Who needs FiOS when you can get 5G wireless service with a data plan?

Fran Shammo has a message for Verizon customers and investors: fiber optic broadband is so… yesterday. Your millennial kids aren’t interested in gigabit speed, unlimited use Internet in the home. They want to watch most of their content on a smartphone and spend more on usage-capped wireless plans.

Shammo is Verizon’s money man – the chief financial officer and prognosticator of the great Internet future.

Like his boss, CEO Lowell McAdam, Frammo has his feet firmly planted in the direction of Verizon Wireless, the phone company’s top moneymaker. If one ever wondered why Verizon Communications has let FiOS expansion wither on the vine, Mr. McAdam and Mr. Shammo would be the two to speak with.

This week, Shammo doubled down on his pro-wireless rhetoric while attending the Bank of America Merrill Lynch 2016 Media, Communications & Entertainment Conference — one of many regular gathering spots for Wall Street analysts and investors. He left little doubt about the direction Verizon was headed in.

Shammo

“As we look at the world if you will, and we look at our ecosystem, […] the world is moving to a broadband wireless world,” Shammo told the audience. “Now, I am really – when I say world, I am really talking the U.S., right. So, but I do think the world is moving to a wireless world.”

In Shammo’s view, the vast majority of people want to consume content, including entertainment, over a 4G LTE (or future 5G) wireless network on a portable device tied to a data plan. Shammo predicted wireless usage will surpass DSL, cable broadband, and even FiOS consumption in 3-5 years. If he’s right, that means a mountain of money for Verizon and its investors, as consumers will easily have to spend over $100 a month just on a data plan sufficient to cope with Shammo’s predicted usage curve. In fact, your future Verizon Wireless bill will likely rival what you pay for cable television, broadband, and phone service together.

Millennials don’t want fiber, they want wireless data plans

Shammo argued millennials are driving the transition to wireless, claiming they already watch most of their entertainment over smartphones and tablets, not home broadband or linear TV. His view is the rest of us are soon to follow. Shammo claims those under 30 are turning down cable television and disconnecting their home broadband service because they prefer wireless. Others wonder if it is more a matter of being able to afford both. A 2013 survey by Pew data found 84% of households making more than $54,000 have broadband. That number drops to 54% when annual household incomes are lower than $30,000 per year. But those income-challenged millennials don’t always forego Internet access — some rely on their wireless smartphone to access online content instead.

A microcell

Verizon Wireless may be banking on the same kind of “hard choice” many made about their landline service. Pay for a landline and a mobile phone, or just keep mobile and disconnect the home phone to save money. Usage growth curves may soon force a choice about increasing your data plan or keeping broadband service at home. Shammo is betting most need Verizon Wireless more.

Verizon FiOS is really about network densification of our 4G LTE network

Shammo continued to frame its FiOS network as “east coast-centric” and almost a piece of nostalgia. The recent decision to expand FiOS in Boston is not based on a renewed belief in the future of fiber, Shammo admitted, it is being done primarily to lay the infrastructure needed to densify Verizon’s existing LTE wireless network in metro Boston to better manage increased wireless usage. Shammo’s spending priorities couldn’t be clearer.

“Obviously, we said, we would build up Boston now, because it makes sense from a LTE perspective,” Shammo said. “We can spend $300 million over the next three years to make that more palatable to expand FIOS. So we will continue to expand that broadband connection via fiber where it makes financial sense for us.”

In other words, it is much easier to justify capital expenses of $300 million on network expansion to Wall Street if you explain it’s primarily for the high-profit wireless side of the business, not to give customers an alternative to Time Warner Cable or Comcast. FiOS powers cell sites as well as much smaller microcells and short-distance antennas designed to manage usage in high traffic neighborhoods.

Shammo also believes Verizon must not just be a ‘dumb wireless’ connection. Controlling and distributing content is also critically important, and Shammo is still a big believer in Verizon’s ho-hum GO90 platform, which compared to Hulu and Netflix couldn’t draw flies.

Even Verizon CEO McAdam admitted a few weeks ago at another Wall Street conference GO90 was “a little bit overhyped.” Most of GO90’s content library is mostly short video clips targeted at millennials with short attention spans. The downside of making that your target audience is the rumor many who sampled the service early on have already forgotten about it and moved on.

Forget about congested home and on-the-go Wi-Fi and expensive fiber optics. Verizon will sell you 5G wireless (with a data plan) for everywhere.

Shammo believes the future isn’t good for Wi-Fi in the home and on-the-go. As data demands increase, he believes Wi-Fi will become slow and overcongested.

“There is a quality of service with our network that you can’t get with others,” Shammo said. “I mean, most people in this room would realize that when Wi-Fi gets clogged, quality of service goes significantly down. It’s an unmanaged network. You can’t manage that.”

Instead, Verizon will eventually deploy 5G wireless instead of FiOS in many areas without fiber optic service today. Frammo said 5G would cost Verizon a lot less than fiber, “because there is no labor to dig up your front lawn, lay in fiber, or be able to fix something.”

Shammo doesn’t believe 5G wireless will replace 4G LTE wireless, however.

“LTE will be here for a very long time and be the predominant voice, text, data platform for mobile,” Shammo said.

So instead of unlimited fiber optic broadband, Verizon plans to sell home broadband customers something closer to Wi-Fi, except with a data allowance. It’s a return to fixed wireless service.

Verizon Wireless’ existing fixed wireless service is heavily usage capped and not cheap.

Just a few short years ago, Verizon was looking to fixed wireless as a replacement for rural DSL and landline service. Now Shammo sees the economics as favorable to push a similar service on all of its customers, except those already fitted for FiOS. That changes the dynamics on usage as well, because Verizon Wireless ditched unlimited service several years ago except for a dwindling number of customer grandfathered in on its old unlimited plan.

Current 4G LTE fixed wireless customers can expect 5-12Mbps speeds with data plan options of $60 for 10GB, $90 for 20GB, or $120 for 30GB. The 5G service would be substantially faster than Verizon’s current fixed LTE wireless service, but the company’s philosophy favoring data caps for wireless services makes it likely customers will pay much higher prices for service, higher than Verizon charges for FiOS itself.

Despite denials Verizon Communications was interested in selling off more of its wireline network to companies like Frontier Communications, the company’s chief financial officer reminded investors Verizon is willing to sell just about anything if it will return value to its shareholders.

In September, rumors Verizon planned to sell more of its wireline network where the company has not invested in widespread FiOS fiber-to-the-home expansion grew loud enough to draw a response from Verizon CEO Lowell McAdam at the Goldman Sachs 24^th annual Communicopia Conference.

“When people ask me, and I know there’s some speculation that we might be interested in selling the wireline properties, I don’t see it in the near-term,” McAdam said.

Today, Shammo seemed to clarify McAdam’s pessimistic attitude about another Verizon landline sell off in the near future.

“We’re extremely happy with the asset portfolio we have right now, but as we always say we continue to look at all things,” Shammo said. “Just like the towers, we said we would not sell the towers and then we got to a great financial position and we sold our towers. If something makes sense [and] we can return value to our shareholders and it’s not a strategic fit we’ll obviously look at that.”

Shammo

For most of 2014, Verizon denied any interest in selling its portfolio of company-owned wireless cell towers. In February 2015 the company announced it would sell acquisition rights to most of its cell towers to American Tower Corporation for $5.056 billion in cash.

Some analysts believe the early indicators that suggest Verizon is ready to sell include its lack of upgrades in non-FiOS service areas and Verizon’s willingness to walk away from up to $144 million from the second phase of the FCC’s Connect America Fund to expand Internet access to more of Verizon’s rural landline customers.

Verizon’s decision to take a pass on broadband improvement funds infuriated four southern New Jersey counties that claim Verizon has neglected its copper network in the state. As a result of allegedly decreasing investment and interest by Verizon, customers in these areas do not get the same level of phone and broadband service that Verizon customers receive in the northern half of New Jersey.

More than a dozen communities have signed a joint petition sent to the Board of Public Utilities, New Jersey’s telecom regulator, insisting the BPU take whatever measures are needed to preserve the availability of telecommunications services in southern New Jersey. The towns also want the BPU to consider funding sources to help improve broadband service that public officials claim is woefully inadequate. Outside of Verizon FiOS service areas, Verizon offers customers traditional DSL service for Internet access.

The communities:

• Atlantic County: Estell Manor and Weymouth Township.
• Gloucester County: South Harrison Township.
• Salem County: Alloway Township, Lower Alloways Creek, Mannington Township, Township of Pilesgrove, and Upper Pittsgrove Township.
• Cumberland County: Commercial Township, Downe Township, Hopewell Township, Lawrence Township, Maurice River Township, City of Millville, Upper Deerfield Township, and Fairfield Township.

Officials claim Verizon has pushed its wireless alternatives to customers in the region, including its wireless landline replacement. But officials suggest Verizon’s wireless coverage and the quality of its service is not an adequate substitute for wireline service.

Verizon’s Home Phone Connect base station

Verizon has proposed decommissioning parts of its wireline network in rural service areas and substitute wireless service in the alternative. At issue are the costs to maintain a vast wireline network that reaches a dwindling number of customers. Verizon reminds regulators it has lost large numbers of residential landline customers who have switched to wireless service, making the costs to maintain service for a dwindling number of customers that much greater.

But for many communities, the focus is increasingly on broadband, especially in areas that receive little or no cable service. Telephone companies serving rural communities are surviving landline disconnects by providing broadband service.

For companies like Frontier Communications, CenturyLink, and Windstream, investments in providing broadband service are among their top spending priorities. At larger phone companies like Verizon and AT&T, highly profitable wireless divisions get the most attention and are top spending priorities.

Speaking this morning at the UBS 43rd Annual Global Media and Communications Conference, Shammo told investors Verizon will continue to allocate the majority of its capital allocation around Verizon Wireless to help densify its wireless network. Verizon, Shammo noted, plans further spending cuts for its wired networks next year as FiOS network buildouts start to taper off.

This will make expansion and improvement of Verizon DSL unlikely, and may put further cost pressure on maintaining Verizon’s wireline networks, which could further motivate a sale.

Verizon’s chief financial officer Fran Shammo is likely looking at three alternatives for the future:

1. Increase investment in Verizon Communications to further expand FiOS fiber optics;
2. Look at cost savings opportunities to improve the books at Verizon Communications, including decommissioning rural landline networks (if Verizon can win regulator approval);
3. Consider selling Verizon’s non-core wireline assets in areas where the company has not made a substantial investment in FiOS and refocus attention on serving the dense corridor of customers along the Atlantic seaboard between Washington, D.C. and Boston.

Verizon Wireless: The Neiman Marcus of mobile providers

A customer retention call with Verizon Wireless is short and to the point: enjoy the coverage you get from us now at the prices we charge or cancel and live with inferior cell phone service from one of our competitors.

Verizon chief financial officer Fran Shammo waved goodbye to 138,000 Verizon Wireless customers in the last three months and he could care less.

“If the customer who is just price-sensitive and does not care about the quality of the network—or is sufficient with just paying a lower price—that’s probably the customer we’re not going to be able to keep,” he said in the company’s quarterly earnings call today.

The wireless industry’s price war has not yet inflicted much damage on Verizon, which considers itself above the fray.

Average revenue per customer has started to significantly decline for the first time in wireless industry history, despite efforts to bolster earnings with expensive data plans and bundling services, including unlimited voice calling most cell phone users no longer care about. Both T-Mobile and Sprint are resorting to slashing prices and reducing the fine print to pick up business, with T-Mobile being the more successful of the two pulling it off. But the combined market share of Sprint and T-Mobile remains a fraction of what AT&T and Verizon Wireless have captured.

Verizon believes it has a premium product and expects to be paid for it. Like a Neiman Marcus of the wireless industry, customers can expect a superior level of service, if they can afford to pay for it.

To keep customers dazzled, this summer Verizon Wireless is planning a new wireless video service featuring content from the NFL and likely more. Verizon hopes customers without unlimited data plans will be willing to pay several dollars extra for the new streaming service. But perhaps not too many extra dollars. Verizon executives have discovered a loophole in the FCC’s new Net Neutrality regulations allowing video content to be sponsored by Verizon or its advertising partners and exempt from usage allowances or caps.

Known as “zero-rating,” the practice is much more common overseas, where content providers pay for customer’s usage of their applications. Critics call the practice an end run around Net Neutrality. The FCC has continued to avoid the issue of broadband usage caps and usage-based billing, which ISPs have interpreted to mean a green light on the practice. In fact, some earlier comments from the FCC suggest the agency believes subsidized Internet traffic might be beneficial to consumers. Verizon pockets the money in either case.

Tim Berners-Lee, who created of the World Wide Web, called zero-rating “positive discrimination,” giving too much power to Internet providers.

“Zero-rated mobile traffic is blunt anti-competitive price discrimination designed to favor telcos’ own or their partners’ apps while placing competing apps at a disadvantage,” added Antonios Drossos, managing partner of Rewheel. “A zero-rated app is an offer consumers can’t refuse.”

Verizon Wireless has not yet priced its forthcoming video offering, but it could be marketed as a monthly add-on feature or as a pay-per-view option.

[flv]http://www.phillipdampier.com/video/Bloomberg Verizon Bids Good Riddance to Customers Leaving for a Cheaper Deal 4-21-15.flv[/flv]

Bloomberg reporters talk about Verizon’s disinterest in competing with other carriers in the ongoing price war, and is fine with letting price-sensitive customers leave. It won’t be cutting prices anytime soon. (2:01)

Verizon’s FiOS expansion is still dead.

Verizon Communications does not see its remaining landline customers as part of the company’s future growth and customers should not be surprised if Verizon sells more of its legacy network to other telephone companies including Frontier, Windstream, and CenturyLink.

Speaking at the Morgan Stanley Technology, Media and Telecom Conference 2015 on March 2, Verizon chief financial officer Fran Shammo made it clear to investors Verizon will dump “non-core” assets that do not align with the company’s future long-term growth strategy, even in areas where FiOS predominates.

Shammo told investors Verizon’s growth strategy is predicated on Verizon Wireless, which will continue to get most of the company’s attention and future investment.

“It’s all around the wireless network and I’ve consistently said before, you should anticipate that wireless CapEx continues to trend up while wireline continues to trend down,” Shammo said.

The bulk of Verizon’s investments in its wired network are being made in areas that are already designated as FiOS fiber to the home service areas. Shammo explained that the company is required to invest in FiOS expansion to comply with agreements signed in cities like New York and Philadelphia to make the service widely available in those communities. Beyond those commitments, Shammo signaled the company isn’t planning any significant new spending to upgrade the rest of its legacy copper network.

“We continue to invest in those things that we believe are the future growth of the company,” Shammo said, and anything involving its wired networks outside of Verizon’s core FiOS service area in the northeast and Mid-Atlantic states probably doesn’t qualify.

What will happen in Verizon service areas that are not considered priorities?

“For the right price and right terms, if there’s an asset we don’t believe is strategic to Verizon and can return shareholder value, we’ll dispose of that asset,” Shammo said.

An example of that strategy was Verizon’s sudden announcement in February it would sell its wireline assets in Florida, California, and Texas to Frontier Communications for $10.54 billion. Although a significant part of those service areas are served by FiOS after Verizon invested more than $7 billion on upgrades, Verizon still plans to abandon customers and walk away from that investment because it is not part of Verizon’s future growth strategy.

“If you look at Florida, Texas, and California, these are three island properties,” Shammo told investors. “FiOS is a very small footprint of those properties compared to the copper [except in] Florida because it was just Tampa. But you look at that and you say strategically there’s really not much we can do with those properties because they are islands.”

Verizon will spend the proceeds from its latest landline sale on the wireless spectrum it just acquired and will pay down some of the debt incurred after buying out Vodafone’s former ownership stake in Verizon Wireless. The company has also undertaken a massive share repurchase program, planning to buy back 100 million shares by 2017 to help its shareholders. To ease investor concerns about some of Verizon’s latest strategic moves, it also announced plans to buy back an extra $5 billion worth of shares in the second quarter of this year.

A close review of the latest Verizon sale to Frontier shows the extent Verizon believes in its wireless business at the cost of its legacy copper and FiOS networks. That comes as no surprise to Verizon observers who note its current CEO used to run Verizon Wireless.

Shammo, as featured on a recent cover of CFO Studio magazine.

“It’s been clear for years that Verizon has wanted out of the copper business,” said Doug Dawson from CCG Consulting. “They first sold off large portions of New England to Fairpoint. Then in 2010 they sold a huge swath of lines in fourteen states to Frontier including the whole state of West Virginia. And now comes this sale. It’s starting to look like Verizon doesn’t want to be in the landline business at all, perhaps not even in the fiber business.”

Verizon’s latest sale involves “higher margin properties than the rest of our wireline business,” Shammo said, in part because large parts of the urban service areas involved were previously upgraded to FiOS.

“So if you look at Dallas, we were over 50% penetrated both in TV and broadband,” said Shammo. “So, it was a very highly penetrated market that was delivering a lot of cash flow and delivering a lot of earnings. So by just divesting of the three properties, if you just did it on an apples-to-apples basis, there would be dilution.

Giving up that amount of cash flow — needed to win back the $7 billion in FiOS upgrade investments Verizon made in the three states — would normally concern investors worried about the “stranded costs” left over from investments that were never fully repaid. But Verizon has a plan for that: an “Involuntary Separation Plan” (ISP) for more than 2,000 Verizon employees, a polite way to describe job-cutting layoffs.

“We have a year to plan for this and the plan is similar to what we did with the last time we rolled properties out from Frontier,” Shammo said. “We will plan to offset the stranded cost and those plans are already being worked. You saw a little bit of that in the fourth quarter where we gave some ISPs to the represented employee base and we had 2,100 people come off payroll.”

Verizon’s growing preoccupation with Verizon Wireless leaves some analysts questioning the company’s wisdom giving up high-profit FiOS broadband in favor of wireless at a time when competition among wireless companies is finally emerging.

“Verizon reports an overall 41% market penetration for its data product on FiOS networks,” said Dawson. “Data has such a high profit margin that it’s hard to think that FiOS is not extremely profitable for them. The trend has been for the amount of data used by households to double every three years, and one doesn’t have to project that trend forward very far to see that future bandwidth needs are only going to be met by fiber or by significantly upgraded cable networks.”

Considering the wireless market is maturing and most everyone who wants a cell phone already has one, there are questions about where Verizon sees future growth in a business where it is getting harder to attract new customers.

“Verizon was a market leader getting into the fiber business. FiOS was a bold move at the time,” Dawson reflects. “It’s another bold move to essentially walk away from the fiber business and concentrate on wireless. They obviously think that wireless has a better future than wireline. But since they are already at the top of pile in cellular one has to wonder where they see future growth?”

A Verizon executive told investors there is no wireless spectrum shortage in the United States and Verizon has historically purchased and warehoused spectrum it had no intention of using immediately.

Fran Shammo, chief financial officer of Verizon Communications, drew attention to Verizon’s controversial spectrum acquisition policy as part of a conversation with investors about the recent FCC auction that sold 65 megahertz of wireless frequencies for an unprecedented $44.9 billion, far and away the highest ever seen in a spectrum auction.

“In every purchase of spectrum up to this auction, the scale was that it was more efficient to buy spectrum than it was to build capacity because the scale was spectrum was cheaper to build on capacity,” Shammo said.

Before the auction, there were significant differences in Verizon Wireless’ network capacity in different cities. In New York City, Verizon controls 127MHz. In Los Angeles and San Francisco it manages with 107MHz, but only has 97MHz to work with in Philadelphia, San Diego and Chicago.

Verizon Wireless has always held spectrum it acquired at auction but never put into widespread use on its network. But bidding during the FCC’s most recent Auction 97 made bidding and warehousing unused frequencies an expensive proposition, more expensive than beefing up Verizon’s existing network with additional cell towers, microcells, and other technology to make the most use of existing spectrum assets.

“This auction flipped [our acquisition] equation in certain markets,” Shammo said in reference to Verizon’s bidding strategy. “And so we became much more diligent on what markets we strategically wanted and [which] we were willing to let go because when you looked at it, if I was to get what I wanted initially when I went in, I would have spent an extra $6 billion when I could create the same capacity with $1.5 billion by building it.”

In the most recent auction, Verizon Wireless considered spectrum acquisitions crucial in California, where it added frequencies in Los Angeles, San Diego and San Francisco. But Verizon gave up bidding on spectrum for densely populated New York and Boston where the asking price grew too high. That forces Verizon Wireless to increase the efficiency of its existing network in those cities. It will do so by deploying more cell towers to divide the traffic load, as well as adding microcells and other small-area solutions in high traffic urban areas.

Despite not getting everything it wanted, Verizon took the auction results in stride, claiming its network was fully capable of handling growing traffic loads even in areas where it failed to win new spectrum.

“People think that spectrum is the Holy Grail and if you don’t have enough spectrum, you can’t have the capacity,” Shammo said. “But actually that’s not true now because technology has changed so much. If you look at small cell technology, diversified antenna systems, and when you think [about] Chicago, if you walk down the street, you see small cells on lamp posts. So, the municipalities are starting to open up to that small cell technology.”

AT&T paid $18.2 billion for nearly 250 licenses, compared with $10.4 billion Verizon will spend on 181 licenses. The presence of Dish Networks in the bidding clearly irritated AT&T and Verizon, primarily because the satellite dish provider incorporated two “designated entities” — SNR Wireless LicenseCo and Northstar Wireless — as bidding partners, winning up to 25% off their bids as part of a “small business discount.” The two DEs won over $13 billion in licenses with $3 billion in savings.

AT&T accused Dish of circumventing auction activity rules and distorting the bidding.

“As a result, Dish the corporate entity won no licenses,” said Joan Marsh, AT&T’s vice president of federal regulatory matters. “The Dish DEs, who each enjoyed a 25% discount, won substantial allocations.”

Marsh complained Dish already controls around 81MHz of spectrum that remains unused for wireless telecom services.

Dish also made life difficult for large carriers who have learned to predict the likely bidding strategies of their competitors based on experience. Many were surprised Dish managed to both bid up prices and win a substantial percentage of spectrum, all for a wireless business it has yet to build.

T-Mobile was not happy either. CEO John Legere called the auction “a disaster for American wireless consumers.” T-Mobile suffered considerably in the auction, outspent by Dish & Friends 132 times for important wireless licenses.

“Three companies alone spent an insane $42 billion between them, grabbing a ridiculous 94 percent of the spectrum sold at this auction,” Legere wrote, referring to AT&T, Dish Network and Verizon Wireless. “This whole thing should scare the hell out of you and every other wireless consumer in the U.S., because there is another important auction next year, and the results have to be different if wireless competition is going to survive.”

With the auction over, Verizon Wireless will continue to shift its spectrum usage around to accommodate network changes. Verizon will continue to emphasize enlarging 4G LTE services while gradually reducing the percentage of its network used for other purposes. Verizon expects to shut off its CDMA voice network in the early 2020s and is reducing the amount of spectrum dedicated to supporting its legacy 3G network.