CenturyLink/Zayo: Verizon’s Forewarning

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While Verizon’s first-mover position with 5G wireless in the US will offer many advantages, including a locality just simply wanting to avoid the negative aesthetics of having another operator in the same location, it also adopts the role of the guinea pig in taking on many unknown technical challenges, leading to higher, unanticipated expenditures. Although there is ample speculation about CenturyLink purchasing at least a portion of Zayo (which fibeReality believes will happen), along with our intelligence pointing to a possible CenturyLink-T-Mobile-Sprint merger, we would assert that in hindsight, at least some Verizon executives may have tried to argue harder for pulling the trigger on purchasing the fiber provider itself. To be fair, Verizon had to be especially concerned about regulatory matters, as it has a historic reputation for at least trying to control as many assets as possible, including dark fiber in the past. Also, with the company focus squarely on 5G, why would it want to divert its attention by getting into an entirely new business, especially one that does not tend to have strands located in the critical access portion of the network to support its next-gen wireless infrastructure? Nevertheless, in our opinion, the cost of Verizon’s “One Fiber,” will be off by perhaps as much as double its original projections, and that it could have otherwise bought out Zayo entirely, and just made any other needed fiber additions over the course of just a few years. At least initially, Verizon planned for “One Fiber” to take up to five years to build out, but it would not be surprising to us, if it even requires a longer time to be completed. While there is no turning back for that operator anyway, CenturyLink is not in a position to just put the gas pedal down without understanding a lot of the true ownership and construction costs. So, taking over the fiber assets of Zayo, partially to fill in gaps in areas of the country it is planning to aggressively target, whether it is for future wireless assets or for other applications, appears to make a lot of sense.

Even though Verizon kind of implies “last mile,” when it refers to “One Fiber” in its messaging, it has really been about constructing its own very large rings in all of the NFL cities in the States, as well as in some of the strategic, non-NFL municipalities. The shocking amount of uncomfortable friction between the wireless and business divisions (despite the emphasis on the word, “One”) to get access to fiber, with instances of the latter unexpectedly tending to get priority (it could even be the inability to physically get it across the street), including on planning matters (despite being made up of a smaller group), symbolizes the inherent, problematic nature of placing new fiber underground. It was not that long ago that the legacy, optical wireline networking forks in general at Verizon were being treated as second-class citizens.

Partially, it is about working through disparate software systems within the company, but there is additionally, the host of unpredictable obstacles that can occur in digging up the ground to install fiber. Yet, given Verizon’s adamant stance about totally owning its fiber (another example of its “control” mentality”), we doubt very seriously that it would have actually changed its mind about purchasing Zayo, even assuming it knew the much higher cost in advance.

Again, it is more about an admonition to CenturyLink, with a valuation 14 times smaller than Verizon, that the firm cannot afford the luxury of so liberally deploying its own new fiber, if it is already widely available through an acquisition, especially outside of its traditional territory, where the bulk of the attractive enterprise markets (including for 5G apps) are located in the country. It has the added benefit of making the company an even bigger dark fiber provider (mainly resulting from the Level 3 merger), which would be beneficial in that higher volumes will become more important as margins are getting tighter, notably in places in which there is ample competition.

Regulatory blockage on such a deal, with CenturyLink gaining even more excess capacity, at least with the current FCC, would be doubtful, and there is only a single, true blue state in the old “US West” region. For the longer term, there would be a number of legal arguments/maneuvers: the precedent already established with Level 3, it could divest extra fiber where it does not play as a CLEC; and it could shift possession of the fiber later to potential wireless or content service operations.

Separately, Google is once more able to pretend it has a deep interest in optical technology (other than by necessity for its internal network) by reportedly bidding for Zayo. As when it came to spectrum auctions, the search engine behemoth gets a kick out of jacking up the price that will be paid by an incumbent service provider.

As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]