Verizon spending millions on network upgrades to counter growth of video traffic

Verizon Wireless (NYSE:VZ) is struggling to meet a surge in online video traffic, which has caused the carrier's network performance to drop in key metropolitan areas and is costing the operator millions of dollars in network upgrades.

According to a Wall Street Journal article, data from RootMetrics has shown that Verizon's wireless download speeds suffered a year-on-year plummet of more than 20 percent in some markets. And the decline is becoming noticeable to Verizon end users.

The article cited customer Damon Leonhard, who said his Verizon service works well in Dublin, Ohio, where he lives but has data traffic stumbles when he travels to dense urban markets such as Atlanta or Los Angeles. He said he bought a second phone to use on the T-Mobile US (NYSE:TMUS) network as backup.

Verizon Communications CEO Lowell McAdam acknowledged the problems last week during an investor conference. "There are certain hot spots that frankly the network hasn't performed at the level that we would like it to," he said.

Back in October, Verizon CFO Fran Shammo admitted during another investor conference the carrier's wireless business was having "a little bit of a speed issue" in New York, San Francisco and Chicago as congestion caused some users to get pushed off of LTE to 3G CDMA service.

According to RootMetrics' data, Verizon's download speeds as of October had dropped roughly 29 percent in San Francisco and 15 percent in Chicago since spring 2012. However, data speeds in New York improved slightly, RootMetrics CEO Bill Moore told the Wall Street Journal.  

Shammo acknowledged the "amount of consumption of video took us a little bit by surprise." The operator said during the second quarter that it would boost spending by some $500 million during 2013 to improve its wireless network. Shammo said Verizon is mitigating data traffic problems through the deployment of small cells, distributed antenna systems and its AWS spectrum.

According to McAdam, Verizon intends to augment its LTE network in 50 different cities with AWS spectrum on top of its 700 MHz spectrum during the first half of 2014 to avoid potential capacity issues. Verizon previously said it would deploy AWS spectrum on 5,000 cell sites by year-end. The company is almost finished upgrading its LTE network in New York City by using the AWS spectrum, he added. That could be the explanation for the improved data speeds witnessed by RootMetrics in that market.

John Giere, president and CEO of Openwave Mobility, has predicted that mobile operators "will push mobile video optimization to the top of their priorities in order to ensure levels of QoE." He also predicted that more wireless operators will offer mobile video streaming as a premium service by tonnage or by time. Regional operator C Spire already segments out billing for video streaming.

The most recent Ericsson (NASDAQ:ERIC) Mobility Report, issued in October, estimated that around 35 percent of global data traffic was due to video during 2013, but that percent will balloon to more than 50 percent during 2019.

AT&T (NYSE:T) has already said that more than 50 percent of traffic on its network stems from video and the operator expects more of the same in the future. AT&T CEO Randall Stephenson predicted last week, "That is where the next round of growth, or even the next wave of growth, in this industry comes from."

Ericsson said users "with the greatest usage on the highest data plan will often consume 10 times the average monthly volume." Similarly, at the end of the third quarter, 38 percent of Verizon's customers were on LTE and generated 64 percent of its data traffic.

McAdam predicted Verizon will quickly get on top of its network issues. "I think it is a short-term blip, and this just proves that you have got to stay ahead of the demand," he said.

For more:
- see this Wall Street Journal article (sub. req.)
- see this Openwave Mobility release

Related articles:
With global smartphone subscriptions reaching 5.6B by 2019, Ericsson turns to 'app coverage'
3G/4G wireless network latency: How did Verizon, AT&T, Sprint and T-Mobile compare in November?
Verizon's Shammo: LTE capacity issues will be worked out by year-end
Verizon will deploy AWS spectrum in 50 markets by mid-2014 
AT&T makes inroads with DAS, tops 400 LTE markets 
Verizon's net adds below expectations, T-Mobile could be to blame
Verizon, AT&T continue bickering over 'most reliable' LTE network claims