During Verizon’s second-quarter earnings conference call today, company executives made it clear that 5G is the linchpin of its entire corporate strategy. And that’s particularly noteworthy because this was outgoing CEO Lowell McAdam’s last earnings conference call with Verizon, and it was Hans Vestberg’s first call as the company’s incoming CEO.
Both McAdam and Vestberg made it clear that Verizon’s strategy will be to grow its broadband internet access business, whether that’s through the sale of IoT services, 5G network services, fiber network services or network-based video analytics and advertising services through Verizon’s new Oath business.
"When I look into the assets we have, and I've been working here now for quite a while, I really like the assets we have and the ones we're building. That will give us the opportunity to be a much larger broadband provider,” Vestberg said during the call, adding that Houston will join Los Angeles and Sacramento as the third of the four cities where Verizon will turn on its 5G-based fixed wireless residential broadband service later this year. "5G gives us that opportunity.”
And Vestberg reiterated that in-home residential broadband—where Verizon will use 5G to beam internet services into fixed locations like homes and offices—is just one of many types of services that Verizon will provide through 5G. He said the company would launch mobile 5G services next year and then would look to additional services beyond that, including for Verizon’s enterprise customers. “We are in constant dialogue with our enterprise customers to see how we can build new types of services for them,” Vestberg said. “We could do a specific slice for an enterprise and that could be a private 5G network with low latency or something like that. So, we see that as a great opportunity."
McAdam also emphasized the importance of 5G—as the centerpiece of Verizon’s “intelligent edge network”—to Verizon’s future by discussing it at length in his opening remarks during Verizon’s conference call. “We are positioned to be the clear leader in the deployment of 5G services based on our technological expertise, asset base, engineering talent and spectrum portfolio. This leadership position is attracting opportunities in areas such as over-the-top TV, smart cities, transportation, education and healthcare, just to name a few. I believe the impact of 5G on consumers will be much bigger than any previous generation. But the biggest impact will be on businesses as we provide the platform for the fourth industrial revolution. We know the consumer requires a mobile-first, digital-information experience, and the new businesses that we have added such as Oath and our IoT platforms are poised to be at the forefront of enhancing our ability to meet this growing customer demand."
Added McAdam: "The cornerstone of our strategy will always be network leadership and customer experience."
A sunset on Verizon’s video adventures
Importantly, McAdam said that he’s leaving Verizon in a solid position to take advantage of the 5G opportunity. Indeed, this week Verizon reported its first growth in wireless service revenue since 2014; an agreement with its 34,000 unionized workers stretching through 2023; and a pretax charge of $658 million mainly related to the closure of its Go90 video service.
"I'm glad we didn’t follow a lot of the things that the analysts and bankers told us we had to do,” McAdam said. “That has put us in a position now where we've got a strong balance sheet, we've got a clear strategy, and I think we are going to put a significant distance between us and the competition. The first mover on network generation changes usually gains a significant amount of market share, and with the assets that we have we think we're in a position to do that with 5G."
Of course, under McAdam’s leadership, Verizon did dabble in the video business, mainly through its failed Go90 effort and its acquisition of Yahoo’s video business. But both Vestberg and McAdam made it clear today that Verizon isn’t looking to become a media or content company: "We are not going to be owning content," McAdam said, explaining that “we’re going to be their best partner from a distribution standpoint.”
(Vestberg added that content providers are particularly excited about Verizon’s 5G network because of the low latency it can provide.)
Indeed, Verizon’s retreat from video appears to be underscored by a report this week from Bloomberg that Verizon is reportedly in discussions with the likes of Apple and Google to acquire a live TV service that it can sell through its forthcoming fixed wireless 5G offering. Interestingly, that report dovetails with a rumor cited by Wall Street Research firm MoffettNathanson that Verizon might be looking to sell its Fios video business to a third party like Hulu, a move that would effectively mark Verizon’s complete exit from selling video content. (Bolstering the notion that Verizon might exit its Fios video business is the operator’s continued struggles in the area. Verizon said it lost another 37,000 net pay TV subscribers for its Fios video service in the second quarter, on top of the loss of 15,000 in the year-ago period.)
Verizon’s embrace of a 5G-centered broadband provider business is a dramatically different strategy from the one AT&T is pursuing, first through its acquisition of DirecTV and now through its purchase of Time Warner. AT&T has made it clear that it hopes to combine the sale of its content with its internet access services in order to juice both businesses.
Diving into Verizon’s 5G strategy
So, if Verizon is betting the farm on 5G, what does that mean exactly? So far, Verizon’s executives have been relatively reticent in discussing the 5G opportunity beyond grandiose but mostly vague statements.
But McAdam and Vestberg did offer a few new nuggets about Verizon’s 5G efforts—and perhaps the most interesting item is that Verizon isn’t raising its spending much ahead of its 5G launch. In fact, the company now says that it expects its overall capex for this year to come in on the low end of its $17 billion to $17.8 billion guidance.
"We also can build so much more efficiently with new technologies and multipurpose equipment,” Vestberg said, explaining that Verizon continues to expect to cut $10 billion in costs from its operations by 2020. “We put in a new process for capital efficiency that [CFO] Matt [Ellis] and I are sharing. And I think that's what you're seeing right now."
And Vestberg said that the bulk of Verizon’s capex won’t be devoted to macro cell towers.
"Back a couple of years ago, the majority of our investment was in macro towers, and today the majority is on densification with small cells,” he said. “So, we have shifted dramatically over the years and I've only been part of it now for one year, but I've seen how the engineering team is responding to the new way of working and it's setting up the whole new network structure. So that's what you see in the figures."
Vestberg also said that Verizon continues to invest in fiber as a way to bolster its 5G buildout and network densification efforts. Specifically, he said that Verizon is deploying fiber into 50 different cities outside of its traditional ILEC fiber footprint.
So, will Verizon acquire more of the millimeter-wave spectrum that it has said will form the basis for much of its initial 5G deployments? Vestberg said that “we’re looking into any auctions that are coming up,” adding though that “we’re also feeling good about the position we have on millimeter wave.”
McAdam also addressed concerns that the mobile and internet provider businesses are largely mature and don’t warrant the kind of investment that Verizon is making.
"I really don't think much about postpay or smartphones or any category you want to look at as an opportunity for future growth,” McAdam explained. “There's so many things that we have absolutely zero percent penetration today that are going to be big businesses five years from now. That's why I'm so excited to see the way we're positioned.”
Verizon’s insistence that 5G will be an inflection point is both worrisome and worth watching. On the one hand, early on Verizon invested heavily into LTE, and that gave the operator a leading position in the U.S. mobile market, so the operator may well cash in on a similar strategy in 5G. On the other hand, AT&T’s foray into video, advertising and content aligns with a similar strategy by Comcast and signals the operators’ belief that there’s only so much to be gained from the sale of network access.
If 5G does indeed prove to be transformational, either in the short term or the long term, Vestberg’s statements today will be validated. But if LTE proves to be the wireless industry’s high point, Vestberg might find himself following McAdam out the door. — Mike | @mikeddano