Entner: After the strike, what's next for Verizon?

Roger Entner Recon Analytics

Roger Entner

Verizon (NYSE: VZ) just ended a long and painful labor conflict with the trade unions that represent its landline employees. The four-year labor deal gives the management team under CEO Lowell McAdam time to re-assess the situation and take action as the company undertakes the massive transformation from telecom company to wireless internet company. The dramatic nature of this transformation is demonstrated by the fact that Verizon's wireline business represents 29% of its topline revenues and only 7% of operating income.

The latest round of strikes should renew the determination to push ahead with exiting the wireline business. In 2010, Frontier acquired 4.8 million rural phone lines in 14 states from Verizon, followed by the sale of Verizon's landline business in California, Florida and Texas. After these two deals, Verizon only has landline services in the Northeast corridor from Virginia to Massachusetts.

The picket lines in front of Verizon Wireless stores were the most visible reminder of the strike. Demonstrating its commitment to serve wireline customers, a legion of wireline managers and wireless employees were trained to fill the gap left by their striking colleagues. The wireless employees filling in for striking wireline employees left their own gap behind the scenes. Many activities -- from day-to-day work to a large number of projects -- just didn't get done. In addition to work left unattended in the wireless operation, wireless employees worked 13 days every fortnight, with just only one day off.

With the strike now over, Verizon management must wonder if the remaining wireline activities are worth the distraction it creates on a regular basis. Their answer will almost inevitably be "no," especially because Verizon seems to have a significantly more acrimonious relationship with its unions than AT&T (NYSE: T). A sale of the remaining wireline assets beyond what it needs to operate its wireless backbone is the way to go. Some use the recent XO Communications acquisition as a counterpoint to this opinion but seem to miss that the XO acquisition is more aimed at in-sourcing its wireless backbone operations rather than focused on serving consumer or business customers.

It is worthwhile to remember the basis of Verizon's overall strategy: Data rules the world and increasingly moves over mobile networks, with video comprising the lion's share of traffic. Verizon Wireless's core strength is providing reliable wireless connectivity and it should leverage its perceived network leadership in other segments. Following that logic, Verizon should take a share of the revenue streams that are created by the use of its network. If Netflix (NASDAQ: NFLX) and YouTube can make a business out of mobile video, so should Verizon. If Google can generate billions from mobile advertising, so should Verizon-- because it understands mobile networks a lot better than those that make money from it. Whatever it lacks, like a programmatic ad engine and a content network, it can buy -- AOL and Millennial Advertising are recent examples.

Nevertheless, history shows us that it is not necessarily that simple: Redbox Instant demonstrated that Netflix's business is a lot harder and more entrenched than one might think. Softcard showed us that just because Apple can launch a payment service, three wireless carriers are not necessarily destined to do better (or Google, in this case, which bought Softcard.) When Verizon thought it could have a key advantage in the cloud market by owning a provider, it bought Terremark, a group that is now reportedly up for sale.

A completion of the retreat from wireline will improve Verizon's financial performance as it concentrates on higher margin, higher growth segments. All the financial efficiency metrics will improve substantially, with a considerable decrease in revenues but a small decrease in profits.

In addition, if the DC district court strikes down Title II regulations for wireless, the company would free itself from all the debilitating and competition-distorting follow-on regulations around special access, privacy and set-top boxes.

The surprise agreement between Verizon and INCOMPAS (the former COMPTEL) around special access was heralded by some as a breakthrough of a network provider agreeing to a new regulatory framework. In the joint ex-parte filing with the FCC both sides proclaimed that "over the years, INCOMPAS and Verizon have had sharply different views on the proper regulatory framework for dedicated services, including TDM special access and Ethernet." What the agreement actually signaled was that Verizon would end being a provider of broadband connectivity and become a buyer of these services like any INCOMPAS member.

It is completely logical that under this scenario it would agree with INCOMPAS' position. A wireless/internet-focused Verizon could compete against the Googles and Facebooks of the world on an even footing by providing an integrated set of services. The FCC, which controls privacy regulations for telecom providers, could no longer distort the privacy market place by requiring Verizon to request opt-in and opt-out consent from its customers, while Google and other data collecting behemoths are unaffected. If the FTC, which holds authority over privacy among all business, institutes new rules around privacy they would impact all competitors equally. At the same time, Verizon would switch from the losers of the set-top box proposal to the winners. Without its own TV service, it would rely on the same Trojan Horse that Google and Vizio are intending to use to monetize the TV stream. A possible change of sides of Verizon in the ongoing regulatory battle around the set-top box would be another signal of the new focus of Verizon.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.