Is Fiber Consolidation Finally Here?

Two weeks ago, Verizon revealed plans to acquire Frontier Communications for a deal valued at $20B, an announcement that has subsumed the telecom industry. Quickly on its heels, we started hearing prognostications that “consolidation” is finally here.

While I don't doubt we'll see more deal activity if the Fed lowers rates as expected, I do think we have a way to go when it comes to consolidation. Just as importantly, this transaction has once again raised the term "Fixed Mobile Convergence" for the umpteenth time.

A Little History of Frontier

Where did this acquisition come from? I asked ChatGPT to walk us through Frontier's transactional history, the underlying M&A rationale, relevant statistics, and how these transactions were viewed. The following isn't a bad summary, but it once again reminds me how scary AI can be. Note the transactions with Verizon, and please verify what I found.

1. Formation and Early Growth

• 1935: Foundation as Citizens Utilities Company
• 1990s: Diversification into Telecommunications

2. Rebranding and Focus on Telecom

• 2000: Rebranding to Citizens Communications

3. Acquisition of Frontier Corp

• 2001: Transaction. Acquired Frontier Corp, a Rochester, New York-based telecommunications company, for approximately $3.65 billion.

4. Expansion Through Rural Wireline Acquisitions

• 2009-2010: Transaction. Acquired Verizon’s rural wireline operations in 14 states for $8.6 billion.

5. Acquisition of AT&T’s Wireline Assets in Connecticut

• 2014: Transaction. Acquired AT&T’s wireline, broadband, and video operations in Connecticut for $2 billion.

6. Verizon’s Wireline Operations in California, Texas, and Florida

• 2016: Transaction. Acquired Verizon’s wireline operations in California, Texas, and Florida for $10.54 billion.

7. Financial Challenges and Bankruptcy

• 2020: Event. Filed for Chapter 11 bankruptcy.

The irony here is that Verizon is essentially buying back the same properties they sold years ago! However, what is interesting is that they are paying the same amount as what they originally received during the sale of assets to Frontier, but they are getting many more fiber-connected areas, as well as the other acquisition scale.?

It's not a bad transaction from the view of shedding lower-valued assets, letting someone else fix them, and then buying them back at the same price but with more value and longevity.

What About Fixed Mobile Convergence?

As soon as the deal occurred, we started hearing about how this deal validates "Fixed Mobile Convergence." This is not my first time hearing this, though I acknowledge it has value.

I have been hearing about Fixed Mobile Convergence, or "FMC," for almost two decades. I remember many presentations to senior executives that touted the importance of FMC. Unfortunately, it seemed at times to be more of a flashy term vs. real value.

The reality is that when someone says FMC, they are talking about creating value through ownership of both a fixed and mobile network via two methods:

1. Lowering customer churn by bundling mobile and broadband
2. Getting better rates on fiber connectivity to cell towers

There are other ways to create value (such as bundled enterprise offers), but honestly, from what I saw, the value was in those two areas. There has been discussion of creating “experiences” that transit fixed and mobile networks, though that is generally available for the masses already when you move from a WiFi to a cellular environment. I’m not saying there isn’t some value there somewhere, I just haven’t seen anyone make a compelling case yet.

Here's the rub. In order to get that bundle in #1, you have to reduce your price to create value for the customer. You also need to be able to provide them with a single billing experience.

We are already hearing that this strategy has not worked as well for cable as expected. They are performing well in terms of mobile additions, but bundling is proving to be more challenging than anticipated. Customers are generally happy with their current mobile provider and don't want to switch.

Regarding fiber connectivity value in #2, there is absolute truth to the idea that owning your own backhaul has benefits. The ability to plan, build, maintain, and control your destiny is quite powerful. You can also eliminate markups, but since things like "special access" for cell tower backhaul often get regulatory scrutiny, the actual benefits can be muted.

I'm not saying these things to throw cold water on the idea of FMC. My conversations with people in the large telcos tell me they work. I just think we need to be honest with ourselves about what FMC actually means: It's a bundle and has some network-scale cost benefits.?

FMC Needs Massive Scale to Work

If you are a nationwide corporation with revenues and EBITDA in the tens of billions of dollars, an FMC play doesn't move the needle until you get to scale. If we look at Verizon's press release, we can see that they are picking up some properties across the west and upper midwest/rust belt, but there are obviously big gaps.

It’s these big gaps that lead to the question of consolidation. Take, for example, the old “Centurylink” properties I found on BroadbandNow that went to Lumen and also Brightspeed:

This is why the analysts immediately prognosticate that Verizon will buy the Lumen properties, even though Verizon has to go through a very long acquisition and regulatory approval process just to get this first one done.

However, this topic is not limited to Verizon. We've heard about T-Mobile's investments in Lumos and Metronet. Doesn't that mean consolidation is coming?

The challenge I see here is that we're using one large fixed mobile acquisition as a signal that the entire fixed industry is moving to consolidate. If you ask anyone in the industry, they will say consolidation is inevitable, but that's, frankly, safe to say of any industry. That's what always happens!?

The issue is that we have several hoops to jump through before we start to see this great consolidation in the fixed world everyone talks about, including:

• How quickly does the Fed lower interest rates, and how quickly does deal activity pick up?
• Will the FCC and DOJ approve these transactions, especially in a new administration?
• Will potential buyers wait to let BEAD and other programs finish out before buying what could be a very speculative purchase?
• What happens to the builds of RDOF, CPF, ReConnect, E-ACAM, etc.? Will this result in stranded assets, and how long will it take until we know?
• Do investors get anxious to see returns and jump into poorly formed transactions just to show activity?

You can tell I'm a bit of a skeptic. I believe Verizon-Frontier is an incredibly impactful transaction in the industry, but we have to be thoughtful and treat every transaction separately based on its merits and its impacts on our own plans.

Consolidation is inevitable in any industry, but the level of consolidation and speed in telecommunications is very much in question.?

The point of all this is to simply say don't get caught up in the hype and focus on your own strategy. Deliver great products, services, and experiences. Never let your guard down, but don't get drawn into distraction.

How do you see consolidation evolving in the telecommunications industry?

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