Verizon builds breadth, depth with XO fiber buy, but gaps still remain

Sean Buckley, FierceTelecomVerizon (NYSE: VZ) came out of its M&A hibernation period announcing a deal to acquire XO's fiber network for $1.8 billion.

The deal gives Verizon some much-needed fiber assets it can use to address two near-term needs: an expanded Ethernet service reach with a larger set of on-net buildings and wireless backhaul, particularly to accommodate small cells.

Helping its Ethernet play will be access to 4,000 additional on-net buildings in 40 major markets and 1.2 million fiber miles.

Gaining access to additional fiber will allow Verizon to better respond to business customers' Ethernet needs. It also reflects the growing use of higher speed Ethernet services to access other services like IP/VPNs and cloud.

Service providers have increasingly cited deploying fiber to more buildings as a priority for Ethernet services. Respondents to a Vertical Systems Group fiber survey said in 2015 that expanding the reach of their fiber network was a primary growth challenge.

Rosemary Cochran, principal of Vertical Systems Group, told FierceTelecom in an email that the acquisition won't have a great near-term effect on the telco's standings in the research firm's recently released U.S. Ethernet Leaderboard.

Verizon continues to trail Level 3 Communications, which is holding on to the second position on the Leaderboard.

"As for the VZ-XO deal, it could potentially help Verizon increase its position on the US Leaderboard, but that would be long term as the expected close of the deal isn't until 2017 and pending regulatory approvals," Cochran said. "Until then, to move up its rank on the US Leaderboard Verizon needs to step up focus on closing retail Ethernet business with its existing fiber footprint."

Cochran said Verizon could benefit from the deal if it also gains XO's retail customer base even though it only serves 4,000 on-net buildings.  

"It isn't entirely clear on this deal what's happening on the customer end, however it would make it interesting if XO's retail Ethernet customer base is included -- although limited if only on-net fiber customers (now 4,000 fiber  buildings)," Cochran said. "Verizon's wholesale business may benefit more from the XO deal overall."

Interestingly, Verizon hasn't been as aggressive in recent years of expanding its metro and on-net fiber building footprint.

By contrast, fellow telcos like AT&T (NYSE: T) and CenturyLink (NYSE: CTL) continue to expand their on-net fiber footprints. For example, AT&T has reached over 1 million business locations via its FTTB strategy via its Project VIP initiative.

While that program has mainly wrapped up, it puts AT&T in a position of strength to battle cable rivals like Comcast (NASDAQ: CMCSA), which has been expanding fiber into markets. One advantage AT&T has, though, is it better understands the complex nature of larger multinational corporations (MNCs).

Then there's CenturyLink. The telco has been making notable progress, expanding its on-net fiber footprint and focusing on a deeper fiber footprint to deliver 1 Gbps FTTB series. In 2014, CenturyLink launched a program to enable 16 cities with FTTB and FTTH 1 Gbps data services, targeting a mix of business and residential customers.  

But even with all of these builds, the reality is no single service provider can reach everywhere with their fiber.

Service providers like Verizon that have large MNC customers face this issue, driving them to have an arsenal of service provider partnerships.

Verizon's wireless business faces a similar situation for backhaul. While it does leverage its own fiber, Verizon still has to rely on other providers outside of that footprint.

XO does give it some better density, particularly as it connects more small cells to its network on poles and in buildings.

As a result a number of new opportunities exist for large wholesale fiber-based transport providers like Level 3 and Zayo, two providers that have built out sizable metro and long-haul fiber networks. Verizon already uses both providers for long-haul, metro and backhaul.

Zayo has been very aggressive on the backhaul front, winning deals for tower and small cell backhaul. Level 3, while not pursuing a fiber-to-the-tower strategy, has intimated it's interested in small cells.

A large part of XO's fiber network is based on fiber it leases from Level 3. Once its indefeasible rights of use leases (IRUs) are up, some analysts believe that Verizon could work with Level 3 to construct a new IRU or an expansion for other routes.

How and when these scenarios play out is still uncertain but given the relationships the telco has it's not all that farfetched.

Verizon's deal to acquire XO is another sign of service provider consolidation, but its real influence depends on how the carrier leverages and extends the wireline assets.

If played right, Verizon could take the assets and regain lost ground in the Ethernet space -- setting it up to challenge aggressive competitors like Level 3.--Sean

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