Cable, 5G Break the Big Telco 'We can't invest due to FCC' Myth

By Doug Mohney April 25, 2016

"TIA Announces Support for Lawsuit Against FCC Internet Rules, Saying Broadband Networks will Falter as Investment Shrinks " -Telecommunications Industry Association(TIA) press release, August 6, 2015.

"Hey Boston.  A 100% Fiber-Optic Network is Coming" - Verizon press release, April 12, 2016, which goes on to boast of $300 million of Verizon investment over 6 years by replacing copper with fiber across the city.

It has been a year and change since the Federal Communications Commission (FCC) declared stronger rules for the Internet by reclassifying broadband access under Title II.  Shortly thereafter, the PR machines of the telecommunications industry pumped out tales of woe both directly through their associations and via various paid surrogates. 

"With this regulation, phone companies will not invest in infrastructure," went the cry. "The environment is too chaotic."

Why is Verizon spending so much money in Boston? The rules haven't been repealed yet, so Verizon must feel fairly confident that one way or another it is going to make money. One could argue Verizon feels fairly confident in either an appeal in the courts and/or President Trump/Clinton influencing FCC regulation in their favor moving forward, but I doubt it.

Or, Verizon has simply joined the pragmatism of AT&T in believing, whatever the FCC does, it still has to invest in broadband to compete with cable companies and prepare for the arrival of 5G networks.   AT&T broke ranks with the whole "we can't invest in broadband networks" theme when it snapped up DirecTV and had to vow it would roll out more and improved broadband services among the conditions for the deal to be approved – not that AT&T wasn't already investing more heavily into broadband in many of its territories as Google Fiber began edging into its traditional turf.

It would be very instructive for all involved to catalog the number of gigabit announcements taking place around the country, with CenturyLink, Frontier, and Windstream all opening up multiple cities with gigabit.  Add in regional/local carriers and municipalities moving to install fiber, and there is no faltering, but a relative boom in fiber deployment that is only going to continue over the next five years. 

Wall Street offers another set of data to consider. Just last week, ADTRAN – one of those equipment vendors that would be suffering if investment has faltered – announced it had done quite well in the first quarter of 2016 and posted a cash dividend.

“ADTRAN delivered a solid performance this quarter resulting in earnings coming in ahead of initial expectations," Chief Executive Officer Tom Stanton stated in the press release," Compared to the same period last year, Q1 domestic revenue was up over 39% with increases in both our products and services businesses. Improved gross margins and lower operating expenses helped us increase operating income over 181% versus Q1 of 2015. Longer term, we expect further improvement in the carrier environment as customers accelerate investments in upgrading their network infrastructure to meet customer demand.”

Let me stop and underline two key points from ADTRAN - 1) Compared to the same period last year, Q1 2016 domestic review was up OVER 39 percent with increases in both products (hardware) and services business.  Does that sound like a decline to you? 2) Stanton told Wall Street and the world that longer term ADTRAN expects more money coming from carriers as they ACCELERATE investments in upgrading networks to meet customer demand.

Why does Stanton believe that carriers are going to accelerate network investments? I can cite three reasons off the top of my head, two that are big competitive drivers.  First, Google Fiber and the cable companies are deploying for gigabit speeds.  Every time Google Fiber starts making serious noise about opening up service in a new territory, the incumbent telco vendor finds a way to deploy gigabit services. 

Even without Google Fiber, cable companies are rolling out DOCSIS 3.1 and gigabit speeds.  This month alone Cox announced gigabit deployments in middle Georgia and Phoenix, Arizona.  Cox says it will have gigabit speeds in all of its markets by the end of this year.  Comcast is offering multi-gig packages in some markets.  Telcos that want to keep broadband customers will have to offer similar offerings.

Verizon's Boston fiber build is as much driven by a need to support 5G as it is to stay competitive with cable offerings.  When you start running around talking about multi-gig wireless speeds with line-of-site cells needed to deliver the service, it only takes about a minute or so to realize that you need fiber at 10 Gbps to 100 Gbps feeding 5G cells in order to deliver that promise.

It's been years since Verizon started a new fiber build, having stopped cold when it decided that it wasn't getting the returns it wanted out of FiOS.  Now there's talk of cities such as Alexandria, Virginia and Baltimore, Maryland potentially getting Verizon fiber – all the more ironic since the City of Alexandria is looking at installing fiber on its own since Verizon had not declared interest up until five minutes ago.

The third reason why fiber needs to come is the "abandon in place" strategy for copper is likely costing carriers a ton of money in terms of overhead and maintenance.   More fiber translates to newer, cleaner plant, which means they need fewer blue collar workers to maintain everything.  Put bluntly, if Verizon wants to reduce its unionized workforce, it will have to put in more fiber.  

Edited by Maurice Nagle

Contributing Editor

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