Is Verizon Headed for Trouble? Let’s Do Some Fact Check

Verizon is the wireless industry leader not only in the US, but also in the world. Their most recent earnings call also highlights strong performance by the consumer division which can largely attributed to contribution from wireless. OOKLA ranks Verizon as #1 on a number of important metrics including consistency of speed and nation-wide availability of 4G.

But, wait! Do things look equally rosy for nation’s #1 mobile network operator (MNO) for years to come? Let’s look at a few facts and then draw your own conclusion.

1)     Disparity between Spectrum Holdings vs. Number of Subscribers

Let’s begin with this chart that I drew exactly 2 years ago – right after T-Mobile started deploying their much needed 600 MHz spectrum. The chart shows percentage spectrum holdings, measured on a MHz-POPs basis by frequency bands per licensee. Spectrum ownership for these low to mid bands among top 4 MNOs has largely remain unchanged for the past 2 years.

Figure-1: Nation-wide Spectrum Holdings Summary

A few things stand out from this chart-

·        Verizon is well positioned in coverage bands i.e. low bands of 700MHz and 800MHz (no wonder Verizon can offer best nation-wide coverage). But, it’s relatively thin on capacity bands i.e. mid bands of 2.1GHz and higher

·        T-Mobile and Sprint have complementary spectrum – a scenario that strengthens their case for merger

·        Applying % of ownership to available bandwidth per spectrum band, the ranking of total spectrum holdings looks like this-

o  Sprint: 188MHz

o  AT&T: 149MHz

o  Verizon: 114MHz

o  T-Mobile; 111MHz

o  Dish: 96MHz

o  US Cellular:10MHz

o  Others: 72MHz

·        In terms of spectrum ownership, Verizon’s 3rd rank immediately raises question of disparity as it ranks #1 in terms of number of subscribers. This FierceWireless article shows that although Verizon’s postpaid market share is >3X the market share of Sprint, it has only about 60% of spectrum that Sprint has under its belt.

Figure-2: Wireless Postpaid Market Share by MNOs (source- FierceWireless, Evercore ISI Research)

2)     Most Congested Network in the World!

From 1 above, it is not difficult to infer that Verizon has capacity constraints. That’s exactly what came out through a study conducted by Helsinki-based research firm Rewheel. The study puts Verizon at the highest level of utilization among all carriers studied — at a staggering 57% capacity utilization. For reference, AT&T and T-Mobile were at 32% and 28% respectively. To be fair, this study only accounted for macro sites deployed by MNOs and did not take into account capacity augmentation by small cells. However, small cells are not yet a mainstay for US MNOs. Although, it certainly will be as CBRS 3.5GHz becomes available after PAL auction in June, 2020 and C-Band 3.7-4.2GHz potentially becomes available in/after 2023. But till that happens, Verizon has to operate within the constraints of arguably being the most congested mobile network in the world

Figure-3: Ranking of Congested Mobile Networks (source- FierceWireless, Rewheel)

3)     But, Doesn’t Verizon Have Mm-wave?

Of course, it does – a lot of it, indeed. After bidding for the highest amount ($505M) in FCC’s recent past Auction 101 (for 28GHz) Verizon has near monopoly in that particular spectrum band. That’s because, Verizon already had 58% of nation-wide 28GHz spectrum and during the bidding process it took 72% of the auctioned spectrum put forward by FCC. Verizon also owns 40% of nation-wide 39GHz spectrum and can bid heavily once the remaining portion is made available by FCC in the next round of mm-wave auction. 

Figure-4: Post-auction ownership distribution of 28GHz mm-wave spectrum (source- Allnet)

No body disputes that the fat pipe i.e. wide bandwidth that comes with these high frequency mm-wave bands, has a major role to play in enhanced Mobile Broadband (eMBB) of 5G. But there is skepticism around stand-alone utility of mm-wave bands. A formidable chunk of industry experts believe that mm-wave deployments will occur as “hotspots”, more like a mid-band overlay. This is because of the well-known challenges that mm-wave has in terms of propagation distance, penetration, and vehicular mobility support. And I already pointed out that mid-band is a huge challenge for Verizon, specially in the near term, until CBRS and C-Band become available.   

4)     What about “5G Home” – Verizon’s Fixed Wireless Access (FWA)?

Honestly, I think that at this point, 5G Home's impact is immaterial. Although named “5G Home”, technically it’s pre-5G as it complies Verizon’s own 5G Technical Forum (5GTF) criteria, not standard body 3GPP’s 5G criteria. It started with grand vision of 30M households passed and 9M households served at 30% take rate. But, after very limited deployment in first 4 markets (Sacramento, Los Angeles, Houston, and Indianapolis), Verizon has abruptly postponed its roll out. A more detailed analysis can be found in my earlier blog post on this topic. Also, expect Verizon to deploy (and exhaust) their spectrum (mm-wave or otherwise) for mobility use case first, instead of wasting (!) that for fixed wireless use case. A leading wall street sell side research house has showed that, revenue yield is ~37X for using the same spectrum resource for mobility use case (vs. fixed wireless use case). Instead of dense urban markets, FWA may have a sweet spot in suburban and rural markets where lower level of mobile usage will mean more availability of the same spectrum for FWA type use cases. And, that’s exactly the strategy T-Mobile is after.  

So, I would rather characterize this as an attempt to maintain the “We are 1st in 5G” type initiative. We know that this is not new. If you refresh your memory, you would recall that back in 2009, similar thing happened as Verizon rushed to launch LTE and claimed the “We are 1st in LTE” title. Back then, I was working for Nokia Siemens Networks (NSN) Japan as a solution manager for their subscriber database (HSS)– “One NDS” solution. My customer KDDI had a lot of things in common with Verizon (due to their common heritage in CDMA) and I worked with the global NSN team when NSN’s “One NDS” was chosen as the only substantial offering from NSN for the newly launched LTE network.

5)     So, What’s the Way Out? Acquisition?

That route now looks increasingly uncertain. For any acquisition motivated by spectrum, Dish was the obvious choice for Verizon. But Dish’s sky-high valuation (~$30B), almost entirely attributed to its spectrum, means that deal did not happen. More importantly, the likelihood of any such deal to happen with Dish (or with T-Mobile/Sprint, for that matter) is now dead. In the proposed merger between T-Mobile and Sprint, Dish has emerged as the new asset-based MNO to maintain 4 operators in the market. 

This essentially means that Verizon is running out of options. For cable, existing MVNO deals with Verizon are producing decent results. We see massive wireless subscriber gain for both Comcast and Charter – as of Q2, 2019, Xfinity had 1.58M lines (103% annual growth) and Spectrum had 518K lines. Analysts predict that by 2020, ~50% of all wireless customer net adds may go to Cable MVNOs. Addition of Altice to this mix of cable MVNOs only strengthen that trend. This latest deal also highlights the fact that Verizon is not the only option to host MVNOs. If the T-Mobile and Sprint merger finally happens, new T-Mobile will have massive excess capacity; and so will Dish as they gradually build their network. This may dilute Verizon's bargaining power as MVNO hosts. Also, in 5G era, cable will be a formidable force in wireless by its own, largely leveraging its vast wireline assets on the ground and access to mid bands of spectrum.

6)     And, There is Even More to It

Leading wall street research houses squarely put Verizon in the “loser” spot if the proposed merger between T-Mobile and Sprint goes ahead. Verizon is poised to lose market share to new T-Mobile, to cable (MVNO or otherwise), to Dish (the new 4th MNO), and even to AT&T, its arch-rival. That’s an unavoidable destiny for someone who holds #1 position. Any gain by the challengers will inevitably make dents to the subscriber base of the pole position holder.

Then, there are concerns around Verizon’s financial woes - astronomical debt and challenges in the face of new (e.g. cloud-native) business models. That’s a whole new discussion that some experts are focusing on.  

To be fair to Verizon, this is NOT the complete story. The executives who are running nation’s #1 MNO are certainly not inept. Of course, Verizon has been doing (and will do) a lot of things right. In this blog post, I rather wanted to focus on some other facts which do not seem so right.