If “follow the money” is a maxim in business, then it should come as no surprise Verizon favors the making the bulk of its investments and expansion in its enormously profitable wireless business.

Verizon Wireless earned the company $12.9 billion in operating profits during the first six months of 2013 while landlines and Verizon’s fiber optic network only delivered $87 million. That inconsistency may help explain why Verizon FiOS expansion is stalled while Verizon throws enormous sums into its 4G LTE wireless upgrade project.

The average Verizon Wireless bill is now over $150 a month. FiOS customers pay an average of over $150 a month as well, but Verizon’s costs to reach its smaller customer footprint are higher. Revenues for basic landline service are considerably lower than either wireless or fiber service.

With wireless providing a virtual ATM for Verizon Communications, the New York Times notes it is unsurprising that Verizon wants to buy out its European partner Vodafone, which owns 45% of Verizon Wireless. Once the $130 billion transaction is complete, Verizon will keep wireless profits all to itself as it continues lobbying for permission to decommission rural landlines and encourage those customers to use its vastly more profitable and almost entirely unregulated wireless network instead.

Exactly 100 years after Verizon predecessor AT&T/The Bell System voluntarily agreed to be a regulated monopoly provider of telephone service, Verizon Wireless and AT&T have successfully established unregulated wireless networks that serve most Americans with cell service and wireless data at prices that would be shocking to people 20 years ago.

Verizon Communications notified the New York Public Service Commission late Tuesday it was abandoning a request to replace damaged landlines anywhere in the state where the company’s facilities were substantially destroyed with a wireless service called Voice Link.

Verizon’s original tariff, if approved, would have allowed the company to drop landline service in areas of New York where it decided it was impractical to repair or replace heavily damaged wired infrastructure. Customers in these areas would no longer be able to obtain wired landline service or DSL broadband. Instead, under the original tariff request, Verizon would offer customers Voice Link as its sole service offering, providing voice-only service over existing telephones, assuming a good signal was available from a nearby Verizon Wireless cell tower.

Yesterday, Stop the Cap! reported a well-placed source in Albany indicated Verizon was unlikely to win approval of its tariff request after a summer of real-world experiences with Voice Link service on Fire Island. Customers overwhelmingly rejected the service, complaining about dropped and missed calls, poor voice quality, and the lack of an affordable broadband option. Yesterday, Verizon separately announced it was reversing an earlier decision and would now install its fiber network FiOS on Fire Island, offering customers the option of keeping Voice Link or switching to FiOS for telephone and/or broadband service.

Accordingly, Verizon today requested the PSC abandon proceedings regarding its request, calling the issue “moot,” and for now will no longer pursue an effort to drop landline service in New York. Verizon will continue to offer Voice Link in the state as an optional service, but will also provide traditional landline and DSL service (where available).

Verizon has not said whether it will continue to pursue regulators for permission to supply Voice Link as its sole service offering in part of New Jersey and Pennsylvania where the company’s landline networks were damaged by last year’s Hurricane Sandy.

With total ownership of Verizon Wireless now assured, Verizon Communications plans to begin “tree trimming” assets in its portfolio that cannot match the profitability of its wireless business.

Verizon CEO Lowell McAdam told CNBC he has already communicated with Verizon’s executive team about the direction Verizon will take after it buys out Vodafone’s ownership interest in Verizon Wireless. One potential target for sale: millions of Verizon’s rural landlines that cannot hope to match the revenue an average cell phone customer delivers the company.

Verizon’s wireless assets now represent the company’s biggest generator of sales and profit, accounting for two-thirds of 2012 revenue and almost all of its operating income.

Where Verizon chooses to invest is largely dependent on what kind of return the company can expect. So far, the best returns have come from Verizon Wireless.

“I think there is no better way to deploy our capital then to invest in a [wireless] asset that today generates more than $80 billion in annual revenue, provides a 50% margin, generates significant cash flows and is uniquely positioned for future growth and profitability,” McAdam told investors Tuesday on a conference call announcing the purchase of Vodafone’s stake in Verizon Wireless. “Beyond the financial benefits, there is simply no better asset that fit seamlessly into our portfolio and our strategic beliefs. Our growth strategy has three basic elements: connectivity, platforms and solutions. We are very bullish on the growth outlook for the U.S. wireless marketplace.”

McAdam made it clear to CNBC’s Jim Cramer the company is not so bullish on its declining wireline business, which includes landlines, DSL, and even FiOS — the company’s fiber optic network:

Jim Cramer, CNBC: “[Under former Verizon CEO Ivan Seidenberg, Verizon] took areas that really weren’t growth areas and sold them to Frontier and other players. Would you be able to get rid of some of your underperforming landline businesses to be able to increase [Verizon’s] growth even further?”

Lowell McAdam, Verizon: “That is a possibility. […] If you talk about opportunities here, now that we have One Verizon, […] we are going to trim some limbs around the tree here. Things that aren’t performing will not be a part of our portfolio so we can invest in things that will drive the kind of growth we are excited to be able to tap here.”

McAdam

The trimming has already started in New York and New Jersey, where Verizon is moving forward with the introduction of a less expensive wireless landline replacement called Voice Link, now optional for some customers but could eventually be Verizon’s sole landline service offering in certain areas if state regulators approve.

Verizon calls the service an improvement for customers dealing with repeated service calls to fix troublesome landlines. Upkeep of Verizon’s copper networks has proved costly to the company, especially as it continues to count landline customer losses. The company argues providing wireless phone service is pro-consumer, providing a bundle of calling features and unlimited local and long distance calling at the same price Verizon charges for basic, no frills landline service. Local officials and residents using the service complain it is inadequate and unreliable.

“Voice Link is an innovative solution for a specific segment of Verizon’s voice-only customers that delivers reliable voice service using our trusted and reliable wireless network,” said Verizon spokesman John Bonomo. “Unlike copper-based service, it is less likely to fail during an adverse weather event because of our wireless networks’ resiliency.”

Analyzing the market value of Verizon’s buyout of Vodafone’s part ownership in Verizon Wireless and accounting for net debt reveals Verizon’s wireless operations are worth $289 billion, with  Verizon’s current 55 percent share worth about $159 billion. In contrast, Verizon’s wireline operations including landlines, business broadband, and FiOS are worth just a fraction of that — $24 billion, according to Bloomberg News.

Kevin Roe, an analyst at Roe Equity Research LLC in Dorset, Vt. values the wireline business at about $21 billion based on his estimates, while Spencer Kurn of New Street Research LLC puts the implied value of the unit at about $26 billion.

Verizon’s top rated fiber service FiOS has brought the company higher earnings and is deemed a success, but its total revenue remains insufficient to offset Verizon’s continued landline losses as customers drop home phone service and DSL. From a business perspective, that explains why Verizon is eager to invest billions in its high return wireless business while leaving further expansion of its fiber optic network on hold.

Revenue from the wireline unit totaled $39.8 billion last year, down from $50.3 billion in 2007, data compiled by Bloomberg show. During the same period, Verizon’s wireless revenue surged 73 percent to $75.9 billion.

“Clearly, wireless is going to be worth a lot more” than Verizon’s other businesses, Chris King, a Baltimore-based analyst at Stifel Financial Corp., told Bloomberg in a phone interview. Wireless is “where the growth is going to be coming from. There’s a bigger market opportunity going forward.”

McAdam has brought his enthusiasm for the wireless business to his role as Verizon CEO and its priority shows as he predicts even larger earnings in the future. McAdam told investors only 64 percent of Verizon Wireless customers use smartphones. Verizon wants to convert the remaining 30 million basic phone customers to higher-priced smartphone service as quickly as possible. Getting customers to switch to 4G-capable devices is also lucrative for Verizon, because its LTE network can more efficiently handle data at a lower cost. Only one-third of Verizon customers now use 4G LTE devices.

Embracing consumption based billing for wireless data is perhaps the biggest potential revenue generator of all as customers consume more data and begin connecting more devices to Verizon’s network.

Platforms including machine to machine and in-car connectivity “create even greater opportunities to drive increased usage,” McAdam said. “We also see many opportunities with Internet and cloud-based services. The digital economy is moving to mobile first on everything, which means there are many growth opportunities to pursue.”

Verizon Communications spent Labor Day weekend putting the final touches on a carefully crafted deal to attain full ownership of its wireless unit, buying out its British partner’s 45 percent share in a deal valued at $130 billion.

The long talked-about buyout of Vodafone has been on the table for years, but became a priority for Verizon CEO Lowell McAdam, who spent much of his career overseeing Verizon Wireless. Since McAdam took over from predecessor Ivan Seidenberg in 2011, he has refocused priority on Verizon’s wireless business, at the cost of landlines and Verizon’s fiber optic network FiOS.

The transaction dwarfs (by nearly four times) the $33 billion annual budget of the entire state of New Jersey. Verizon has agreed to pay Vodafone $58.9 billion in cash and $60.2 billion in Verizon shares, and finance another $5 billion of the deal in loan notes. Verizon has also agreed to sell its 23 percent ownership in Vodafone Italy worth around $3.5 billion and take on $2.5 billion of Vodafone’s debt.

A deal this large would normally generate tens of billions in tax revenue payable to HM Revenue & Customs in England and the Internal Revenue Service in the United States, but creative accounting at both companies makes it all but certain Vodafone will pay nothing in British taxes and only $5 billion to the IRS, despite its $130 billion windfall.

Vodafone is structuring the deal through a Dutch holding company, transferring assets to Verizon in a way that minimizes the tax bite. As proposed, the deal is exempt from taxes in both the Netherlands and the United Kingdom.

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CNBC had this exclusive interview with Verizon CEO Lowell McAdam discussing why Verizon is willing to spend $130 billion to end its partnership with Vodafone and how Verizon Wireless will change as a result. (12 minutes)

Wall Street investment banks will do better than American and British tax authorities, dividing at least $1.3 billion in financing, merger, and legal fees surrounding the Verizon deal. Many of New York’s largest investment banks are taking part in the transaction.

Vodafone is depending heavily on guidance from Swiss-based UBS and Goldman Sachs. The latter has earned $438 million so far this year advising companies on mergers and acquisitions.

Verizon is relying on advice from J.P. Morgan Chase and Morgan Stanley. Bank of America Merrill Lynch and Barclays have joined to offer their help with the enormous debt-funding package required for the deal.

Verizon customers will notice little to nothing different about their wireless service after the deal is complete in the first quarter of 2014. Many customers had no idea Vodafone was part owner of the largest wireless company in the United States. Verizon always maintained effective control of the U.S. operation and plans no immediate changes as a result of assuming outright control of the company.

Little controversy is expected in getting the deal approved by regulators for the same reason.

Shareholders are likely to reap most of the rewards. Vodafone stockholders are expecting the bulk of the proceeds from the sale will be returned to them in the form of dividends. Verizon shareholders also expect better returns in the future now that Verizon’s profitable wireless unit will no longer have to set aside costly dividend payments intended for Vodafone and its shareholders.

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The BBC reports the sale of Vodafone’s 45% share of Verizon Wireless has been structured so that both companies can entirely avoid British and Dutch capital gains taxes and limit the American tax bite to less than $5 billion.  (1 minute)

Verizon hopes being the master of its own destiny will allow the company to innovate its wireless network towards future revenue opportunities, especially in the machine to machine connectivity business. Both AT&T and Verizon Wireless are racing to enable medical devices, home appliances, electric meters, and automobiles to communicate over their respective wireless networks. Both companies are concerned that the cell phone marketplace has become saturated in the United States, with most people desiring cell phone service already having it. With Wall Street demanding ongoing growth quarter after quarter, new revenue sources are more important than ever.

“Even in the saturated market, (Verizon Wireless) continues to post growth figures,” Bill Menezes, an industry analyst at research firm Gartner told USA Today. “They’re looking at a world where growth is coming from these ancillary devices.”

Many Verizon shareholders expected a deal this year, but some are concerned Verizon has offered too much to buy out Vodafone. Many Wall Street analysts had expected Vodafone would part with its 45 percent ownership of Verizon Wireless for around $100 billion, but Vodafone clearly held out for more.

The corporate deal is the world’s third largest after Vodafone’s $203 billion takeover of Germany’s Mannesmann in 1999 and AOL’s 2000 $181 billion acquisition of Time Warner.

Vodafone is planning to use some of the proceeds not returned to shareholders to bolster its European business, which has suffered from the economic downturn and robust wireless competition that have kept prices low. Wall Street analysts predict the European market is ripe for a wave of consolidation similar to what happened in the United States over the last decade. Vodafone may need more financial resources to protect its market position or have the flexibility to buy out competitors.

The European wireless giant has been a quiet partner of Verizon Wireless for almost 14 years. Verizon Wireless was launched in 2000 as a joint venture of Bell Atlantic and Vodafone. As the venture was being launched, Bell Atlantic merged with GTE, forming Verizon Communications.

[flv]http://www.phillipdampier.com/video/CNBC Discussing the media deals 9-3-13.mp4[/flv]

CNBC reports historically low interest rates and cheap credit for corporations made it an ideal time to structure a deal so important to J.P. Morgan Chase, the bank sent CEO Jamie Dimond to persuade Verizon board members to approve it. Investment banks will split more than one billion dollars in deal fees.  (7 minutes)

AT&T has boosted the maximum available broadband speed for its U-verse Internet offering to 45/6Mbps service in 40 cities across 15 states.

The broadband speed boost is part of AT&T’s Project Velocity IP (VIP), a three-year plan to expand U-verse’s capabilities and coverage into more communities within AT&T’s local landline service areas.

Most of the funding for Project VIP is being directed into expanding AT&T’s profitable wireless 4G network, but about $6 billion will be spent upgrading AT&T’s aging copper wireline facilities.

A big priority for AT&T is to retire copper-based distribution networks and replacing that wiring with fiber optics. U-verse depends on a significant amount of fiber to provide enough bandwidth for its television, phone and broadband service. But unlike Verizon FiOS, which delivers a fiber connection straight to the home, AT&T still relies on traditional copper wiring into the home.

Until AT&T replaces that copper with fiber, top broadband speeds are unlikely to keep up with its biggest competitor — cable broadband.

AT&T’s says the 45Mbps speed boost represents an incremental upgrade and plans further speed increases to 75Mbps.

In more rural areas, U-verse will rely on IPDSLAM technology to increase speeds up to 45Mbps. AT&T eventually hopes to further bump download speeds to 100Mbps.

For the most rural communities within its service area, AT&T hopes to offer service exclusively over its wireless network, eventually scrapping rural landlines altogether.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/KTAL Shreveport U-verse Coming to Louisiana 8-23-13.mp4[/flv]

KTAL-TV reports AT&T’s upgraded U-verse could soon be coming to Shreveport, La. as part of Project VIP, which may give Comcast some much-needed competition in the Ark-La-Tex region. (3 minutes)