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.

Will Alphabet Antitrust Even Matter, By the Time is is Finally Resolved?

Potential antitrust action against Alphabet could include asset divestitures, though some believe  more-likely outcomes are behavioral measures that might temporarily slow Alphabet growth, but could  have fewer longer-term negative consequences--with one glaring exception.

If Alphabet leaders are consumed with defending themselves against antitrust, it is possible they will be constrained from moving forward in some key new area (possibly related to artificial intelligence), much as some believe Microsoft fell behind in mobility because of its antitrust efforts. 

The precedent there is the Microsoft antitrust action of 2001, which caused some initial changes in business practices intended to benefit competitors, but which arguably did not slow down Microsoft growth in other areas, with the notable exception of mobility and smartphones. 

Indeed, some might argue that Microsoft sought growth in other areas precisely because of the behavioral remedies. In other cases, even asset divestitures have had complex outcomes. 

The breakup of the AT&T system in the early 1980s was intended to promote competition, and did so. But consolidation followed and AT&T essentially was reassembled. Competition--the intended outcome of the breakup--did increase. 

But AT&T arguably was more affected by the emergence of the internet and the mobile communications revolution than by the antitrust actions. AT&T’s legacy businesses are a much-smaller part of overall revenue compared to mobility, which generates more than half of total revenue. 

Indeed, the long-term impacts on industry structure and dominant firm performance are complex. Standard Oil was broken up into 34 different competing firms. But consolidation followed and the surviving firms arguably were not harmed. 

Exxon; Mobil (eventually combined to form ExxonMobil; Chevron; Amoco (later acquired by BP) and Marathon Oil were formed by state-level Standard Oil divisions, for example. 

IBM’s antitrust suit eventually was dropped, but that firm’s fortunes were arguably shaped more by the emergence first of the minicomputer and then by personal computing than regulatory action. 

In fact, one possible outcome is that the case drags on long enough that market dynamics already have shifted, lessening the importance of any proposed remedies. It is possible that Google’s search dominance already will have declined because of generative AI alternatives, long before the antitrust action is applied. 

Much product search and other forms of discovery already have shifted to Amazon or social media, while AI-powered “answers” are poised to disrupt other forms of search as well. In other words, the Department of Justice antitrust action might be coming just at the point where it becomes almost irrelevant, by the time it is settled, if any action occurs at all. 

The Microsoft antitrust action lasted a decade before being resolved, and some might argue that shifted the playing field to mobility and phones, making the original reasons for antitrust actions around personal computers and browsers somewhat moot. 

Also, Alphabet also faces antitrust action in other countries, which could lead Alphabet to take voluntary actions that alleviate those concerns in ways that lessen Alphabet’s market dominance, but without huge structural changes such as breaking Alphabet up into smaller “bets.” 

Some have suggested Android and Chrome, or perhaps YouTube wind up becoming products owned by separate companies. What remains unclear are possible changes--or continuity--of consumer behavior. Users might not switch from using Google for search, Android for the operating system of their mobile devices or Chrome for their preferred browser, anymore than they’d switch from using YouTube to some other app. 

Rapid technology change can upend even well-intentioned reform. The Telecommunications Act of 1996, for example, aimed to increase competition in the communications market largely around voice services. 

Though arguably succeeding in that sense, the Act missed the arrival of the internet, and exempted mobile services, both of which had an even more profound impact on connectivity, content and communications than the effort to promote competition in fixed-network voice services. 

To some genuine extent, the Telecom Act focused on the wrong problem, or perhaps on an unnecessary problem, given the disruptive changes the internet and mobility were unleashing. 

One might have a disquieting--and similar--feeling about the antitrust action against Google. By the time it is resolved, it might not matter so much.

DT Revenue Growth: Scale or Scope?

Deutsche Telekom says it plans to boost revenue growth by increasing economies of scale and using artificial intelligence. The promise of AI to reduce costs is likely understood by all observers. The “economies of scale” might be more complicated, as that term implies wringing cost out of existing operations by selling more, or to more customers, using the same assets. 

Strictly speaking, the latter phrase (“scale”) refers to selling at higher volumes (to more customers). But some of DT’s stated plans might involve selling new or different products to the same customer base, which, strictly speaking, is “economy of scope.” 

In other words, “scale” means selling a product to more customers. “Scope” means selling additional things to existing customers. As a practical matter it might not matter whether what DT intends are examples of scale or scope. It is likely both will be at work.

  

DT expects to sell “additional products and services ranging from payment services for cell phone insurance services and platforms for payment services through to AI solutions for consumers” in its mobile business, which is a clear example of scope economics. 

In the global business markets, DT seems to suggest gains will come from higher sales to more customers, which is a “scale” economy. 

In the telecom industry, “economies of scale” can be operationalized as instances where the average cost per user decreases as the volume of services provided increases. That generally arises from spreading large fixed infrastructure costs over a growing number of subscribers; increasing sales to those customers or otherwise optimizing network usage to reduce cost per unit.

So, compared to some other industries, scale economies are more difficult, as the physical network footprint generally has to be increased to reach more potential customers (acquisitions of other telcos, for example; or building out new networks outside the present geographic footprint). 

Industry	Economies of Scale Potential	Fixed Costs	Marginal Costs	Scalability	Barriers to Scaling
Virtual Products (e.g., SaaS, streaming)	Extremely High	High (development, initial infrastructure)	Near zero (reproducing digital products)	Unlimited (global reach)	Low (mainly infrastructure scaling, user acquisition)
Telecom Networks (e.g., Fiber, Cellular)	Moderate	Very High (infrastructure: cables, towers)	Significant (capacity upgrades, maintenance)	Limited (capacity constraints, physical coverage)	High (geography, regulation, infrastructure costs)
Manufacturing (e.g., Electronics)	High	High (factories, machinery)	Low (once economies of scale are achieved)	High (limited by supply chain and logistics)	Moderate (supply chain constraints, capital investment in machinery)
Automobile Production	Moderate to High	High (factories, R&D, supply chains)	Moderate (labor, raw materials, logistics)	High (dependent on supply chain, market demand)	Moderate (complex supply chain, regulation, capital intensive)
Retail (e.g., E-commerce)	Moderate	Moderate (warehousing, logistics)	Low (online distribution, logistics costs decrease with scale)	High (digital platforms scale easily)	Moderate (logistics, competition, last-mile delivery costs)
Healthcare (e.g., Hospitals)	Low to Moderate	Very High (equipment, staff, real estate)	High (labor, equipment usage, pharmaceuticals)	Limited (physical capacity, staffing limitations)	High (regulation, physical constraints, capital-intensive infrastructure)
Energy (e.g., Renewable energy production)	Moderate	Very High (plant construction, grid integration)	Low to Moderate (depending on energy source)	Moderate (limited by physical infrastructure)	High (regulatory barriers, physical infrastructure expansion)
Education (e.g., Online platforms)	High	Moderate (platform development, content creation)	Near zero (digital content distribution)	Very High (global reach, online scalability)	Low (content development, digital infrastructure scaling)
Logistics (e.g., Delivery services)	Moderate	High (transportation, warehousing)	Moderate (fuel, labor, vehicle maintenance)	Moderate (dependent on infrastructure and efficiency)	Moderate (geography, labor, fleet expansion)
Financial Services (e.g., Banking, FinTech)	High	Moderate (technology, regulatory compliance)	Low (digital transactions, account maintenance)	High (digital services can scale globally)	Moderate (regulation, cybersecurity, trust building)

Still, some might argue that telco potential for economies of scale is less than might be expected. When a new geography is to be served, additional capital investment is required. So, by definition, the additional customers and revenue are not generated by the “same” assets, which would imply lower cost per customer. 

To be sure, there are possible economies in other areas (back office, overhead), but telco geographic expansion on a facilities basis requires additional investment in plant. 

So DT’s possible upside is more likely to come from “scope” in its consumer business, but possibly “scale” in its global business customer segment.

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.