Cincinnati Bell threw in the towel on its wireless mobile business Monday when it decided to sell its wireless spectrum licenses, network, and 340,000 customers for $210 million to its larger rival Verizon Wireless.

While most analysts say the transaction is the inevitable outcome of a wireless industry now dedicated to consolidation, at least one analyst said the threat of Google Fiber eventually entering the Cincinnati market may have also contributed to the decision to sell.

The future of Cincinnati Bell’s wireless division had been questioned for more than a year, ever since the arrival of the company’s newest CEO Ted Torbeck in January 2013. Cincinnati Bell, one of the last independent holdouts of the Bell System breakup that have not been reabsorbed by AT&T or Verizon, had struggled since Torbeck’s predecessor made some bad bets on acquisitions, including an investment in microwave communications provider Broadwing that left the company with more than $2 billion in debt in 2004. Another $526 million acquisition of data center Cyrus One left the company further in debt.

Torbeck

Torbeck promised a frank evaluation of Cincinnati Bell’s operations last year and keeping its declining wireless division no longer made sense with Torbeck’s focus on replacing the company’s aging copper wire network with fiber optics.

For years, Cincinnati Bell’s biggest competitor has been Time Warner Cable, which has taken away many of its landline customers. Cincinnati Bell’s mobile phone division was created to protect its core business, picking up wireless subscribers as customers dropped their landlines. But the cable company’s bundled service packages made landline service much less expensive than sticking with the phone company, and many wireless customers prefer a national wireless phone company offering better coverage and a wider selection of devices.

Rampant wireless industry consolidation has concentrated most of the cell phone market in the hands of AT&T and Verizon Wireless, giving those two companies access to the most advanced and hottest devices while regional carriers made do offering customers less capable smartphones. Its competitors’ march towards 4G LTE network upgrades also challenged Cincinnati Bell with costly capital investments in a 4G HSPA+ network that Torbeck recently decided no longer made economic sense.

Cincinnati Bell’s wireless revenue for 2013 was $202 million, a decrease of 17 percent from 2012. The company also lost 58,000 subscribers last year, an unsustainable drop that showed few signs of stopping.

“Our business has been in decline for five or six years,” Torbeck told the Cincinnati Business Courier. “This is absolutely the right time to make this deal. It was probably the highest value we could get at this point in time.”

Torbeck believes Cincinnati Bell’s best chance for a future lies with with fiber optics, capable of delivering phone service along with a robust broadband and television offering that can effectively compete with Time Warner Cable.

“We’ve got to grow market share in Cincinnati and fiber optics is the way to do it,” Torbeck said in 2013. “We have about 25 percent of the city covered and we think from a financial perspective we can get to 65 or 70 percent so we’ve got significant growth opportunity there.”

Last year, Cincinnati Bell had passed 184,000 homes with fiber optics – a 28 percent market share. But only 52,000 homes subscribed to Fioptics — Cincinnati Bell’s fiber brand. Time Warner Cable had managed to keep many of its wavering 446,000 customers loyal to the cable company with aggressive discounting and customer retention offers. But now that many of those discounts have since expired, Torbeck wants to reach 650,000-700,000 homes in its service area covering southwestern Ohio and northern Kentucky and convince 50% of those customers to switch to fiber optics.

Torbeck isn’t interested in limiting his business to just greater Cincinnati either.

“At some point in time, we’d like to expand regionally into Indianapolis, Columbus,” Torbeck said. “Louisville is another opportunity. But that’s probably a little down the road. From a fiber standpoint, we could look at acquisitions and get into metro fiber. These are things we’re looking at, but these are things that are down the road. We got a lot of room for growth just here in Cincinnati.”

But financial analysts warned Cincinnati Bell’s enormous debt load limits the company’s potential to invest in expansion. Torbeck’s decision to sell off the company’s wireless unit is another step in reducing that debt and further investing in fiber optics expansion.

The company’s unique position as the last remaining independent phone company that still bears the name of the telephone’s inventor may make the company a target for a takeover before Torbeck’s vision is realized. One analyst thinks Cincinnati Bell would be a natural target for Google, which has a recent record of repurposing fiber networks built by other companies as a cost-saving measure to further deploy Google Fiber.

“They are a small and cheap company with the infrastructure that Google could use,” said Brian Nichols. “My theory is that Google will buy undervalued companies like Cincy Bell to save on the mounting costs of buildouts, which could top $30 billion,“ Nichols wrote in an email to WCPO-TV.

Google did exactly that in Provo, Utah, acquiring struggling iProvo from the city government for $1 in return for agreeing to expand the fiber network to more homes.

Cincinnati’s local phone company would sell for considerably more than that, but it would still prove affordable for Google, which has a market value of $361 billion, about 470 times that of Cincinnati Bell.

Cincinnati Bell has already spent about $300 million on Fioptics and plans to spend an extra $80 million this year on expansion. Before the network is complete, the phone company is likely to spend as much as $600 million on fiber upgrades. But the payoff has been higher revenue — $100 million last year alone, and a stabilizing business model that has reduced losses from landline cord-cutting. Telecom analyst Nicholas Puncer offers support for the investment, something rare for most Wall Street advisers.

“It’s a reasonable strategy,” Puncer said. “There’s only going to be more data going through networks in the future, not less. The way we consume content is going to be a lot different 10 years from now than it is today. This is their effort to be on the right side of that, giving people more options to receive that content.”

But if Google Fiber comes to town, it may not be enough.

“Google has an unprecedented luxury,” Nichols said in his email to WCPO. “They are [attaching] fiber to existing poles owned by AT&T (and other telecom companies), and then targeting areas where consumers agree for service before the network is even built. Given this demand, and its mere ability to operate in such a manner, I do think Cincinnati Bell will have major problems once that day comes (likely sooner rather than later). In fact, I don’t think they stand a chance of competing against Google.”

Cincinnati Bell said it will continue to offer wireless service for customers for the next 8 to 12 months. The company will notify customers with further details regarding transition assistance around the time of the closing, which is expected to be in the second half of 2014.

It was not immediately clear on Monday if the sale will impact jobs. Cincinnati Bell Wireless employs about 175 people, including retail store employees.

[flv]http://www.phillipdampier.com/video/WKRC Cincinnati Cincinnati Bell selling wireless spectrum to Verizon 4-8-14.flv[/flv]

WKRC in Cincinnati reports on what the sale of Cincinnati Bell Wireless to Verizon Wireless means for customers. (1:24)

Phillip “Spending $6k per cable customer is obviously a much better deal than paying half that to build a fiber to the home network” Dampier

Math was never my strong subject, but even I can calculate the groupthink of American cable and telephone companies and their friends on Wall Street just doesn’t add up.

This week, we learned that cable companies like Bright House Networks, Suddenlink, and Charter Communications are already lining up for a chance to acquire three million cable customers Comcast intends to sell if it wins approval of its merger with Time Warner Cable. Wall Street has already predicted Comcast will fetch as much as $18 billion for those customers and pegged the value of each at approximately $6,000.

But for less than half that price any company could build a brand new fiber to the home system capable of delivering 1,000Mbps broadband and state-of-the-art phone and television service and start banking profits long before paying off the debt from buying an inferior coaxial cable system. Yet we are told time and time again that the economics of fiber to the home service simply don’t make any sense and deploying the technology is a waste of money.

Let’s review:

Google Fiber was called a boondoggle by many of its competitors. The folks at Bernstein Research, routinely friendly to the cable business model, seemed appalled at the economics of Google’s fiber project in Kansas City. Bernstein’s Carlos Kirjner and Ram Parameswaran said Google would throw $84 million into the first phase of its fiber network, connecting 149,000 homes at a cost between $500-674 per home. The Wall Street analyst firm warned investors of the costs Google would incur reaching 20 million customers nationwide — $11 billion.

“We remain skeptical that Google will find a scalable and economically feasible model to extend its build out to a large portion of the U.S., as costs would be substantial, regulatory and competitive barriers material, and in the end the effort would have limited impact on the global trajectory of the business,” Bernstein wrote to its investor clients.

So Google spending $11 billion to reach 20 million new homes is business malpractice while spending $18 billion for three million Time Warner Cable customers is confirmation of the cable industry’s robust health and valuation?

Bernstein’s firm never thought highly of Verizon FiOS either.

“If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I’d have some seriously happy customers,” Craig Moffett from Bernstein said back in 2008. “My problem would be whether I could earn a decent return doing it.”

Back then, Moffett estimated the average cost to Verizon per FiOS home passed was $3,897, a figure based on wiring up every neighborhood, but not getting every homeowner to buy the service. Costs for fiber have dropped dramatically since 2008. Dave Burstein from DSL Prime reported by the summer of 2012 Verizon told shareholders costs fell below $700/home passed and headed to $600. The total cost of running fiber, installing it in a customer’s home and providing equipment meant Verizon had to spend about $1,500 per customer when all was said and done.

Moffett concluded Verizon was throwing money away spending that much on improving service. He wasn’t impressed by AT&T U-verse either, which only ran fiber into the neighborhood, not to each home. Moffett predicted AT&T was spending $2,200 per home on U-verse back in 2008, although those costs have dropped dramatically as well.

Moffett

Moffett’s solution for both Verizon and AT&T? Do nothing to upgrade, because the price wasn’t worth the amount of revenue returns either company could expect in the short-term.

It was a much different story if Comcast wanted to spend $45 billion to acquire Time Warner Cable however, a deal Moffett called “transformational.”

“What we’re talking about is an industry that is becoming more capital intensive,” Todd Mitchell, an analyst at Brean Capital LLC in New York told Bloomberg News. “What happens to mature, capital-intensive companies — they consolidate. So, yes, I think the cable industry is ripe for consolidation.”

Other investors agreed.

“This is definitely a bet on a positive future for high-speed access, cable and other services in an economic recovery,” said Bill Smead, chief investment officer at Smead Capital Management, whose fund owns Comcast shares.

But Forbes’ Peter Cohan called Google’s much less investment into fiber broadband a colossal waste of money.

“Larry Page should nip this bad idea in the bud,” Cohan wrote.

Cohan warned investors should throw water on the enthusiasm for fiber before serious money got spent.

“FTTH authority, Neal Lachman, wrote in SeekingAlpha, that it would cost as much as $500 billion and could take a decade to connect all the houses and commercial buildings in the U.S. to fiber,” Cohan added.

Cohan was concerned Google’s initial investment would take much too long to be recovered, which apparently is not an issue for buyers willing to spend $18 billion for three million disaffected Time Warner Cable customers desperately seeking alternatives.

An investment for the future, not short term profits.

Municipal broadband providers have often chosen to deploy fiber to the home service because the technology offers plenty of capacity, ongoing maintenance costs are low and the networks can be upgraded at little cost indefinitely. But such broadband efforts, especially when they are owned by local government, represent a threat for cable and phone companies relying on a business model that sells less for more.

The American Legislative Exchange Council (ALEC), funded by Comcast, Time Warner, AT&T, Verizon, and other large telecom companies is at the forefront of helping friendly state legislators ban community fiber networks. Their excuse is that the fiber networks cost too much and, inexplicably, can reduce competition.

“A growing number of municipalities are […] building their own networks and offering broadband services to their citizens,” ALEC writes on its website. “ALEC disagrees with their answer due to the negative impacts it has on free markets and limited government.  In addition, such projects could erode consumer choice by making markets less attractive to competition because of the government’s expanded role as a service provider.”

The Fiber-to-the-Home Council obviously disagrees.

“Believe it or not, there are already more than a thousand telecom network operators and service providers across North America that have upgraded to fiber to the home,” says the Council. “The vast majority of these are local incumbent telephone companies that are looking to transform themselves from voice and DSL providers into 21st century broadband companies that can deliver ultra high-speed Internet and robust video services, as well as be able to deliver other high-bandwidth digital applications and services to homes and businesses in the years ahead.”

Stephenson

In fact, a good many of those efforts are undertaken by member-owned co-ops and municipally owned providers that answer to local residents, not to shareholders looking for quick returns.

The only time large companies like AT&T move towards fiber to the home service is when a competitor threatens to do it themselves. That is precisely what happened in Austin. The day Google announced it was launching fiber service in Austin, AT&T suddenly announced its intention to do the same.

“In Austin we’re deploying fiber very aggressively,” said AT&T CEO Randall Stephenson. “The cost dynamics of deploying fiber have dramatically changed. The interfaces at the homes, the wiring requirements, how you get a wiring drop to a pole, and the way you splice it has totally changed the cost dynamics of deploying fiber.”

Prior to that announcement, AT&T justified its decision not to deploy fiber all the way to the home by saying it was unnecessary and too costly. With Google headed to town, that talking point is no longer operative.

Tracking Cable’s Top Internet Speeds

The National Cable & Telecommunications Association (NCTA) offers this infographic to suggest the deregulated cable broadband industry works well without any interference from meddling politicians.

Their claim: “Ongoing investments have enabled cable providers to continue boosting broadband speeds with top tiers increasing 50% every year.”

The reality: Cable’s broadband speed comes at a very high cost. The majority of Americans cannot buy 505Mbps residential broadband service from Comcast and even if you could, the price tag hovers around $300 a month, with a nearly-$1,000 early contract termination penalty, a $250 installation and $250 activation fee. Customers at other cable providers often find their maximum speed is just 50Mbps and/or their Internet usage is limited by a usage cap.

Google Fiber and some other gigabit fiber to the home providers are offering unlimited 1,000Mbps service for $70 a month with no installation or activation fee if a customer agrees to stick around.

Verdict: The cable industry could do better for much less.

AT&T says it plans to adopt fiber to the home service in cities around the United States as part of an expansion of its U-verse GigaPower service.

CEO Randall Stephenson told investors at the Morgan Stanley Technology, Telecom, and Media Conference the “cost dynamics” of fiber optics have become “really encouraging” in its targeted fiber deployment in Austin, Tex.

“In fact I would tell you we are so encouraged that we want to begin taking this to other communities [where] we can get the terms and conditions like we have in Austin,” Stephenson said, referring to Austin’s red-tape cutting and clearing the way for fiber upgrades with eased permit requirements and pole attachment policies. “We are redirecting investment to fiber to the home deployment, and in fact we are going to launch the service in Dallas this summer.”

Stephenson added that where U-verse faces significant competition from a “new competitor,” AT&T will be “a little more aggressive and assertive in deploying that technology around the country.”

That most likely means AT&T will choose fiber to the home service in areas facing imminent competition from Google Fiber or another similar provider.

Google has proposed expanding its gigabit fiber network to nine metropolitan areas around the United States, but none of them include cities in the Mid-Atlantic and Northeast dominated by Time Warner Cable, Comcast, and Verizon FiOS.

Altogether, the expansion project could bring fiber to the home Internet service to 34 new cities:

• Arizona: Phoenix, Scottsdale, Tempe
• California: San Jose, Santa Clara, Sunnyvale, Mountain View, Palo Alto
• Georgia: Atlanta, Avondale Estates, Brookhaven, College Park, Decatur, East Point, Hapeville, Sandy Springs, Smyrna
• North Carolina: Charlotte, Carrboro, Cary, Chapel Hill, Durham, Garner, Morrisville, Raleigh
• Oregon: Portland, Beaverton, Hillsboro, Gresham, Lake Oswego, Tigard
• Tennessee: Nashville-Davidson
• Texas: San Antonio
• Utah: Salt Lake City

Google’s Fiber Blog:

Now that we’ve learned a lot from our Google Fiber projects in Kansas City, Austin and Provo, we want to help build more ultra-fast networks. So we’ve invited cities in nine metro areas around the U.S.—34 cities altogether—to work with us to explore what it would take to bring them Google Fiber.

We aim to provide updates by the end of the year about which cities will be getting Google Fiber. Between now and then, we’ll work closely with each city’s leaders on a joint planning process that will not only map out a Google Fiber network in detail, but also assess what unique local challenges we might face. These are such big jobs that advance planning goes a long way toward helping us stick to schedules and minimize disruption for residents.

We’re going to work on a detailed study of local factors that could affect construction, like topography (e.g., hills, flood zones), housing density and the condition of local infrastructure. Meanwhile, cities will complete a checklist of items that will help them get ready for a project of this scale and speed. For example, they’ll provide us with maps of existing conduit, water, gas and electricity lines so that we can plan where to place fiber. They’ll also help us find ways to access existing infrastructure—like utility poles—so we don’t unnecessarily dig up streets or have to put up a new pole next to an existing one.

While we do want to bring Fiber to every one of these cities, it might not work out for everyone. But cities who go through this process with us will be more prepared for us or any provider who wants to build a fiber network. In fact, we want to give everyone a boost in their thinking about how to bring fiber to their communities; we plan to share what we learn in these 34 cities, and in the meantime you can check out some tips in a recent guest post on the Google Fiber blog by industry expert Joanne Hovis. Stay tuned for updates, and we hope this news inspires more communities across America to take steps to get to a gig.

Google does not guarantee every community will actually get the service, and a read between the lines makes it clear that a close working relationship between Google and city officials and utilities will be essential for projects to move forward. Bureaucratic red tape could be a fiber-killer in some of these communities, as could an intransigent utility fighting to keep Google fiber off utility-owned poles.

Google continues to completely ignore the northeastern United States for fiber expansion. Analysts suggest Google will not enter areas where fiber broadband service already exists, and this region of the country is home to the largest deployment of Verizon’s FiOS. Despite the fact Verizon has canceled further expansion, and large sections of the region have little chance of seeing a fiber upgrade anytime soon, Google seems more interested in serving the middle of the country and fast growing areas including North Carolina, Georgia, Phoenix and Texas. Its choice of San Jose obviously reflects the presence of Silicon Valley.