Analysts debate whether Verizon will run out of network capacity

In a new research report, the financial analysts at New Street Research contend that, based on Verizon's (NYSE: VZ) current spectrum holdings, the nation's largest wireless carrier only has half the network capacity it will need by 2020.

"While Verizon has touted small cells as an alternative, small cells only carry about 1/3 the capacity of a macro site, and the company would need to roll out over 80,000 small cells in just the top 25 markets to maintain the current QoS [quality of service]; this would present a significant cost and a significant network planning challenge," the New Street analysts warned in a new report on network capacity in the wireless industry. The firm essentially argues that Verizon will need to purchase additional spectrum or shed millions of customers in order to maintain its current network quality.

Importantly, the New Street analysts said that T-Mobile US (NYSE:TMUS) and Sprint (NYSE: S) could gain market share due to the situation as Verizon -- and to a lesser extent AT&T (NYSE: T) -- struggle with increasingly overloaded wireless networks. "The challengers [T-Mobile and Sprint] have far more capacity per sub than the incumbents [Verizon and AT&T]," the analysts argued. "As usage increases the incumbents will see performance deteriorate first and at a faster pace, leading to a natural shift in subscribers from more congested networks to less congested networks. Re-farming, carrier aggregation, small cells, and eventually 5G will help all networks cope with demand; however, they won't help VZ and AT&T close their relative capacity gap unless they spend at a much greater rate than the other two."

However, TMF analyst Tim Farrar took issue with that assessment, arguing that New Street's network capacity calculations are based on "a completely flawed premise." Specifically, Farrar noted that New Street's analysis doesn't take into account a range of factors including the efficiencies carriers may gain from deploying new technologies like LTE-U and more powerful MIMO technologies. Indeed, Farrar pointed to research showing that moving from 2×2 MIMO to 4×4 MIMO reduces New Street's "supposed capacity shortfall" from 50 percent to 14 percent.

"Perhaps Verizon do actually understand network engineering and the potential for network capacity enhancements better than analysts with a simplistic, erroneous spreadsheet model?" Farrar noted.

In response to questions from FierceWireless about Farrar's comments, New Street Research analyst Jonathan Chaplin noted that the massive $45 billion raised by the FCC's recent AWS-3 spectrum auction pointed to carriers' desperate need for more network capacity. Chaplin said Farrar's arguments don't take into account that factor.

Chaplin also cast doubt on the full effect of moving to 4x4 MIMO, and said that all carriers will be able to use LTE-U, 4x4 MIMO and other advanced wireless technologies, which means that "Verizon will still have far less capacity per sub than the other three carriers."

"Customers will follow capacity over time," he said.

For their part, Verizon executives generally don't comment directly on the carrier's network capacity situation. Though Verizon CEO Lowell McAdam and CFO Fran Shammo have indicated recently Verizon would be interested in Dish's spectrum. 

"We like the higher band like AWS. We've said that all along that [Dish Chairman and CEO] Charlie [Ergen] is sitting on very good spectrum," Shammo said on Verizon's third quarter earnings conference call, according to a Seeking Alpha transcript. "It's very good for capacity, which is why we spent $10.4 billion in the auction." Shammo added that "higher frequency spectrum is capacity and that's really what we need at this point in time."

For more:
- see this Farrar post

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