With the advent of AT&T/DirecTV Now, AT&T’s new over-the-top streaming TV service launching later this year, AT&T is preparing to bury the U-verse brand.

Earlier this year, AT&T customers noticed a profound shift in the company’s marketing priorities. The phone company began steering potential customers to AT&T’s latest acquisition, satellite television provider DirecTV, instead of U-verse. There is an obvious reason for this – DirecTV has 20.45 million customers as of the second quarter of 2016 compared to 4.87 million customers for AT&T U-verse TV. Volume discounts make all the difference for pay television companies and AT&T hopes to capitalize on DirecTV’s lower programming costs.

AT&T’s buyout of DirecTV confused many Wall Street analysts, some who believe the days of satellite television are past their peak. Satellite providers lack the ability to bundle services, although some phone companies partner with the satellite company to pitch phone, broadband, and satellite TV to their customers. But consider for a moment what would happen if DirecTV introduced satellite television without the need for a satellite dish.

Phillip Dampier: The “U” in U-verse doesn’t stand for “unlimited.”

AT&T’s DirecTV Now will rely on the internet to deliver television channels instead of a satellite. AT&T is currently negotiating with most of the programmer conglomerates that own popular cable channels to allow them to be carried “over-the-top” through broadband connections. If successful, DirecTV Now could become a nationwide powerhouse alternative to traditional cable TV.

AT&T is clearly considering a potential future where DirecTV could dispense with satellites and rely on broadband instead. The company quietly began zero rating DirecTV streaming in September for AT&T Mobility customers, which means watching that programming will not count against your data plan. For current U-verse customers, broadband speeds have always been constrained by the need to reserve large amounts of bandwidth to manage television viewing. Although AT&T has been boosting speeds in selected areas, a more fundamental speed boost could be achieved if AT&T dropped U-verse television and turned the service into a simple broadband pipe that relied on DirecTV Now to manage television service for customers.

AT&T seems well on the way, adding this notice to customer bills:

“To make it simpler for our customers U-verse High Speed Internet and U-verse Voice services have new names: AT&T Internet and AT&T Phone. AT&T Internet product names will now align with our Internet speed tiers. Our voice plan names will remain the same.”

An earlier internal company memo suggested AT&T would eventually transition all of its TV products into “AT&T Entertainment” after completing a transition to its “next generation TV platform.” Increasingly, that platform seems to be an internet-powered streaming solution and not U-verse or DirecTV satellite. That transition should begin in January.

Gone by end of 2016.

It would represent a formidable change, but one that makes sense for AT&T’s investors. The transition to IP networks means providers will offer one giant broadband pipe, across which television, phone and internet access will travel. The bigger that pipe becomes, the more services customers are likely to use — and that means growing data usage. Having a lot of fiber infrastructure also lays the foundation for expansion of AT&T’s wireless network — particularly towards 5G service, which is expected to rely on small cell technology to offer faster speeds to a more localized area — fast enough to serve as a home broadband replacement. Powering that network will require plenty of fiber optics to provide backhaul access to those small cells.

Last week, AT&T announced it launched a trial 100Mbps service using point-to-point millimeter-wave spectrum to offer broadband to subscribers in multiple apartment complexes around the Minneapolis area. If the initial trial is successful, AT&T will boost speeds to include 500Mbps service to those same complexes. AT&T has chosen to provide the service outside of its usual service area — Minneapolis is served by CenturyLink. AT&T acquired a nationwide license to offer service in the 70-80GHz band back in 2009, and an AT&T spokesperson claimed the wireless signal can reach up to two miles. The company is also experimenting with new broadband over power lines technology that could offer service in rural areas.

Just like its wireless service, AT&T stands to make money not just selling access to broadband and entertainment, but also by metering customer usage to monetize all aspects of how customers communicate. Getting customers used to the idea of having their consumption measured and billed could gradually eliminate the expectation of flat rate service, at which point customers can be manipulated to spend even more to access the same services that cost providers an all-time low to deliver. Even zero rating helps drive a belief the provider is doing the customer a favor waiving data charges for certain content, delivering a value perception made possible by that provider first overcharging for data and then giving the customer “a break.”

As of mid-September, streaming media analyst Dan Rayburn noted Akamai — a major internet backbone transit provider — was selling content delivery contracts at $0.002 per gigabyte delivered, the lowest price Rayburn has ever seen. Other bids Rayburn has reviewed recently topped out at 0.5 cents per gigabyte. According to industry expert Dave Burstein, that suggests large ISPs like AT&T are paying something less than a penny per gigabyte for internet traffic.

“If you use 139GB a month, that costs your provider something like $1/month,” Burstein wrote, noting doubling backbone transit costs gives a rough estimate of the cost to the carrier, which also has to carry the bits to your local exchange. In this context, telecom services like broadband and phone service should be decreasing in cost, not increasing. But the opposite is true. Large providers with usage caps expect to be compensated many times greater than that, charging $10 for 50GB in overlimit fees while their true cost is well under 50 cents. Customers buying a cell phone are often fitted with a data plan that represents an unprecedented markup. The extent of price increases customers can expect can be previewed by looking at the cost of phone service over the last 20 years. The average, often flat rate telephone bill in 1995 was $19.98 a month. In 2014, it was $73 a month. In 2015, it was $90 a month. Those dramatically rising prices in the last few years are mostly as a result of the increased cost of data plans providers charge to clean up on customers’ growing data usage.

Both Comcast and AT&T are dedicated to a campaign of getting customers to forget about flat rate, unlimited service at a reasonable cost. Even as both companies raise usage caps, they continue to raise prices as well, even as their costs to provide the service continue to drop. Both companies hope to eventually create the kind of profitable windfall with wired services that wireless providers like AT&T and Verizon Wireless have enjoyed for years since they abandoned unlimited flat rate plans. Without significant new competition, the effective duopoly most Americans have for telecommunications services offers the opportunity to create a new, more costly (and false) paradigm for telecom services, based on three completely false claims:

• data costs are expensive,
• usage must be monetized, and
• without a bigger return on investment, investors will not finance the next generation of telecom upgrades.

But as the evidence clearly shows, profits from selling high-speed internet access are only growing, even as costs are falling. Much of the drag on profits come from increasing costs related to licensing television content. Voice over IP telephone service is almost an afterthought for most cable and phone companies, often thrown in for $10-20 a month.

AT&T’s transition puts all the attention and its quest for fatter profits on its broadband service. That’s a bad deal for AT&T customers no matter what the company calls its “next generation” network.

Smartphone manufacturers are dealing with sluggish sales for the newest and greatest phone models because American consumers are increasingly resistant to paying for top of the line devices.

Apple, Samsung, and others are facing some of their biggest challenges ever delivering upgrade features deemed useful enough to encourage consumers to spend the more than $600 that many high-end phones now command in the marketplace. As blasé new features fail to deliver a “must-have” message to consumers, many are hanging onto their existing phones and refusing to upgrade.

The decision by wireless providers to stop subsidizing devices backed by two-year contracts have delivered sticker shock to consumers looking for the latest and greatest. The Apple iPhone 7, expected to be announced this month, will likely carry a price of $650 — a serious amount of money, even if your wireless provider or Apple agrees to finance its purchase interest-free for 24 months. Despite the fact wireless providers charged artificially higher service plan rates to recoup the cost of the device subsidy over the length of the contract, consumer perception made it easier to justify paying $200 for a subsidized phone versus paying full retail price and getting cheaper service.

As a result, consumers are strategically holding on to their cell phones longer than ever and avoiding upgrade fever just to score a lower cell phone bill. The Wall Street Journal reports that since T-Mobile started the trend away from device subsidies in 2013, Citigroup estimates the smartphone replacement cycle has now lengthened to 29.6 months, considerably longer than in 2011 when upgrades were likely even before the two-year phone contract expired.

The average combined monthly revenue (in $) earned per subscriber from service and equipment installment plan fees is still rising, despite the alleged “price war.” (Image: Trefis)

Wireless providers don’t mind the change since they endured fronting the subsidy cost to phone manufacturers and slowly recouped it over the next two years. Not dealing with a subsidy would make the accounting easier. But AT&T and Verizon Wireless both understood the average consumer doesn’t have a spare $650 sitting around for a new device, much less the nearly $2,500 it would cost to outfit a family of four with a new top of the line smartphone every two years. So they entered the financing business, breaking the cost of the device into as many as 24 equal installment payments. Instead of paying $672 for a Samsung Galaxy S7, Verizon Wireless offers 24 equal installments of $28. That would be a distinction without much difference from the old subsidy system except for the fact some carriers are trying to sell their equipment financing obligations to a third-party, allowing them to move that debt off their books as well.

In fact, wireless providers are doing so well under the “no-contract/pay full price or installments” system, Wall Street analyst firm Trefis has started to ask whether the so-called wireless carrier “price war” is just a mirage. The firm notes (reg. req’d.) all the four major carriers are doing well and collecting an increasing amount of money from their customers than ever before. Much of that added revenue comes from customers bulking up data plans and being forced to pay for unlimited voice and texting features they may not need. But Trefis also points to reined in marketing spending at the carriers, who no longer have to entice customers into device upgrades as part of a contract renewal.

Things are looking worse for phone manufacturers that have relied on revenue based on the two-year device upgrade cycle in the United States. Apple is under growing pressure as its iPhone faces declining demand. In the U.S. alone, analysts predict iPhone sales will drop 7.1% this year. UBS predicts an even less optimistic 9% drop, followed by a 5% drop next year, even after iPhone 7 is introduced. AT&T has already reported some of the lowest upgrade rates ever during the first three months of 2016.

Another clue consumers are planning to hold on to their smartphones longer than ever — sales of rugged cases and screen protectors are up, as are smartphone protection/loss insurance plan sales, according to AT&T senior VP Steven Hodges. Parents even expect their children to give their phones better care.

Customers “realized it was a $500 to $700 device,” Hodges said at an industry conference held in June. “As such, they started taking care of them differently. You tell a kid this is only $49, the kid is going to use his phone as a baseball at times.”

Other customers are looking forward to benefiting from a dramatically lower bill after paying off their device in 24 months.

Kristin Maclearie has an iPhone 6 and she wants to keep it for the long term, if only to see her Verizon bill drop once she finishes her monthly payments. She told the Wall Street Journal as long as it keeps working, “I’ll just hang onto the one I have,” she said. “Unless something really cool comes out…but they’re always similar.”

Several years after wireless unlimited data plans became grandfathered or riddled by speed throttling, America’s third and fourth largest carriers have decided the marketplace wants “unlimited everything” after all and is prepared to give customers what they want, at least until they read the fine print.

T-Mobile Announces “The Era of the Data Plan is Over”: T-Mobile ONE

T-Mobile CEO John Legere used a video blog to announce a major shakeup of T-Mobile’s wireless plans this morning, centered on the concept of “unlimited everything.”

“The era of the data plan is over,” said Legere. T-Mobile’s new plan — T-Mobile ONE — does away with usage caps and usage-based billing and offers unlimited calls, texting, and data on the company’s 4G LTE network. The plan becomes available Sept. 6 at T-Mobile stores nationwide and t-mobile.com for postpaid customers. Prepaid plans will be available later.

“Only T-Mobile’s network can handle something as huge as destroying data limits,” said Legere. “Dumb and Dumber can’t do this. They’ve been running away from unlimited data for years now, because they built their networks for phone calls, not for how people use smartphones today. I hope AT&T and Verizon try to follow us. In fact, I challenge them to try.”

Legere

T-Mobile claims the savings with its unlimited plan are enormous compared to its bigger competitors AT&T and Verizon Wireless.

Verizon’s largest LTE usage-capped data plan would cost a family of four $530/month. That’s $4,440 more than T-Mobile ONE will charge.

T-Mobile ONE costs $70 a month for the first line, $50 a month for the second, and additional lines are $20 a month, up to 8 lines with auto pay (add $5 per line if you don’t want autopay). Customers can add tablets for an extra $20 a month.

T-Mobile does offer some caveats in the fine print which are relevant to customers:

• All video streaming on this plan is throttled to support a maximum of 480p picture quality. Higher video quality is available with an HD add-on plan for $25/mo per line;
• Tethering is included with T-Mobile ONE, but it is painfully speed-limited to 2G speeds — around 70kbps, just a tad faster than dial-up. At that speed, a web page that will take less than five seconds to load on a 4G network will take 17-25 seconds. A 60 second YouTube video will take nearly five minutes to watch, and downloading apps or sharing images is often impossible because of timeouts. If you want 4G tethering, that will be $15 a month for 5GB, please;
• Customers identified as among the top 3% of data users, typically those who use more than 26GB of 4G LTE data a month will find themselves in the same data doghouse T-Mobile’s Simple Choice customers are in. That means during peak usage periods on busy cell towers, heavier users are deprioritized on T-Mobile’s network, but we’re not sure if that results in slight speed reductions or the kind of drastic 2G-like experience these kinds of “fair usage” policies often deliver.

Our analysis:

While we’re happy to see unlimited data plans return to prominence, T-Mobile is continuing to punish high bandwidth applications, tethering, and usage outliers with frustrating speed throttles.

T-Mobile’s biggest source of increasing traffic is coming from online video. About a year ago, Legere introduced T-Mobile’s Binge On program, which offers streaming video from T-Mobile’s partners without it counting against your usage allowance. This program had the potential of causing problems with the Federal Communications Commission’s Net Neutrality rules.

Legere seemed to avoid trouble by revealing enough information about Binge On to make it clear why the program exists — to reduce video traffic’s impact on T-Mobile’s network. That might seem counterintuitive until one looks at what it takes to be a Binge On partner — allowing T-Mobile’s Binge On-related traffic to be “optimized” to Standard Definition video (around 480p). No money changes hands between T-Mobile and its Binge On partners.

T-Mobile makes it easy to be a Binge On participant.

Binge On was an important factor in freeing up bandwidth on T-Mobile’s network. Some analysts suggest two-thirds of T-Mobile’s video traffic load disappeared after Binge On was introduced. Video is likely the single biggest bandwidth consuming application on wireless networks today. If a customer is watching on a smartphone or even a small tablet, 480p video is generally adequate and has a lower chance of stopping to buffer.

Another clue about the impact of online video on T-Mobile’s network is the same video throttling strategy is built into T-Mobile ONE and applies to all online video, whether the provider partners with T-Mobile or not. Also consider the extraordinary cost of the optional HD Video add-on, which defeats video throttling: a whopping $25 per month per device. That kind of pricing clearly suggests 1080p or even 4K video is a major resource hog for T-Mobile, and customers looking for this level of video quality are going to pay substantially to get it.

T-Mobile is also clearly concerned about tethering, relegating hotspot and tethered device traffic to 2G speeds, which will quickly deter anyone from depending on it except in emergencies. Again, traffic is the issue. Some semi-rural customers unserved by cable but able to get a 4G signal from a T-Mobile tower may think of using T-Mobile as their exclusive source of internet access. At speeds just above dial-up, they won’t consider this an option.

We’re also disappointed to see 26GB of usage a month as the threshold for potential speed throttling. T-Mobile ONE is not cheap, and without more detailed information about how often those exceeding 26GB face speed slowdowns, how much of a slowdown, and how quickly those speed reductions disappear when the tower gets less congested would be very useful. Until then, customers are likely to interpret 26GB as a type of soft usage allowance they will not want to exceed.

T-Mobile ONE also delivers a powerful signal to Wall Street because it raises the lowest price a T-Mobile postpaid customer can pay to become a customer from $50 to $70 a month for a single line. That’s quite a burden for some customers who will have to look to prepaid plans or resellers to get cheaper service. Other carriers rushed to meet T-Mobile’s $50 2GB plan when it was introduced, which has served as an entry-level price range for occasional data dabblers. If those carriers don’t immediately raise prices as well, they will undercut T-Mobile. That could provoke an increase in cancellations among customers buying on price, not plan features. T-Mobile is banking consumers will appreciate unlimited data enough to pay extra for peace of mind.

Jackdaw Research found customers enrolled in 2GB and 6GB T-Mobile plans will see a price increase with T-Mobile ONE. Those signed up for 10GB or unlimited service will pay the same or slightly less.

Sprint: Unlimited Freedom: Two Lines of Unlimited Talk, Text, and Data for $100/month

Not to be outdone by T-Mobile, Sprint CEO Marcelo Claure today announced his own company’s overhaul of wireless plans, featuring the all-new Sprint Unlimited Freedom plan, which offers two lines of unlimited talk, text and data for $100 a month, with no access charges or hidden fees.

Starting Friday, Aug. 19, Sprint customers can sign up for the new plan, which costs $60 for the first line, $100 for two lines, and $30 for each additional line, up to 10. Sprint pounced on the fact its Unlimited Freedom plan for two is $20 less than T-Mobile charges.

Otherwise the two plans are remarkably similar — too similar for the CEOs of both companies that spent part of today engaged in a Twitter war.

T-Mobile CEO John Legere and Sprint CEO Marcelo Claure traded tweet barbs this morning.

“Sprint’s new Unlimited Freedom beats T-Mobile and AT&T’s unlimited offer – only available to its DirecTV subscribers – while Verizon doesn’t even offer its customers an unlimited plan,” read Sprint’s press release.

“Wireless customers want simple, worry-free and affordable wireless plans on a reliable network,” said Marcelo Claure, Sprint president and CEO. “There can be a lot of frustration and confusion around wireless offers, with too much focus on gigabytes and extra charges. Our answer is the simplicity of Unlimited Freedom. Now customers can watch their favorite movies and videos and stream an unlimited playlist at an amazing price.”

Sprint has also essentially joined the T-Mobile optimization bandwagon, limiting streaming video to 480p, but it goes further with optimization of games — limited to 2Mbps, and music — limited to 500kbps. There does not seem to be any option to pay more to avoid the “optimization” and Sprint is not offering a tethering option with this plan.

“While we initially questioned using mobile optimization for video, gaming and music, the decision was simpler when consumers said it ‘practically indistinguishable’ in our tests with actual consumers,” said Claure. “In fact, most individuals we showed could not see any difference between optimized and premium-resolution streaming videos when viewing on mobile phone screens. Both provide the mobile customer clear, vibrant videos and high-quality audio. Mobile optimization allows us to provide a great customer experience in a highly affordable unlimited package while increasing network efficiency.”

Further expansion of Google Fiber appears to be on hold as the company contemplates moving away from fiber to the home service towards a wireless platform that could provide internet access in urban areas for less money.

The Wall Street Journal today reports Google parent Alphabet, Inc., is looking to cities to share more of the costs of building faster broadband networks or using cheaper wireless technology to reach customers instead.

Six years after Google first announced it would finance the construction of fiber to the home networks, the company has made progress in wiring just six communities, many incompletely. Progress has been hampered by infrastructure complications including pole access, permitting and zoning issues, unanticipated construction costs, and according to one Wall Street analyst, the possibility of lack of enthusiasm from potential subscribers.

Google’s recent acquisition of Webpass, a company specializing in beaming internet access over fiber-connected wireless antennas between large multi-dwelling units like apartments and condos appears to be a game-changer for Google. Webpass was designed mostly to service urban and population dense areas, not suburbs or neighborhoods of single-family dwellings. Webpass’ reliance on wireless signals that travel between buildings removes the cost and complexity of installing fiber optics, something that appears to be of great interest to Google.

Google Fiber is planning a system that would use fiber for its core network but rely on wireless antennas to connect each home to the network, according to a person familiar with the plans. Alphabet chairman Eric Schmidt said at the company’s shareholder meeting in June that wireless connections can be “cheaper than digging up your garden” to lay fiber. The only question is what kind of performance can users expect on a shared wireless network. Google’s plans reportedly do not involve 5G but something closer to fixed wireless or souped-up high-speed Wi-Fi. A web video on Webpass’ website seems to concede “you get best speeds with a wired connection.”

Even Google’s wireless technology solutions provider Webpass concedes that wired broadband is faster.

Former Webpass CEO Charles Barr, now an Alphabet employee, argues wireless solves a lot of problems that fiber can bring to the table.

“Everyone who has done fiber to the home has given up because it costs way too much money and takes way too much time,” Barr said.

Barr’s statements are factually inaccurate, however. Fiber to the home projects continue in many cities, but if they are run by private companies, chances are those rollouts are limited to areas where a proven rate of return is likely. Large incumbent phone and cable companies are also contemplating some fiber rollouts, at least to those who can afford it. Many of the best prospects for fiber to the home service are customers in under-competitive markets where the phone company offers slow speed DSL and cable broadband speeds are inadequate. Rural communities served by co-ops are also prospects for fiber upgrades because those operations answer to their members, not investors. Community broadband projects run by local government or public utilities have also proven successful in many areas.

But like all publicly traded companies, Google must answer to Wall Street and their investors and some are not happy with what they see from Google Fiber. Craig Moffett from Wall Street research firm MoffettNathanson has rarely been a fan of any broadband provider other than cable operators and Google Fiber is no different.

“One can’t help but feel that all of this has the flavor of a junior science fair,” Moffett said of Google Fiber, pointing out the service has managed to attract only 53,000 cable TV customers nationwide as of December. Moffett concedes there are significantly more broadband-only customers signed up for Google, but that didn’t stop him from suggesting Google Fiber has had very little impact on increasing broadband competition across the country.

Analysts suggest Google Fiber is spending about $500 per home passed by its new fiber network. But that is a fraction of the $3,000+ per customer often spent by cable operators buying one another.

Google’s wireless deployment will likely take place in Los Angeles, Dallas, and Chicago according to people familiar with the company’s plans. Less dense cities slated for Google Fiber including San Jose and Portland, Ore., may never get any service from Google at all, but they are likely to hear something after a six month wait.

Google is also reportedly asking cities if the company can lease access on existing fiber networks. Another tactic is requesting power companies or communities build fiber networks first and then turn them over to Google to administer. The latter seems less likely, considering there are successful public broadband networks operating on their own without Google’s help.

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.