Verizon's $300 Million Shell Game in Boston and Cross-Subsidizing Wireless

Verizon told Boston that they were going to be spending about $300 million over 6 years to upgrade the city to FiOS -- a fiber-to-the-home service. But according to Verizon's Francis Shammo, the money really isn't being 'spent'.
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Compare this write-up about Verizon's $300 million, 6 year build out of fiber optics in Boston, Massachusetts, with Verizon's statement that the $300 million was already spent.

"Verizon to build $300M fiber network in Boston"

"Verizon will bring its fiber-optic FiOS network to Boston over the next six years, city and company officials announced..."

Verizon's CFO & EVP Francis J. Shammo stated on the Verizon 1st Quarter 2016 earnings call, April 12th, 2016:

"So the $300 million, you're not even going to see it in the Wireline capital numbers. It's already there."

Verizon's CEO Lowell McAdam is speaking today, May 24th, 2016 in Boston at the JP Morgan Technology, Media and Telecom conference. He will be greeted by the striking Verizon union members from the Communications Workers of America (CWA) and IBEW.

But, simply put--Did Verizon lie to Boston and its citizens? Should there be an immediate investigation of the fiber optic deployments and the $300 million?

Verizon told Boston that they were going to be spending about $300 million over 6 years to upgrade the city to FiOS - a fiber-to-the-home service. But according to Verizon's Shammo, the money really isn't being 'spent'. The wiring may already be there as well, and so this "over six years" for the construction--may be just make believe.

Should there be an investigation into the financial ties of Verizon Wireless and Verizon Massachusetts, the state utility?

But it gets worse: On this 1st Quarter 2016 earnings call, Shammo said that the build out is for another Verizon company - Verizon Wireless--and it is going to be paid for by the wireline, state utility-- Verizon Massachusetts; i.e., it is diverting the wireline construction budgets to do another company's build out of fiber, to be used for wireless services.

While these entities are subsidiaries of the same holding company, Verizon Communications, Inc., Verizon Massachusetts is the state utility and the wireline company, and it is not part of Cellco Partnership, Inc, which does business as Verizon Wireless. (Previously, Cellco was a joint venture with the British telecom firm, Vodafone.) In these excerpts, Verizon attempts to blur the lines about these companies; they are all just 'Verizon'-- but legally, they are not.

Here's an excerpt from the transcript of the call. You decide what's going on. Verizon's Shammo states:

"So obviously when we looked at Boston, it was a city that we needed to densify for the LTE network. So as we looked at all of our current COs around the footprint and the fiber that we already had there, it kind of was a no-brainer to us to say, we can do the fiber bill out. to expand the LTE densification. But we also can use this opportunity with only an increment of about $300 million over the next 5 years to 6 years to expand our FiOS footprint."

"So the $300 million, you're not even going to see it in the Wireline capital numbers. It's already there. And as far as the capital that was going to be incurred on the Wireless side of the house, that was already going to be spent, regardless of whether we expanded FiOS.

"So we will get to this. But we are starting to - we will start this mid-year this year for especially the 5G and 4G LTE densification. We will start the Internet capability with the passing homes."

Does this actually say: We will use the fiber optic wires, but it will be used by another company--the wireless company, who is having fiber optic wires put in and paid for by the wireline company? And does it say that the wireless service will be the 'Internet capability' that is 'passing' homes'... as compared to a 'last mile' fiber optic wire to the home?

Shammo was asked by Goldman Sachs--what about the other parts of the East Coast, as Verizon controls most of the state telecom wires from Massachusetts to Virginia.

"Is this the last significant fiber deployment you would expect to make within your remaining footprint? Or do you think that there's an opportunity to keep doing this in the Northeast?

Francis J. Shammo responded and I paraphrase: When we see an opportunity to roll out wireless - so that the wire doesn't have to actually go to the home, we'll consider doing another city in the US - be we've stopped our wireline deployment except when it helps the wireless company. He actually said:

"Well, I think what we'll have to do... is we'll take one city at a time. Obviously we still don't have Alexandria built out or Baltimore. So if we get to a position where we believe we're going to need to invest in densification in those cities, then that's an opportunity for us to take a look at it. But at this time we're concentrating on Boston."

So, Verizon is concentrating on one city when they control the entire East Coast--and spending $50 million a year that's actually already been spent, and focusing on wireless.

Now, in New York State, we found Verizon has been 'cross-subsidizing' their wireless deployments--i.e., they were able to have the regulated state utility pay for the construction of the wires to the cell towers - and, as we demonstrated, each local phone customer was overcharged about $1000.00-$1500.00 for a "massive deployment of fiber optics" and 'losses'. Verizon NY has been losing over $2 billion a year for the last 5 years (with a caveat to 2013). However, these losses are artificial and were created by manipulating the financial accounting. For example, Verizon Wireless did not pay for some, if not most of the wires to the cell towers used by Verizon Wireless, but dumped the expenses in the state utility construction budgets, helping to create the losses. And the fiber optics appears to be for Verizon Wireless, which was not why NY State granted multiple rate increases.

According to the NY Attorney General, about 75% of Verizon NY's wireline utility budget has been diverted to fund the construction of fiber optic lines that are used by Verizon Wireless's cell site facilities and FiOS cable TV.

"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....Therefore, only a fraction of the company's capital program is dedicated to supporting and upgrading its landline telephone service."

And it appears that Verizon Massachusetts is cross-subsidizing Verizon Wireless's deployments instead of upgrading and maintaining the state utility throughout the entire state.

Verizon is also actually deciding which part of the city should get wired first by having neighborhoods vote.

"Verizon's $300 million build will begin later this year. Verizon will prioritize different parts of each neighborhood through online voting on a company website, it said in a document listing frequently asked questions."

But, as I previously pointed out, Boston was already supposed to have been upgraded with fiber optics starting in 1995--not 2016. We even filed a complaint about it in 1999. As we wrote:

"In statement after statement, before consumers, advocates, regulators and the press, employees and executives at the top echelon of New England Telephone made repeated and unambiguous representations that NYNEX would spend over $500 million to build the fiber optic network in Massachusetts, commencing in 1995. On July 15, 1994, New England Telephone Chairman Paul O'Brien announced that NYNEX was '...putting its money behind its beliefs. We recently announced plans to build what is essentially a new....state-of-the-art broadband network.... capable of providing video-on-demand and interactive information services.' O'Brien went on to promise that construction would begin late that year, 1994, in eastern Massachusetts.

"A few months later, the Patriot Ledger quoted NYNEX spokesman Kenneth Horne describing a very specific plan: 'In Massachusetts, NYNEX plans to begin the new service in Somerville, Revere and Winthrop, then move to Brookline, Cambridge and neighborhoods in Boston, including Roxbury, Brighton, Beacon Hill and the Back Bay...'

This was 21 years ago.

Maybe someone needs to ask Lowell McAdam these questions today at the conference:

  • Is the wireline company cross-subsidizing the wireless build out without proper compensation?
  • Have rates been increased, like New York, based on a manipulation of the accounting - partly because the wireless company isn't paying its 'fair share' for construction or use of the networks?
  • Has the $300 million already been spent on fiber but not 'turned on'?
  • Is Verizon Wireless paying what any other competitor would pay to use the wires?
  • Is Verizon Massachusetts losing money and, like Verizon NY, not paying income taxes?

Maybe the rest of the Bay State should wake up to the fact that Verizon is spending $50 million a year on fiber optics in the state--(or nothing extra at all)--and is subsidizing the wireless company.

Maybe the State needs to start investigations into all of this.

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