Verizon Getting Aggressive with Copper Plant Shutdown

Between Verizon’s 2Q12 earnings call and Lowell McAdam’s (Verizon’s Chairman & CEO) participation at the Guggenheim Securities Symposium, there was a lot of talk last week regarding the controlled shutdown of its copper plant.

Verizon has made no secret of its plans to rid its network of copper – going all the way back to 2004 when they began deployment of its FTTP network and the FCC ruled that incumbent operators no longer had to offer unbundled local loops.

Four years ago – almost to the date, I wrote an article titled “The Copper versus Fiber Conundrum” for Connected Planet.  At this time I stated ” the future success of telecom companies will be the ability to anticipate the unexpected. Verizon did not ask itself if they could afford to deploy fiber; they asked if they could afford NOT to deploy fiber, especially given the impact of cable operators within its own region.

At the time of that article, there was concern that Verizon’s gamble on FTTP was not going to pay off for investors as FiOS was making only a minimal impact on revenues.  However, it was already showing significant OPEX savings – a key factor in Verizon’s initial decision to deploy FTTP.

Fast forward to 2012 and a few things (both good and bad) become more clear.  #1: Verizon slowed its deployment of FiOS significantly, with only 14 million homes available for service as of 2Q12, versus the expected 18 million + more than 2 years ago.  #2: FiOS APRU has increased nearly 15% in the past 2 years; #3: Verizon has made a strategic choice to de-emphasize DSL across its network  by not offering it in FiOS markets and eliminating stand-alone DSL services.

Is Verizon Driving Customers to Cable?

Between the on-going FiOS price hikes and the de-emphasis on DSL, is Verizon just driving consumers to cable?

Verizon can definitely point to higher FiOS revenue, but it is not due to growth.  Rather it is the result of “price-ups” associated with its set-top box rental and according to Verizon “more price-ups coming in the third quarter around the bundles and into the fourth quarter”.

The data speaks for itself.  Since its peak in 4Q05, DSL net additions have been on a rapid decline, heading (and staying) in negative territory since 2Q08.  More importantly, the net gain associated with copper to fiber migrations have been less than stellar, with Verizon gaining only 2,000 net broadband additions during 2Q12.

Although Comcast, TWC and Cablevision have yet to report their quarterly earnings for 2Q12; historically, they outpace Verizon for broadband net additions.

Plans to “Kill Copper” have been in place for some time

Verizon has long been a proponent of circuit to packet migration announcing plans in 2004  for the eventual replacement of nearly 6,000 Class 5 switches.  At that time, Verizon had identified four major triggers to determine and prioritize implementation:

  1. New Service Requirements – primarily IP Centrex
  2. Exhaust of existing switch platform
  3. Outdated switch platforms
  4. Fiber-to-the-Premise (FTTP)

By the end of 2005, the rapid decline of both dial-up services and CLEC competition caused Verizon to re-evaluate its initial plans and a decision was made to implement a phased evolution for its voice network, in which FiOS played a key role.

From the start of its FiOS rollout, Verizon has been very clear in its intentions to merge it voice, video and data services onto a converged packet infrastructure, which would allow them to eventually decommission much of its circuit switch network.

Historically, the gating factor to shutting down the PSTN was regulatory.  However, Verizon has successfully lobbied in Florida and Virginia and Texas to pass some forms of  deregulation, which allows Verizon “to invest where customers want us to invest and start to sunset some of the older technology.”  As such, it appears that once FiOS reaches a certain penetration level in a market, the decision is made to migrate all customers towards FiOS as is already happening in markets such as Dallas.

In addition, Verizon has stated that LTE will be their primary strategy for rural broadband, choosing to invest in that technology, rather than in upgrading the existing copper to support DSL.

Verizon has stated no timeline for when copper-based services will be discontinued for its network footprint.  Part of this is associated with the FCC and when it will set its own PSTN sunset date, the rest is, of course, associated with the financial impact of this decision.  However, with FiOS now representing 65% of consumer revenues, it is likely to happen sooner than later.

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