If Verizon Has Vague Rationale, Think FCC

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For Verizon, there has been the matter of a tremendous buildout of Fiber-to-the-Home (FTTH) infrastructure in the past, which was clearly cost prohibitive, or more recently, supposedly picking up this activity with solutions that do not make sense technically. There have also been the head-scratchers on the purchases of both AOL and Yahoo, the former we addressed over a year earlier. They all have one aspect in common. They are either a means of finding additional ways of obscurely taking fuller advantage of FCC rulings that are favorable to the service provider or of finding an outlet of escape from those regulations unfavorable to the company.

During the last decade, Verizon appeared to be justifiably criticized by analysts on the Street and others for its massive construction of FTTH, particularly at the beginning of the process. The economics were not justifiable and there were hurdles in providing video services. Verizon did its best in offering a rationale that included the following factors: future-proofing the network, lowering operational costs, reducing expenses resulting from the learning curve, allowing for greater amounts of bandwidth, generating revenues from new services, and improving the subscriber experience. While several of these results actually occurred, it still never led to an adequate basis for such a huge investment.

Verizon kind of gave away the real explanation for FiOS, when it stated in concert with its argument: “the acquisition of MCI would generate even more financial benefits than expected and do so more quickly” (from Primed Insight in January 2006). As we pointed out in the past, FiOS was a ruse to pass as many Fortune 2000 customers as possible, and fiber to the business subsidized FTTH. The carrier took advantage of the change in FCC rules that it did not have to unbundle its capacity in furnishing broadband to homes.

Fast forward to today relating to NG-PON2, and nothing has changed. It is just the next piece in the original FiOS plan, which was kept under wraps to make sure that the FCC stays out of its way. Verizon still plays the same game of pretending a relatively big aspect of the future is in providing residential services with the next-gen technology. In looking at a past post on Light Reading, there is the “example” provided of “Verizon…us[ing] the technology to deliver standard residential GPON services over three wavelengths, yet offer a 10-gig business service over the fourth.” Verizon is also extremely unconvincing in asserting that “the technology would have a role to play in residential markets…with the spread of 4K video and Internet of Things applications.”

There has been the acknowledgement that “[t]he primary appeal of NG-PON2 is its application in commercial services” along with legitimate questions asked on the LR site including from people responding to residential applications, including potential pricing difficulties as well as just questioning the need for such high levels of capacity. Nevertheless, it is just incorrect to state that “Verizon finally answered the competitive siren coming from AT&T Inc…, cable operators and other providers who are touting their own gigabit and multi-gigabit residential deployments.”

If Verizon could have waved a magic wand a long time ago to totally extricate itself from the residential landline business, it would have done so because margin generation in this space tends to be little at best. Thus, “NG-PON2-enabled networks would be applied to the business services market initially” and for all intents and purposes, exclusively. Why is it being ignored that investments in FiOS for home apps had ceased a long time ago and that Verizon sold off such assets in three major states? How is it missed that in talking about 10G symmetrical, what types of entities other than enterprises have a requirement for that level of capacity going upstream?

Turning our attention to the acquisitions, in May 2015, fibeReality issued the following article: “Verizon/AOL: Bypassing Title II with New Internal Infrastructure?” We argued “that the fundamental unfairness of an Internet service provider being treated as a utility is at the heart of the AOL acquisition and we find the various other explanations that have been given in the market to be unpersuasive.”

Interestingly, someone else has just adopted a similar line of thought and has extended on to it in the following piece: “Verizon: Is Yahoo Part Of A Strategy To Defeat Net Neutrality?” According to Mark Hibben: “Verizon paid about the same, $4.4 billion, for AOL as it will do for Yahoo. But neither can be said to be particularly strong growth engines, and Yahoo’s lack of a turnaround under [Marissa] Mayer is the stuff of managerial nightmares.” He also noted: “…Verizon could “privatize” some part of its AOL or Yahoo content for distribution via the private network. Under the current rules, Verizon would have broad discretion regarding how much bandwidth to provide for its private network. It would then have an ability to provide de facto preferential treatment for its content…”

[written by Mark Lutkowitz]