Verizon and Amazon: Collaboration that can benefit economies of scale

Verizon Communications Inc. (NYSE, Nasdaq: VZ) and Amazon.com Inc. (AMZN) have signed a 'strategic collaboration which aims to pair Verizon's terrestrial mobile network with Amazon's low Earth orbit (LEO) satellite network 'Project Kuiper'. The benefits are clear for both entities. Amazon and Verizon will cash out on extending Verizon's cellular backhaul in the rural areas of the US where building mobile infrastructure is still not profitable, and Verizon will be able to tap into Kuiper's possible global reach. The collaboration is at its early stages, with both teams developing technical specifications and defining preliminary commercial models.

Background

In early November, Amazon announced that it would launch its first testing satellites by the end of 2022. The company signed up with ABL Space Systems for its maiden launch. Earlier, Amazon also announced signing a launch deal with United Launch Alliance (ULA). As of today, the complete constellation aims to have 7,774 satellites.

Verizon is a leader in providing cellular connectivity in the US. In H1 2021, it won the prestigious IHS Markit's US RootScore Awards in the categories of overall performance, network reliability, and call performance for the sixteenth straight test period, spanning eight years. The company is also at the forefront of 5G network development.

However, what may be less known is Verizon's work outside of the US, where they are amongst global leaders in private network development and digital transformation. To date, Verizon Business Solutions have completed tasks including building scalable, unified fibre-optics with cellular redundancy, providing network, app and device security, low latency process monitoring and leveraging Augmented Reality (AR) for safety and optimization.

Why is this announcement important?

This partnership should be considered as one that will boost various parts of the global economy:

• The economy of scale leading to new sources of revenues for various upcoming industries
• The satellite sector's advancements
• Internet of Things (IoT) penetration and adoption increasing

IoT adoption is a major topic for most organisations on the consumer and business side. Companies aim to be more cost efficient, redundant, driven by AI and big data. But the reality is that the connectivity that enables smart factories, automation and real-time analysis is still years ahead despite being rolled out in some countries and selected (mostly consumer rich) areas within these. Amongst the major factors for this delayed progress is the cost associated with rolling out new equipment that does not always balance out with the estimated demand and (often) unrealised profits associated with the recent deployment of 4G networks.

Coupling Verizon's terrestrial spectrum and Kuiper's satellites with similar low latency and very high level of redundancy can shift the cost and be a powerful enabler for various new IoT initiatives and bring similar high-grade opportunities for rural areas.

The satellite sector will get a publicity lift. With Kuiper directly competing with other multi-thousands satellites' networks, it could create new workplaces, reduce the cost of building, launching, and recycling satellites and support emerging types of ground systems.

Just a few days later, BT and One Web announced a distribution partnership also at global markets. Undoubtedly, there will be more telecom and satellite partnerships in the foreseeable future, which is encouraging. Enhancing co-opetition between connectivity service providers would be required to achieve further progress across renewables, manufacturing, healthcare, education, automotive, space, retail, or finance.

IHS Markit has extended knowledge in providing information to companies interested in learning more about valuation best practices and main misconceptions of digital transformation.

There are material valuation risks surrounding early-stage companies that aim to disrupt consumer relationships via digital transformation and/or offer improvements to the infrastructure. Investors and valuation appraisers face the challenge of envisioning new technologies and business models before knowing whether these companies can execute their business plans.

When valuing an early-stage innovative company, several factors should be considered, including:

• Change in market and sector pricing conditions
• Complexity of the company's capital structure
• Specificity of the industry/segment targeted by the company
• Recent developments in the underlying technology and the innovation of the business and the industry
• Funding risk of the company
• Timeline and exit plan for the investor

Due to difficulty gauging the probability and financial impact of the success or failure of development activities of early-stage companies, traditional valuation techniques (such as discounted cashflows and multiple based approaches) cannot be used in all cases.

In their latest valuation guidelines, the IPEV and the AICPA both recognise the specificity of early-stage companies and recommend using more complex valuation methodologies when necessary. The treatment of liquidation preferences was also a key consideration for valuation appraisers. These complex valuation techniques may include:

• Scenario-Based Model (or PWERM)
• Option Pricing Model
• Milestone-Based Model (or adjusted price or recent investment)

It is important to note that the key difference when dealing with Level 3 assets (and particularly early-stage unlisted equity assets or convertibles) is the heavily analyst-driven approach to valuation. For valuations of such assets, analysts must have the aptitude to understand legal documentation of the deal, corporate finance theory, financial performance and the relevance of milestones and disclosures, as well as the modelling skills to ensure these are appropriately captured at inception and throughout the life of the deal. Due to the heterogeneous nature of investments, this requires significant access to the correct market data, research, model infrastructure, people and control oversights.

When evaluating innovative businesses or projects, investment managers, valuation appraisers and end investors need to be acutely aware of the risks pertinent. It is important to select the most appropriate techniques and methodologies to capture the materiality of those risks in light of accounting standards and industry guidelines such as IPEV and the investment managers' valuation and risk policies.

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Posted 22 November 2021 by Przemek Bozek, Advisory & Consulting, Private Equity & Debt Services, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.