It wasn’t difficult to understand Verizon’s sudden reticence about continuing its fiber to the home expansion program begun under the leadership of its former chairman and CEO Ivan Seidenberg. Starting his career with Verizon predecessor New York Telephone as a cable splicer, he worked his way to the top. Seidenberg understood Verizon’s wireline future as a landline phone provider was limited at best. With his approval, Verizon began retiring decades-old copper wiring and replaced it with fiber optics, primarily in the company’s biggest service areas and most affluent suburbs along the east coast. The service was dubbed FiOS, and it has consistently won high marks from customers and consumer groups.

Seidenberg

Seidenberg hoped by offering customers television, phone, and internet access, they would have a reason to stay with the phone company. Verizon’s choice of installing fiber right up the side of customer homes proved highly controversial on Wall Street. Seidenberg argued that reduced maintenance expenses and the ability to outperform their cable competitors made fiber the right choice, but many Wall Street analysts complained Verizon was spending too much on upgrades with no evidence it would cause a rush of returning customers. By early 2010, Verizon’s overall weak financial performance coupled with Wall Street’s chorus of criticism that Verizon was overspending to acquire new customers, forced Seidenberg to put further FiOS expansion on hold. Verizon committed to complete its existing commitments to expand FiOS, but with the exception of a handful of special cases, stopped further expansion into new areas until this past spring, when the company suddenly announced it would expand FiOS into the city of Boston.

Seidenberg stepped down as CEO in July 2011 and was replaced by Lowell McAdam. McAdam spent five years as CEO and chief operating officer of Verizon Wireless and had been involved in the wireless industry for many years prior to that. It has not surprised anyone that McAdam’s focus has remained on Verizon’s wireless business.

McAdam has never been a booster of FiOS as a copper wireline replacement. Verizon’s investments under McAdam have primarily benefited its wireless operations, which enjoy high average revenue per customer and a healthy profit margin. Over the last six years of FiOS expansion stagnation, Verizon’s legacy copper wireline business has continued to experience massive customer losses. Revenue from FiOS has been much stronger, yet Verizon’s management remained reticent about spending billions to restart fiber expansion. In fact, Verizon’s wireline network (including FiOS) continues to shrink as Verizon sells off parts of its service area to independent phone companies, predominately Frontier Communications. Many analysts expect this trend to continue, and some suspect Verizon could eventually abandon the wireline business altogether and become a wireless-only company.

With little interest in maintaining or upgrading its wired networks, customers stuck in FiOS-less communities complain Verizon’s service has been deteriorating. As long as McAdam remains at the head of Verizon, it seemed likely customers stuck with one option – Verizon DSL – would be trapped with slow speed internet access indefinitely.

Verizon’s FiOS expansion rises from the dead?

But McAdam has finally shown some excitement for a high-speed internet service he does seem willing to back. Verizon’s ongoing trials of 5G wireless service, if successful, could spark a major expansion of Verizon Wireless into the fixed wireless broadband business. Unlike earlier wireless data technologies, 5G is likely to be an extremely short-range wireless standard that will depend on a massive deployment of “small cells” that can deliver gigabit plus broadband speeds across a range of around 1,500 feet in the most ideal conditions. That’s better than Wi-Fi but a lot less than the range of traditional cell towers offering 4G service.

What particularly interests McAdam is the fact the cost of deploying 5G networks could be dramatically less than digging up neighborhoods to install fiber. Verizon’s marketing mavens have already taken to calling 5G “wireless fiber.”

“I think of 5G initially as wireless technology that can provide an enhanced broadband experience that could only previously be delivered with physical fiber to the customer,” said McAdam during Verizon’s second-quarter earnings call. “With wireless fiber the so-called last mile can be a virtual connection, dramatically changing our cost structure.”

McAdam

Verizon’s engineers claim they can build 5G networking into existing 4G “small cells” that are already being deployed today as part of Verizon’s efforts to increase the density of its cellular network and share the increasing data demands being placed on its network. In fact, McAdam admitted Verizon’s near-future would not depend on acquiring a lot of new wireless spectrum. Instead, it will expand its network of cell towers and small cells to cut the number of customers trying to share the same wireless bandwidth.

McAdam’s 5G plan depends on using extremely high frequency millimeter wave spectrum, which can only travel line-of-sight. Buildings block the signal and thick foliage on trees can dramatically cut its effective range. That means a new housing development of 200 homes with few trees to get in the way could probably be served with small cells, if mounted high enough above the ground to avoid obstructions. But an older neighborhood with decades-old trees with a significant canopy could make reception much more difficult and require more small cells. Another potential downside: just like Wi-Fi in a busy mall or restaurant, 5G service will be shared among all subscribers within range of the signal. That could involve an entire neighborhood, potentially reducing speed and performance during peak usage times.

Verizon won’t know how well the service will perform in the real world until it can launch service trials, likely to come in 2017. But Verizon has also made it clear it wants to be a major, if not dominant player in the 5G marketplace, so plenty of money to construct 5G networks will likely be available if tests go well.

Ironically, to make 5G service possible, Verizon will need to replace a lot of its existing copper network it has consistently refused to upgrade with the same fiber optic cables that make FiOS possible. It needs the fiber infrastructure to connect the large number of small cells that would have to be installed throughout cities and suburbs. That may be the driving force behind Verizon’s sudden resumed interest in restarting FiOS expansion this year, beginning in Boston.

“We will create a single fiber optic network platform capable of supporting wireless and wireline technologies and multiple products,” McAdam told investors. “In particular, we believe the fiber deployment will create economic growth for Boston. And we are talking to other cities about similar partnerships. No longer are discussions solely about local franchise rights, but how to make forward-looking cities more productive and effective.”

If McAdam can convince investors fiber expansion is right for them, the company can also bring traditional FiOS to neighborhoods where demand warrants or wait until 5G becomes a commercially available product and offer that instead. Or both.

There are a lot of unanswered questions about how Verizon will ultimately market 5G. The company could adopt its wireless philosophy of not offering customers unlimited use service, and charge premium prices for fast speeds tied to a 5G data plan. Or it could market the service exactly the same as it sells essentially unlimited FiOS. Customer reaction will likely depend on usage caps, pricing, and performance. As a shared technology, if speeds lag on Verizon’s 5G network as a result of customer demand, it will prove a poor substitute to FiOS.

An AT&T executive casually told an audience attending the Wells Fargo 2016 Convergence & Connectivity Symposium that a significant part of AT&T’s wireless network was built with money intended for AT&T’s landline network.

“I came more from the wireline [landline] business and had always a little bit of frustration for me because for many years before I picked up operations in construction and everything for the wireless side of the business, in the wireline world, I was spending a lot of money that was directly supporting the wireless operation, but it showed up as wireline spend,” said Bill Smith,  who has been with AT&T for 37 years and has served as president of AT&T’s Technology Operations since January, 2010. “So we’re not that good at allocating those expenditures.”

Smith’s admission gives further evidence that AT&T has been shortchanging investment in wireline and fiber networks for years, to the benefit of AT&T’s profitable wireless business.

Smith

When mobile networks were first being constructed, there was concern that private investment, not landline ratepayers, be responsible for covering the costs of building wireless infrastructure. Both AT&T and Verizon submitted regular rate increase requests to state regulators during the period, claiming additional compensation was needed to cover the costs of landline network upkeep and upgrades. In most cases, regulators approved those rate increases.

Smith’s admission suggests AT&T systematically allocated expenses associated with its wireless network on the wireline side of the business ledger, reducing the amount available to maintain landline service. Had regulators known, they would have likely rejected the rate increase requests and, more importantly, required AT&T to stop spending landline ratepayer funds on wireless networks.

By depleting funds designated for wired networks, AT&T ultimately made a cheaper choice about the type of advanced network it would deploy. AT&T rejected Verizon’s choice of FiOS fiber to the home service because it was ‘too expensive.’ AT&T’s less costly solution, U-verse, relies on fiber to the neighborhood, with existing copper wiring remaining in place between the nearest fiber link and the telephone interface box on the back of your home or business.

Smith also handily defeated his employer’s justifications for data caps, telling the audience AT&T has strong capacity with plenty to spare, noting increasing traffic demands on AT&T’s networks are nothing new for the company.

“But getting back to the capacity question, I don’t lay awake at night worried about that,” Smith said. “Yeah there are a lot more demands coming in to the business, but there is nothing new about that. We’ve lived through many, many cases of new applications, new waves causing increases in consumption. I feel very good about where we are. The density of our network is very strong, and as I mentioned, I think we lead the industry in terms of U.S. footprint in the density of our network and that’s great. Also we have things like small cell coming on the horizon.”

Wheeler

FCC chairman Thomas Wheeler today told an audience at the National Press Club that 5G — the next generation of wireless networks — “is a national priority, and why, this Thursday, I am circulating to my colleagues proposed new rules that will identify and open up vast amounts of spectrum for 5G applications.”

Wheeler’s proposal, dubbed “Spectrum Frontiers,” is supposed to deliver wireless connectivity as fast as fiber optic broadband, and in Wheeler’s view, will deliver competitive high-speed access for consumers.

“If the Commission approves my proposal next month, the United States will be the first country in the world to open up high-band spectrum for 5G networks and applications,” said Wheeler. “And that’s damn important because it means U.S. companies will be first out of the gate.”

Central to Wheeler’s 5G proposal is opening up very high frequency millimeter wave spectrum — for unlicensed and licensed data communications. Wheeler named two in his speech: a “massive” 14GHz unlicensed band and a 28GHz “shared band” that will allow mobile and satellite operators to co-exist.

“Consider that – 14,000 megahertz of unlicensed spectrum, with the same flexible-use rules that has allowed unlicensed to become a breeding ground for innovation,” Wheeler said.

“Sharing is essential for the future of spectrum utilization. Many of the high-frequency bands we will make available for 5G currently have some satellite users, and some federal users, or at least the possibility of future satellite and federal users,” Wheeler noted. “This means sharing will be required between satellite and terrestrial wireless; an issue that is especially relevant in the 28GHz band. It is also a consideration in the additional bands we will identify for future exploration. We will strike a balance that offers flexibility for satellite users to expand, while providing terrestrial licensees with predictability about the areas in which satellite will locate.”

The CTIA – The Wireless Association, America’s largest mobile carrier lobbying and trade association, is all for opening up new spectrum for the use of their members — AT&T, Verizon Wireless, Sprint, T-Mobile, among others. They just don’t want to share it. Ironically, they are calling on the FCC to regulate who gets access to what frequencies and what services can use them. They’d also appreciate federal rules restricting or preempting local officials responsible for approving where new cell towers can be located, and some form of price regulation for backhaul services would also be nice:

First, we need the right rules for high-band spectrum based on a time-tested regulatory framework. It must strike a reasonable balance for licensed and unlicensed use while promoting investment with clear service and licensing rules. We should avoid experimenting with novel spectrum sharing regimes or new technology mandates.

Second, we need the right rules to help build our 5G infrastructure. Traditional spectrum travels many miles, depending on large cell towers to transmit signals. In contrast, high-band spectrum – capable of carrying greater amounts of data –travels meters, not miles and will require the deployment of thousands of new small cells the size of smoke alarms. This network evolution requires a new infrastructure approach, and Congress, the FCC and states must streamline and simplify local siting and rights of way rules.

Wheeler recognizes that 5G services will work very differently from the 3G and 4G networks we’ve used in the past.

CTIA is the wireless industry’s biggest lobbyist and trade association.

“5G will use much higher-frequency bands than previously thought viable for mobile broadband and other applications,” Wheeler said. “Such millimeter wave signals have physical properties that are both a limitation and a strength: they tend to travel best in narrow and straight lines, and do not go through physical obstacles very well. This means that very narrow signals in an urban environment tend to bounce around buildings and other obstacles making it difficult to connect to a moving point. But it also means that the spectrum can be reused over and over again.”

In other words, think about 5G as an initially limited range wireless network that may turn out to be best suited for fixed wireless service or limited range hotspots, especially before network densification helps make 5G service more ubiquitous. The wireless industry doesn’t think Wheeler’s vision will be enough to resolve capacity issues in the short term, and is calling on the FCC to release even more low and mid-band spectrum in the 600MHz range that can travel inside buildings and offer a wider coverage area.

Wheeler’s recognition that 5G’s shorter range signals will likely require a massive overlay of new infrastructure has also opened the door for the CTIA to call on the FCC to revisit local zoning and antenna placement rules and policies, with the likely goal of preempting or watering down local authority to accept or reject where cell phone companies want to place their next small cell or cell tower. Wireless companies are also expected to push for easy access to utility poles, time limits to approve new cell tower construction applications, and pricing regulation for fiber lines needed to connect 5G infrastructure to backhaul networks.

Cell tower camouflage failure.

On the issue of backhaul — the connection between a cell tower and the wireless carrier’s network, the FCC is planning a pro-regulatory “anchor pricing” approach to benefit wireless companies. Consumers can also relate to being overcharged for slow speed Internet access with little or no competition, but the FCC is only acting for the benefit of the wireless companies for now — the same companies that would undoubtedly complain loudly if anchor pricing was ever applied to them.

“Lack of competition doesn’t just hurt the deployment of wireless networks today, it threatens as well to delay the buildout of 5G networks with its demand for many, many more backhaul connections to many, many more antennae,” complained Wheeler. “Before the end of this year the Commission will take up a reform proposal – supported by the nation’s leading wireless carriers, save one – that will encourage innovation and investment in Business Data Services while ensuring that lack of competition in some places cannot be used to hold 5G hostage.”

While Wheeler’s goals are laudable, there are stunning examples of hypocrisy and self-interest from the wireless industry. Yet again, the industry is seeking regulatory protection from having to share spectrum with unlicensed users, existing licensees, or competitors.  No letting the “free market” decide here. Second, there are absolutely no assurances the wireless industry will deliver substantial home broadband competition. Verizon and AT&T will be effectively competing with themselves in areas where they already offer wired broadband. Is there a willingness from AT&T and Verizon to sell unlimited broadband over 5G networks or will customers be expected to pay “usage pack”-prices as high as $10 per gigabyte, which doesn’t include the monthly cost of the service itself. Offering customers unlimited 5G could cannibalize the massive profits earned selling data plans to wireless customers.

Cactus or cell tower

Upgrading to 5G service will be expensive and take years to reach many neighborhoods. Verizon’s chief financial officer believes 5G wireless will be more cost-effective to deploy than its FiOS fiber to the home network, but considering Verizon largely ended its deployment of FiOS several years ago and has allowed its DSL customers to languish just as long, 5G will need to be far more profitable to stimulate Verizon’s interest in spending tens of billions on 5G infrastructure. It does not seem likely the result will be $25/month unlimited, fiber-like fast, Internet plans.

Although the mobile industry will argue its investment dollars should be reason enough to further deregulate and dis-empower local officials that oversee the placement of cellular infrastructure, it would be a tremendous mistake to allow wireless carriers to erect cell towers and small cells wherever they see fit. Most small cells aren’t much larger than a toaster and will probably fit easily on utility poles. But it will likely spark another wave of pole access controversies. The aesthetics of traditional cell tower placement, especially in historical districts, parks, and suburbs, almost always create controversy. The FCC should not tip the balance of authority for tower placement away from those that have to live with the results.

The mobile industry doesn’t make investments for free, and before we reward them for investing in their networks, let’s recall the United States pays some of the highest mobile service prices in the world. The industry argues what you get in return for that $100+ wireless bill is better than ever, an argument similarly used by the cable industry to justify charging $80 a month for hundreds of channels you don’t watch or want. Therefore, incentives offered to the wireless industry should be tied to permanent pro-consumer commitments, such as unlimited 5G broadband, better rural coverage, and the power to unbundle current wireless packages and ditch services like unlimited texting many customers don’t need. Otherwise, it’s just another one-sided corporate welfare plan we can’t afford.

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.

Requiring Frontier Communications to increase broadband speeds could make the service unaffordable for rural and poor Americans, the company is arguing before federal and state regulators.

In separate filings with the New York Public Service Commission and the Federal Communications Commission, Frontier has asked both for further deregulation and less oversight to ease everything from minimum broadband speed definitions to video franchising regulations.

Frontier’s market focus is primarily on rural communities where it delivers traditional DSL broadband service, typically up to 6Mbps, although many customers complain they get lower speeds than advertised. The FCC is working to modernize the Lifeline program, which offers substantial discounts on basic telephone service to low-income Americans. The Commission is studying the possibility of requiring providers to offer Lifeline Internet access for the first time. What worries Frontier is the Commission’s proposed requirement that providers offer Lifeline Internet speeds starting at 10/1Mbps, something Frontier strongly opposes.

Frontier’s ability to deliver consistent 10Mbps service in rural areas is the issue.

“Certain rural consumers […] may not currently have access to 10/1Mbps fixed Internet speeds and would thus be prevented from choosing to use Lifeline for a fixed Internet service,” Frontier wrote in its filing with the Commission. “Even if higher speeds are available, a minimum speed standard may prevent a customer from opting for a lower speed plan that may better meet their budget.”

Frontier told the Commission that most subscribers are happy buying 6Mbps service from Frontier, coincidentally the same speed it advertises as widely available across its service areas. Frontier argues if it was required to consistently provide 10Mbps service, the cost of the service may become unaffordable to many.

While Frontier argues against speed standards that are difficult for its aging copper-based network to consistently provide, it is using that same copper network as an argument against further regulation and oversight in New York.

“Traditional telephone service providers like Frontier continue to be legitimate and viable competitors in the marketplace—a testament to our tenacity and the quality of our services,” Frontier wrote in comments to the Public Service Commission. “To ensure that this continues to be the case, in the near-term, an immediate no-cost investment that the State can make in the existing copper-based network is to eliminate the regulatory requirements that apply to [traditional phone companies] but that do not apply to other telecommunications providers.

Frontier added, “consumers have a multitude of communications channels available to them including wireline and wireless voice services and wireline, wireless, cable and satellite broadband services.”

Frontier did West Virginia few favors when it took over Verizon’s landline business in the state.

Ironically, Frontier argued New York’s allegedly robust and fast broadband networks (offered by its competitors but usually not itself) are reason enough to support a “light regulatory touch.”

“Today, every municipality in New York has access to one or more wired or wireless networks that can provide voice, video and data services to residents and businesses,” Frontier claimed. “Over 95% of the state has access to the FCC benchmark speed of 25/3 Mbps and 98% of the State has 200kbps speed in at least one direction. New York’s broadband speeds are significantly faster than the national average and other countries.”

But Frontier failed to mention it is incapable of providing consistent access at or above the FCC benchmark speed because it still relies on a antiquated copper-based network throughout most of its New York service areas. Despite Frontier’s claims of offering quality service, the J.D. Power U.S. Residential Telephone Service Provider Satisfaction Study (2015) ranks Frontier dead last among all significant providers in the eastern U.S. It dropped Frontier this year from consideration for its Internet Provider Satisfaction Study, but a year earlier rated Frontier the worst ISP in the eastern U.S.

Although Frontier suggests it faces “robust competition” from “over 100 different broadband providers, especially at lower speeds,” in most of its service areas in New York it faces Time Warner Cable or no competitor at all.

Frontier’s latest defense over why it has failed to significantly upgrade its network infrastructure to remain competitive with cable is ‘customers don’t want or need faster speeds.’ While advertising lightning fast service on its acquired Verizon FiOS and AT&T U-verse networks, Frontier argues New York regulators “must keep in mind the consumer demands on broadband speeds.”

Frontier points to two rural broadband projects in New York, one in Hamilton County and the other in Warren County to make its speed argument (emphasis ours):

“These projects are examples of the importance of collaboration and innovation—rather than dogmatic adherence to performance requirements that are largely aspirational for many NYS citizen—in bringing high quality and transformative broadband access to unserved and underserved communities. Flexibility with regard to technology and broadband speed will enhance an already robust marketplace and result in greater affordability and access.”

Frontier has also told New York officials it wants to eliminate local oversight of video franchising and move New York to a “statewide video franchising” system to “promote competition and to streamline competitive entry into the video market in the state.”

“This will provide enhanced consumer choice as well as additional investment in broadband and video services,” Frontier argued. “In other states that have followed this model, such as Connecticut, consumers have a rich array of video providers and services from which to choose at competitive prices.”

That “rich array of video providers” in Connecticut is primarily Cablevision and Frontier. Frontier acquired a pre-existing U-verse network originally owned and operated by AT&T in the state.