usage support for consumers, at prices those consumers consider fair and reasonable. All of that is dynamic.

To the extent that “cost of use” is a financial problem, governments routinely use subsidies of various types to support consumption of essential or important goods by some citizens who would not otherwise be able to afford such goods. 

As always, the issue of “who pays” has to be answered in the concrete. To the extent that ISP sustainability literally requires profits, providers have to keep working on efficiencies so they can keep costs “reasonable.” And observers debate the degree to which customer usage volume actually matters.

Logically, marginal costs exist when customers use more of a resource. But how much marginal cost exists is an issue. Fixed or sunk costs might actually predominate. But again, subsidy programs can be created that address the needs of specific populations deemed to require support.

What are the Natural Limits to Fixed Wireless Market Share?

T-Mobile says it is on track to reach seven million to eight million fixed wireless accounts in 2025, and perhaps as many as 12 million by 2030. 

If there are about 110 million to 125 million U.S. home broadband accounts, that suggests T-Mobile alone--which had zero market share of the home broadband market until recently--already might claim five percent of the market. 

we might estimate that cable TV internet service providers continue to hold the largest share, but with fixed wireless accounts growing substantially.

One of the odd realities of the U.S. internet access business is that--save for a recent Verizon statement, none of the big leaders of the internet access business actually ever says how many homes their networks pass. But Verizon recently noted that is passes 25 million homes. 

My own past estimates have suggested, out of a total of 140 million U.S. homes (higher than figures some use), that AT&T’s landline network passed 62 million. Comcast had (can actually sell service to) about 57 million homes passed.

The Charter Communications network passed about 50 million homes, the number of potential customer locations it can sell to.

I had estimated Verizon homes passed might number 27 million, which is higher than the 25 million Verizon now says it passes. 

Lumen Technologies never reports its “homes passed” figures, but likely has 20-million or so consumer locations. 

Of course, if one uses the lower 110 million to 125 million figures, then T-Mobile’s share might be higher. It never is very clear whether reported “home broadband” figures include small business locations or not, but most such reports probably do include small business accounts. 

My own past estimates have pegged U.S. homes in the 140 million range based on estimates by the U.S. Census Bureau. As a practical matter, at any given point in time millions of those locations are not part of the cabled home broadband market.

Some units are vacation homes are unoccupied most of the time. Other units are fully unoccupied and therefore not candidates for home broadband services. Some units are boats, trailers or other locations not easy or possible to serve using cabled networks. 

Also, some units are so remote it is economically unfeasible to reach them by a cabled network at all. That might be up to two percent of all U.S. homes. 

AT&T, for example, reports revenues for mobility, fixed network business revenues and consumer fixed network revenues from internet access, voice and other sources. But those are traditional financial metrics, not operating indices such as penetration or take rates, churn rates and new account gains. 

source: AT&T 

Nobody seemingly believes the same effort should be made to measure the number of home broadband provider locations or dwellings reached by various networks. Better mapping, yes. Metrics on locations passed? No. 

And yet “locations passed” is a basic and essential input to accurately determine take rates (percent of potential customers who actually buy). That input matters quite a lot to observers when evaluating the growth prospects of competitors, even if that figure does not matter much for policymakers, who mainly care about the total degree of home broadband take rates, on an aggregate basis. 

The U.S. Census Bureau, for example, reported some 140.5 million housing units housing units as part of the 2020 census. The estimate for 2021 units is 142.2 million units. Assume 1.5 million additional units added each year, for a 2022 total of about 143.6 million dwelling units. 

Assume vacancy rates of about six percent. That implies about 8.6 million unoccupied units that would not be assumed to be candidates for active home broadband subscriptions. The U.S. Census Bureau, though, estimates there are about 11 million unoccupied units when looking at full-time occupied status. That figure presumably includes vacation homes.

Deducting the unoccupied dwellings gives us a potential home broadband buyer base of about 132.6 million locations. 

That has implications for the theoretical maximum market share any of the leading providers might claim. Depending on one’s choice of the base of addressable homes, and keeping in mind there is overlap between at least one of the cable and one of the telco providers in virtually every territory, Comcast and AT&T are best positioned to lead share statistics, in some future market where skill and resources are full deployed (telcos have largely built or acquired fiber-to-home facilities, for example), simply because their networks pass the most homes. 

That does not speak to actual market shares; only potential share were any particular provider to take 100 percent share of the market within its cabled network footprint. 

ISP	Homes Passed	Total Homes Low	Total Homes High	Max Homes Passed Low	Max Homes Passed High
Comcast	57	110	140	52%	41%
Charter	50	110	140	45%	36%
AT&T	62	110	140	56%	44%
Verizon	25	110	140	23%	18%
Lumen	20	110	140	18%	14%
T-Mobile	(not yet applicable)

T-Mobile’s initial foray into cabled networks is important, in that regard, but the potential share stats will not be significant for quite some time, given the small number of homes T-Mobile cabled networks could reach. 

For T-Mobile, fixed wireless is the key to its home broadband share gains. Fixed wireless remains important for Verizon Fixed wireless might become important for AT&T. 

The point is that only AT&T has potential to take significant share in the overall home broadband market, based on its extensive homes passed footprint. Only Comcast and Charter are in the same league. Verizon and Lumen, no matter how well they do in their regions, do not pass a similar number of U.S. homes. 

In principle, T-Mobile gains will be limited by its use of fixed wireless as the primary platform, as that platform appeals to the value portion of the market, for the most part (customers purchasing service at speeds no higher than 200 Mbps). 

Right now, that means T-Mobile’s fixed wireless service, itself limited by T-Mobile only to regions where it has excess capacity, is not available to the up-to-20-percent of the U.S. home broadband market. The T-Mobile addressable market is “homes content with access speeds no higher than 200 Mbps” and further reduced by T-Mobile’s own unwillingness to offer fixed wireless home broadband “everywhere.” 

T-Mobile and Verizon should continue to take market share for some time. Eventually, though, the market segment most attracted to fixed wireless will saturate, leaving the bulk of competition to the cable HFC and telco FTTH facilities. 

In principle, fixed wireless speeds can grow over time, as more spectrum is made available or network architectures move to smaller cells, but there remain physical limits to either of those strategies, especially since the key revenue driver remains mobile device service.