Is Verizon Planning on Becoming an All-Wireless-Only Company: Who Needs the Wires Anyway?

Critical Summer Reading: "The Book of Broken Promises: $400 Billion Broadband Scandal & Free the Net"

You might be thinking:
  • But isn't everyone already using wireless?
  • Hasn't everyone dropped their 'landlines'?

Of course almost everyone reading this has a cell phone. But, you may have been misled if you believe that the wires don't matter or that wireless services alone are the future.

This article is in 2 parts. This is Part 1.

Backdrop

The telecommunications unions, including the Communications Workers of America (CWA), are in contract negotiations with Verizon and the settlement deadline is August 1, 2015. The IBEW, with less telecom representation, has voted to go on strike if the negotiations fail.

But regardless of the outcome, or whether you are pro or con the unions' positions on telecom issues or jobs, one thing is clear -- we are at a critical juncture in communications and it is now trending towards harming large parts of the East Coast of America, not to mention the rest of the USA. And I note that the unions' jobs are tied to the fate of these next steps, even if there is a settlement.

(AT&T was able to cut a deal with some of the unions already, but the issues are identical nationwide.)

Verizon's Plan: Go All-Wireless Only

On July 21, 2015, Fran Shammo, Verizon's CFO, discussed the second quarter earnings and made it clear that the focus of Verizon is wireless, advertising and digital media.


"As always, we continue to invest in our networks and platforms to position us for future growth. We are very focused on developing new products and services in mobile video and the Internet of Things. We are excited about the potential for revenues from these new products and services to grow quickly and become more meaningful in the future. Our acquisition of AOL will be a key piece in our over-the-top mobile video strategy, accelerating our capabilities in digital media and advertising."

Note: Verizon now owns Huffington Post, which was owned by AOL.

This plan was set in motion when Lowell McAdam, (the former head of Verizon Wireless) became Verizon's president and CEO. According to a Bloomberg article:

"Lowell McAdam, Verizon's chairman and CEO, set the course to an all-mobile future with a $130 billion buyout of partner Vodafone Group Plc in February 2014."

And it goes on to quote Jennifer Fritzsche, an analyst at Wells Fargo & Co., who believes that Verizon would like to go "all-wireless".

"'If he had it his way, Lowell would make Verizon an all-wireless company', Wells Fargo's Fritzsche said. Verizon gets about 70 percent of its total revenue from wireless; AT&T gets 56 percent."

It is also clear that Verizon is planning on chopping the unions and the wireline business off at the knees.

"We are very committed to reducing our cost structure while maintaining strong customer satisfaction. The Wireline head count was down 10% year-over-year, and we continue to strive for gains in operational efficiency. As I said, we are far from satisfied and we will continue to work on our cost structure. Capital spending in the Wireline for the first half of the year totaled $2.2 billion, down 19%."

Of course, this is about profits. The wireless segment shows massive profits as compared to those poor, poor, poor old wires...

  • Wireless Segment: "In terms of profitability, we generated $9.9 billion of EBITDA in the quarter, an increase of 9.1%. Our EBITDA service margin increased to 56.1%, up 580 basis points. The EBITDA margin on total Wireless revenue expanded to 43.9% in the quarter, up from 42.3% a year ago."
  • Wireline Segment: "Total operating revenues for the entire Wireline segment were down 2.2%, which included some FX pressure. The segment EBITDA margin was 23.5% in the quarter, up 10 basis points."

You might ask: If wireless is so profitable and everyone is going wireless, why shouldn't Verizon focus on shutting off the copper networks and going wireless?

First and foremost, Verizon also controls the local phone companies that extend from Massachusetts down through Virginia, such as Verizon NY or Verizon New Jersey (with only a small part of Connecticut). Each state-based company has a telecommunications franchise and controls the state-based utility networks. This is the critical, wired infrastructure, sometimes referred to as the "PSTN", "Public Switched Telephone Networks", which businesses and residential customers rely on, not to mention schools, libraries and government agencies.

But that hasn't stopped the company from walking away from obligations in each state. As we pointed out, Verizon has already announced that in most areas it has stopped doing the upgrades of the aging copper wires to fiber optic networks used by FiOS, while CWA has filed FIOA requests with state commissions to determine the extent of the lack of maintenance and repairs of the ailing copper-based infrastructure. At the same time, Verizon's new mantra has been 'shut off the copper' whenever possible. Moreover, based on our analysis, Verizon has left a trail of 'broken promises', where the state-based utilities had made commitments to bring each state a fiber optic future -- and even charged customers for these upgrades starting in the 1990s.

In fact, Verizon is in the process of selling off other wireline territories that were part of the original GTE holdings in Florida, California and Texas.

Verizon's Wireless-Wireline Collusion Might Bother You.

New Network Institute is in the midst of finishing a new report and we've been putting some of the data out. Truth be told, the wireless profits have been inflated with the help of the wireline phone customers.

Diverting Construction Budgets

Verizon Wireless appears to have not paid for some, if not most of the construction costs for the wires-to-the-cell towers and other related expenses.

Fran Shammo, Verizon's CFO, told investors in 2012 that the wireless company's construction expenses have been charged to the wireline business.

"The fact of the matter is Wireline capital--and I won't get the number but it's pretty substantial --is being spent on the Wireline side of the house to support the Wireless growth. So the IP backbone, the data transmission, fiber to the cell, that is all on the Wireline books but it's all being built for the Wireless Company."

And it appears that Verizon dumped billions of additional expenses for construction into the construction expenditures that were supposed to be used to upgrade the state-based utilities, including Verizon New York.

In New York State alone, out of a billion dollar construction budget, Verizon diverted 75% of the monies to 'FiOS TV', a cable service, and for use by Verizon Wireless. In a response to an inquiry by the New York State Attorney General's Office about capital investment, Verizon stated that in 2011 the company spent over $1 billion. The Attorney General claims this is misleading, as the money has been shifted to fund Verizon Wireless and FiOS:

"Verizon New York's claim of making over a "billion dollars" in 2011 capital investments to its landline network is misleading. In fact, roughly three-quarters of the money was invested in providing transport facilities to serve wireless cell sites and its FiOS offering. Wireless carriers, including Verizon's affiliate Verizon Wireless, directly compete with landline telephone service and the company's FiOS is primarily a video and Internet broadband offering."

Note: FiOS is a group of services that ride over a fiber optic wire. The utility budget is supposed to be paying for utility network maintenance and upgrades, not for building a cable service, an Internet service, or even a wireless service.

And the New York State Attorney General writes that Verizon has been reducing staff and focusing on wireless:

"Rather than meet its obligations to provide wireline telephone customers with minimally adequate telephone service, Verizon is continuing to drastically reduce its workforce with the result that the company cannot meet its customers' repair needs in a timely manner. Verizon's management has demonstrated that it is unwilling to compete to retain its wireline customer base, and instead is entirely focused on expanding its wireless business affiliate."

Verizon Wireless, then, appears to be not as profitable as the Verizon SEC reports claim because it is able to not pay billions of dollars of expenses while it makes the wireline networks, in this case the state utility, like Verizon New York, pick up the bills.

This diversion of the wireline construction budgets has had multiple consequences:
  • New York City and the entire East Coast of America did not get upgraded properly to fiber optics because the construction budgets and staff were diverted to fund the wireless business. On average, Verizon completed coverage of less than 50% of most of America's East Coast for fiber optic-based broadband.
  • This makes the wireline networks look 'unprofitable' so as to use all of this financial manipulation to change regulations in the company's favor, such as claiming the need to 'shut off the copper', or losses that drove rate increases.
  • The future is no more upgrades, no maintenance of the copper networks, and in fact, 'shutting off' the copper networks.
  • On the customer side, the future is high priced wireless with no phone wires available, little or no cable competition or even high speed Internet competition, especially in rural and low income areas.
  • And the kicker... if the monies for the construction of the wireline networks have been diverted to fund the wireless networks, then at least in New York State, it would appear that Verizon was able to charge low income families, seniors, regular folk, small businesses and even the government for wireless upgrades.

As we uncovered, in New York, Verizon was able to get the State to grant multiple rate increases on basic residential phone service for "massive deployment of fiber optics" and 'losses'; it came to about $750.00 per line extra, (counting taxes, etc.) and about $300 extra per added feature.

The 'massive deployment of fiber optics' now appears to be the fiber optic wires-to-the-cell-towers and not residential broadband, and the losses are, in part, from the wireless company not paying construction costs and other expenses, thus lowering the revenue to the state utility, while adding hundreds of millions of dollars, per state, per year for the wireless network expenses.

This means that the profitability of the wireless business is being buoyed by the wired networks at the expense of all wireline customers.

Captured Regulators: In June 2015, the New York State Public Service Commission (NYPSC) issued a new report -- "Staff Assessment of Telecommunications Services"-- and, of course, it never mentioned the rate increases. In fact, we find that the State never audited the books for the last decade, even though it allowed multiple rate increases. Nor did the NYPSC mention or ever investigate the financial cross-subsidies between and among Verizon New York and Verizon's other companies and subsidiaries, including Verizon Wireless.

Part 2: N.Y.C. Fiber Optic Smack Down: Verizon & the USTA vs the City of N.Y.

I'll answer these questions in Part 2:

  • But isn't everyone already using wireless?
  • Hasn't everyone dropped their 'landlines'?