Verizon and AT&T have been locked in some form of competitive (with ownership of Bell companies playing a role) embrace since the Bell System broke up. Verizon has a major advantage in demand density, the ability of a market to pay back on network infrastructure, and AT&T has been perhaps the most radical Tier One trying to make up for their demand density deficit. Now there are some signs that Verizon may have taken its advantage too much to heart. The problem may be that so much revenue focus has shifted to mobile networks, where demand density is a lot more complicated.
Verizon’s done well in wireline broadband, including FWA, which is the area where demand density is the most important. For mobile networks, the per-tower range is larger and there’s a fair amount of tower-sharing that goes on, which makes it harder to relate demand density to return on infrastructure. Then you’ve got MVNO relationships…you get the picture. It’s not a surprise that some articles on the two Tier Ones have focused on the wireless space, nor is it surprising that some of the stories seem to be missing some key points.
It’s the wireless space, relative to AT&T and Verizon, that some analysts and tech authors are questioning. In particular, some question the C-Band investment by Verizon, but others are questioning AT&T’s delay in making C-Band 5G available. So is C-Band good or bad?
The biggest question that the Street has about Verizon’s strategy is its C-Band 5G deployment. Nobody disputes that Verizon’s move boosted 5G speeds significantly, but there’s a lot of questions circulating on whether that translates to any incremental revenue. My readers know that I’ve been a 5G revenue-gain skeptic from the first, simply because mobile phones can’t usually exploit faster connections than video streaming requires. Verizon’s loss of mobile customers (36,000 net, and almost 300,000 consumer mobile customers, saved by business adds of over a quarter-million) when AT&T gained over half-a-million sure seems like a bad sign. However, it’s better than last year’s number.
Verizon has always commanded a higher price for mobile services, and it’s pretty doubtful that customers would leave Verizon just because they couldn’t see any difference with C-Band 5G performance. It’s more likely that wireless users are steadily more price-conscious and were leaving based on price. C-Band isn’t available over anything like Verizon’s total footprint and it wasn’t available at all until partway through the quarter, so it’s probably not driving decisions much at this point.
The bigger question is how much upside there is in mobile services, even considering 5G and C-Band. Verizon touted the high rate of 5G adoption at this point in the cycle, versus that of LTE, but when LTE was introduced it was rare for operators to have free phones and regular replacements, so handset inertia likely held LTE back. If 5G isn’t going to boost subscribers (which so far Verizon admits it isn’t; they say market shares are stable and so does rival AT&T) and if users won’t pay more for it, then how does incremental revenue get generated?
Verizon, like most operators contemplating 5G, hoped at first that IoT would be the killer revenue booster. Imagine every family’s “things” adding to the number of wireless subscriptions; the CFO’s heart likely melted at the mere thought. Thought was about all that came along, though, because of course nobody really wanted to pay to get their things networked. Use WiFi for free, right?
Verizon mentioned multiaccess edge computing (MEC) too, but we really don’t have a clear picture of how that would generate incremental revenue. Like IoT, MEC is one of those things that you can sort-of-make-a-logical-case-for, at least at the PR level, but like IoT there are a lot of moving parts in an MEC application and you only get revenue if you can get them all to march in harmony.
The most obvious point to be made here is that 5G isn’t transforming the revenue picture for the telcos. That doesn’t mean it won’t continue to deploy—it’s the successor wireless technology after all. Verizon’s CEO suggested that the payoff for 5G might be delayed for five or even ten years. Even that seemingly pessimistic statement is a bit of gloss; what exactly is a payoff? The challenge here is that infrastructure investment by operators often doesn’t meet even their very forgiving internal rate of return constraints. Simple growth in usage and customers, competitive pressure, and the need to refresh technology at least every five years, combine to force investment as a cost of doing business. That story isn’t very appealing to the Street, though, and so it’s no surprise it’s not told very often.
Verizon made a mistake here, I think. Yes, mobile services have been the darling of the CFO for decades, but that doesn’t mean that you can plan their evolution like you’d plan the evolution of other services. Faster demonstrably means something in wireline, but it means way less when everything the user does is compressed onto a smartphone screen and constrained by mobile behavior. They’ve also made a mistake, one that almost every operator has shared, in simply touting IoT or edge computing as opportunities, with no regard for the fact that they’re not in a position to assure they’ll be realized.
It would be possible for Verizon, or any Tier One, to create the ecosystem needed to realize IoT or edge computing. It would have been possible all along, and in fact all the signs that such ecosystems were needed were there well over a decade ago. That’s the biggest reason to be cautious about the possible; what makes the present so different from the past, other than that the passage of time likely makes such ecosystem creations more difficult. Verizon wasted a lot of time if they were expecting to realize actual revenue gains out of either IoT or the edge.
AT&T has issues, too. Most on the Street rate them lower than Verizon, and in terms of fundamental wireline services, they should be. But AT&T’s weakness is proving a strength because it’s forced them to confront truths about service evolution that Verizon has yet to confront. Don’t look at things like net mobile adds to declare AT&T a winner, look at their commitment to truth in future services. Don’t look at their failure to push super C-Band speeds in 5G as a weakness, either. Faster is better only when users value it enough to pay for it.