Analysts have suggested Verizon Communications Inc. might need to purchase a major cable operator, but the telco's recent fiber deal is a much smaller and more targeted transaction.
WideOpenWest Inc., the midsize cable operator based in Colorado, agreed to sell a portion of its fiber network in the Chicago market to a subsidiary of Verizon for $225 million in cash.
The deal comes less than one week after Verizon CFO Matthew Ellis said the company was interested in buying more fiber assets during a recent earnings conference call.
"As we think about the fiber we need for the business, certainly, we need more going forward," Ellis said, adding that he expects Verizon to add fiber through a combination of "buying fiber that already exists if it's the right type of fiber," building its own fiber networks and leasing.
"So more to come there as we go forward," the CFO said.
In the case of the WOW! transaction, Verizon is buying a fiber network that is still being built.
"It was still in the process of being built, so we're actually going to finish building it by the end of next year," Lucas Binder, WOW! vice president of corporate development and investor relations, said in an interview. As part of the deal with Verizon, WOW! will complete the build-out of the network in exchange for approximately $50 million from the telco.
Due to the relative newness of the fiber and the overall design of WideOpenWest's network, Binder said a "miniscule" number of WOW! customers will be impacted by the transaction.
WOW! Business fiber map for the Chicago market
"There are a couple of them but none of the residential customers and almost none of the commercial customers are impacted," he said, adding, "All of our customers in the Chicago suburbs that we serve as part of legacy WOW! will remain WOW! customers."
Specifically, they will remain on WideOpenWest's coaxial cable or hybrid fiber/coax network, Binder said, noting that WOW! does have some fiber assets in the Chicago area that are not being sold as part of the deal.
"We do have other fiber assets in the area, and we do serve our big market and enterprise customers with both coax and fiber directly. But all of the residential customers are on coax, and the vast majority of our commercial customers are, as well," he said.
Verizon is planning to use the fiber assets it is acquiring to support its next-generation 5G network plans. The build-out of the newly purchased fiber is expected to be completed in 2018.
In a statement, Verizon President of Network and Technology Hans Vestberg said the deal "is another example of Verizon's commitment to invest in multi-use fiber to provide customers with next-generation broadband services, such as smart cities and 5G."
As part of the 5G rollout, wireless operators will need to densify their networks, deploying hundreds of thousands of small cells, or cellular base stations and antennas, every few hundred meters. The increased speeds and increased connections associated with 5G will create an immense amount of backhaul traffic, exacerbating the need for fiber backhaul services.
Some analysts have suggested the need for fiber could prompt Verizon to buy a cable operator outright. But Craig Mathias, principal at the wireless communications advisory firm Farpoint Group, is doubtful, noting Verizon has plenty of other less expensive options.
"There's lots and lots of fiber out there," he said.
Mathias noted that a major M&A transaction would be costly at a time when Verizon will have to spend on small cell deployment, spectrum and network upgrades.
"You have to be continually upgrading, not just on the wireline side going to fiber, but from 4G to gigabit 4G to 5G … Then you have to update all of your backhaul. All of the backhaul you've got is totally inadequate for 5G speeds," he said, adding, "How much money is there to do all this?"