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It's OfficiaI: Verizon Concedes WireIess Network OverIoad
By Alexander Eule
1,110 words
16 November 2013
Barron's Online
BON
English
Copyright 2013 Dow Jones & Company, lnc. All Rights Reserved.
Humility has never come easily to the phone companies.
For years, the industry has sliced and diced data to create the best marketing pitch. Today, Verizon Wireless
boasts it has "the nation's largest and most reliable 4G LTE network." AT&T (ticker: T) says it "not only has the
nation's fastest 4G LTE network, but now also has the most reliable 4G LTE network." T-Mobile, the smallest of
the Big Four carriers, takes a folksy approach: "We have you covered like nobody else."
So it was surprising to hear some frank talk from Verizon Communications (VZ) last week. Speaking to a group of
investors on Tuesday, Chief Financial Officer Francis Shammo conceded that Verizon's fourth-generation data
network is suffering under a heavy influx of users in New York City, Chicago, and San Francisco. "Yeah, that
obviously has put pressure on our network," Shammo said at Wells Fargo Securities' Technology, Media &
Telecom Conference in New York. "We did not anticipate that amount of growth in the network."
Jennifer Fritzsche, the Wells Fargo analyst who interviewed Shammo, tells Barron's: "lt was a very rare
falling-on-the-sword moment for Verizon."
lt's conceivable that Shammo's comments were a subtle message to the federal government that Verizon needs
some form of regulatory relief or better access to spectrum. Fritzsche pointed out to me that Verizon, on a
per-subscriber basis in Manhattan, has far less spectrum than either Sprint (S) or T-Mobile US (TMUS).
Or, perhaps, it was just an honest assessment of reality from the company. From my desk in midtown Manhattan,
l often struggle to get a data connection on my LTE-powered Verizon iPhone. On the other hand, in the suburbs,
my LTE connection easily beats what l can get from a local Starbucks hotspot.
Consistency aside, the new 4G networks are becoming profit engines for Verizon and AT&T. When it works well,
LTE offers home broadband-type speeds directly to a smartphone or tablet. Already, customers are adding
multiple devices to their family accounts, while upping their monthly data allowances. Over time, the network will
bring cars and all manner of machines onto the grid.
The wrinkle is that LTE subscribers use far more data than prior generations of customers. Nationally, LTE users
represent a third of Verizon's user base but consume 64% of the network's data. ln New York City, the LTE
demand is even higher, the company says. And, right now, Verizon just can't handle the density.
"l would say that the amount of consumption of video took us a little bit by surprise," Shammo added last week.
Verizon has promised to up its capital outlay by $500 million this year to plug holes in its densest urban areas.
"Each week it gets better and better," Shammo said.
Verizon, it's only fair to note, was first out of the gate with its LTE network; the acronym stands for Long-Term
Evolution. lt has a big lead over the competition in LTE subscribers.
Verizon's 4G footprint now covers 97% of the country, compared with 80% for AT&T and far less for T-Mobile and
Sprint. RootMetrics, an independent testing firm, still generally puts Verizon at the top of the heap when it comes
to national reliability and speed.
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"A lot of this is frankly Verizon's own success in getting LTE out there a year in advance," RootMetrics CEO Bill
Moore says of Verizon's capacity issues in the big cities. AT&T faced a similar network crunch when it was the
only U.S. carrier with the iPhone from 2007 to 2011. The iPhone encouraged customers to use more data; LTE is
now doing the same.
ROOTMETRlCS TESTED VERlZON'S network in Chicago and San Francisco in the spring and then again this
fall. The firm uses a real-world approach, sending its field workers out with the same handsets used by
consumers. According to Moore, Verizon's download speeds in the two cities remained about the same, but there
was a 20% decline in upload speeds. lt's possible Verizon has reined in upload speeds in order to preserve the
more-important download link.
ln Chicago and San Francisco, AT&T's LTE data network is now outperforming Verizon's, according to
RootMetrics. Verizon has maintained its lead in New York City, though RootMetrics hasn't yet released its
updated October data.
With data consumption still exploding, it's fair to wonder if carriers will ever be able to keep up with demand. Cisco
estimates that mobile data traffic will grow 56% a year in North America through 2017.
A lot of the hope lies in small-cell technology and advanced software that can automatically manage advanced
networks, according to Stphane Tral, who covers mobile infrastructure and carrier economics for market
research firm lnfonetics.
Small cells will be a big part of Verizon's upgrade efforts in New York, Chicago, and San Francisco. The "small
cells" are antennas, not much larger than a brick, that can hang from light poles and other street fixtures.
Frequently, the antennas are attached to larger baseband units in the basements of nearby buildlings.
The small cells create a new layer of coverage, allowing the network to handle higher capacities. lt's the "second
phase of the LTE rollout," Tral says. The hardware mostly comes from equipment players Alcatel-Lucent (ALU)
and Ericsson (ERlC). But the real money, Tral notes, will come from the software that brings the whole network
together.
"The big trend is to connect all the dots from the user all the way up to the centralized network management,"
Tral says.
Alcatel-Lucent is bundling software with its equipment, but Cisco Systems (CSCO) and Amdocs (DOX), thanks to
recent acquisitions, are also becoming larger players in the network-management space.
For consumers, there's other good news on the horizon. A re-awakened T-Mobile and better-financed Sprint are
bringing more competition to the wireless marketplace. Both carriers are racing to catch up in the 4G market.
"Overall, this arms race is improving reliability in a huge way," Moore says. "We are now leading the world in
terms of network quality," he adds.
The carriers, meanwhile, haven't lost their swagger. Amid his mea culpa last week, Shammo reminded investors:
"lf you look at our growth pattern from the industry, we're still doubling, tripling some of our competitors in net
adds from an LTE perspective."
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E-mail: alexander.eule@barrons.com
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