Analysts: Verizon could run out of network capacity in 2-3 years

While Verizon's (NYSE: VZ) CFO touted the company's network densification plans during the company's second-quarter conference call, analysts are speculating the operator will face LTE network congestion issues over the next couple of years.

In a research report, analysts at New Street Research said that based on management comments, they estimate that if data growth continues at the current pace, Verizon will run out of capacity in the next two to three years, even if it refarms all 2G and 3G spectrum. "Densification may delay the crunch by a year or two, but sooner or later the company will need more spectrum," said analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam. And if the much anticipated OTT offering is successful, "it will only exacerbate this," they said.

Macquarie Capital analysts Kevin Smithen and Will Clayton said they are even more convinced now that Verizon "will have network congestion issues on LTE over the next couple of years" and that this could ultimately lead to higher churn. They made their comments in a research note after Verizon mentioned on its conference call that LTE network traffic doubled year-over-year.

Concerns about Verizon's ability to meet capacity demands are notable given Verizon's track record investing in its network and long-time bragging about the quality of its network. It's also worth noting--given the wireless industry's historical emphasis on getting access to more spectrum--that Verizon CFO Fran Shammo highlighted techniques other than spectrum that will help the operator keep up with demand.

"As I've said before, the number one reason a customer leaves you is because of quality of the network, price is number two," he said during the call with analysts.

Interestingly, Shammo hinted that Verizon may not participate in the upcoming 600 MHz spectrum auction.

Verizon's 700 MHz and AWS-1 spectrum bands, which represent about 40 percent of its licensed spectrum portfolio, are used to support its LTE network, he noted. Verizon is just beginning to refarm 1900 PCS spectrum from 3G to 4G LTE in select markets, representing the next phase of spectrum to be deployed to serve its growing LTE usage. The carrier's densification efforts include small cells, distributed antenna systems (DAS) and other in-building systems, including current deployments in markets like New York City and Chicago.

Verizon is also looking at software-defined networking (SDN) as a way to improve network efficiency. "We're into that," Shammo said of SDN. "Obviously, LTE in itself is a software-developed network and it gives you the scalability of giving richer network experiences, and our team is working on that and we've been working on that for quite some time. So there's a lot of things that will bring efficiency to the network."

Shammo also mentioned C-RAN technology as something that's "out there" as a way to ease network congestion. "Obviously 5G is being talked about in the industry. Of course, Asia is involved in 5G and of course we will start to get involved in the standard-setting around 5G," he said, according to a Seeking Alpha transcript. "So there's a lot happening in this industry from a technology standpoint, so spectrum's important, it will always be important, but it's not the only tool we have in our toolbox."

A Verizon spokeswoman told FierceWirelessTech the company could not comment on its C-RAN plans beyond what Shammo said during the conference call.

C-RAN, which stands for Cloud RAN (radio access network) as well as Centralized RAN, leverages distributed base station architecture to enable a host of benefits, such as capex and opex savings, increased asset utilization and savings on energy. At GSMA's Mobile World Congress Shanghai 2015 last week, many leading Asian operators, such as NTT DoCoMo, SoftBank, SK Telecom, KT and China Mobile, talked about how C-RAN or advanced C-RAN enhancement should be a component of future 5G systems, said Guang Yang, senior analyst of wireless operator strategies at Strategy Analytics.

The challenge with C-RAN architecture is it requires a lot of fronthaul links to connect remote radio units and centralized baseband units, Yang told FierceWirelessTech. "It will be challenging for operators to get so many fibers," he said, adding that the availability of fronthaul resources restricts the deployment scenarios of C-RAN, and that's why only some East Asian operators, namely in China, Japan and South Korea, have deployed C-RAN in large scale. "All of them have plenty of fiber resources."

He also noted that Ericsson (NASDAQ: ERIC) has been working with Verizon on Radio Dot trials for in-building deployments. "Verizon has achieved a nationwide 4G coverage," Yang said. "It is the time to improve its in-building performance. C-RAN based in small cell solution, such as Ericsson's Radio Dot, could be an option for Verizon to improve in-building performance."

Following tests of the Dot system with Verizon in a lab in Walnut Creek, Calif., Ericsson announced earlier this year that Verizon was the first to deploy the Dot system in a commercial building in the United States. Installed in Verizon's regional headquarters in Southfield, Mich., the Dot was supporting Verizon's Advanced Calling service, including HD Voice and Video Calling over LTE, in indoor environments.

For more:
- see this Seeking Alpha transcript (reg. req.)

Related articles:
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Madden: CRAN and DAS will converge for the enterprise
C-RAN, distributed architectures bring action to the edge
C-RAN: Plotting next-generation wireless from inside the base station hotel
Ericsson goes after enterprise, DAS market with Dot