Verizon's Stratton: Economics drive fiber build versus buy decisions

glowing blue rods with a dark background
Purchasing XO Communications fulfilled multiple needs for Verizon, potentially allowing it to regain its standing in the business and wholesale Ethernet markets.

Verizon’s recently completed acquisition of XO Communications deepened the telco’s metro fiber asset war chest, but any extensions of this fiber reach have to produce a favorable economic return.

John Stratton, EVP and president of operations, told investors during the recent Deutsche Bank 25th Annual Media & Telecom Conference that a decision on whether to purchase fiber from a dark fiber provider or build it themselves is a “market-by-market calculation.”

Verizon's Stratton
John Stratton, EVP and president of operations
at Verizon

“If we go into a particular market, depending on the size of the business opportunity, we’ll look at whether to build versus buy,” Stratton said. “I don't think you'll see us building because there's no one to buy from. I can't imagine that scenario, although I suppose it's possible, but we haven't really seen that yet.”

Purchasing XO fulfilled multiple needs for Verizon. Since the acquisition came with metro network rings in 45 major U.S. markets with over 4,000 on-net buildings and 1.2 million fiber miles, the provider could potentially regain its standing in the business and wholesale Ethernet markets. The service provider's intercity network also spans 20,000 route miles connecting 85 cities.

RELATED: After delay, Verizon wraps $1.8B XO acquisition, deepening metro fiber density in 45 markets

The XO deal also feeds into Verizon’s “one fiber” strategy, which calls for Verizon to deploy fiber to meet a host of needs, including consumer wireline, wireless and business services.

Stratton said any decision about new fiber builds is “really an economic decision about how well we will sweat or leverage the asset against how many of our lines of business.”

Wireless, SMB building blocks

Building on the “one fiber” strategy, Verizon sees the broader role of its fiber network as being an engine for its growing 4G and upcoming 5G wireless networks. Stratton said that fiber is a fundamental building block to support wireless densification efforts in the cities and towns where it offers service.

“As you consider the importance of fiber, it's increasingly a wireless asset,” Stratton said. “Asset is probably the wrong word, but a resource that we use to propagate our cell densities.”

Verizon can also use the larger fiber network to target small to medium businesses (SMBs). Like its ILEC brother CenturyLink, Verizon has lost share to cable operators in the SMB segment, particularly in markets where it only offers copper-based DSL today.

Stratton said the larger fiber network it gets from XO “brings the opportunity for us to grow the small and medium business, which is principally where XO was focused, in a meaningful way.”

Now that the XO deal is done, the next move for Verizon is to integrate the network assets and workforce into Verizon’s larger fold. While Stratton could not provide any specific details, he said the process is on track.

“We are working with the XO team to integrate,” Stratton said. “We really like the management team and the assets are complementary.”

Business services struggles continue

While Verizon gained a much larger network by acquiring XO Communications, the service provider continues to see challenges in business services revenue, a trend that continued into the fourth quarter.

During the fourth quarter, Verizon reported Global Enterprise revenues were $2.9 billion, down 4.5% year-over-year from $3.01 billion in the same period a year ago.

Stratton said that while the telco is hopeful that it will start seeing greater enterprise customer spending, the segment remains slow.  

“In terms of sentiment about broader growth in investment, we haven't seen it yet,” Stratton said. “I'm optimistic about some of the changes that we see more broadly in the environment, but at this point in time there's nothing really that has quite happened yet.”

What makes Verizon confident that it can take more market share when enterprises begin to really spend again is the advent of virtualized services. Having implemented SDN and NFV across network, the service provider has been ramping up services like SD-WAN, for example. The service provider currently has over 90 active SD-WAN implementations and 16 full-scale deployments. It also has 30 participants taking part in a universal CPE program trial.

“We have seen other trends in enterprise that are more to do with how large enterprise clients buy [services],” Stratton said. “Virtualization has been a huge shift in the last couple of years. We expect that to continue.”