Verizon Strikes Fiber Deal With XO
After years of sourcing its fiber from third parties, Verizon moves to buy national DWDM facilities -- and gains XO enterprise customers in the process.
Verizon Communications this morning announced that it has agreed to buy XO Communications' fiber-optic network business -- essentially its wireline operations, including enterprise services -- in a deal valued at approximately $1.8 billion.
Details of the acquisition are still a bit sketchy, but it seems Verizon is getting all of XO's fiber-optic network business -- meaning its physical assets as well as enterprise and wholesale customers. "Verizon will acquire everything except the wireless spectrum, which it has an option to purchase at a later time," and by "everything" that does mean XO's enterprise-oriented communications and collaboration and network services, an XO spokesperson confirmed.
Nonetheless, the deal is really about the fiber and transport services, said Brian Washburn, service director, global business network and IT services, at Current Analysis. As of press time he's waiting on briefings from both companies, but summed it up this way: "Verizon is not doing it for the revenue, but it is all about the money."
The transport business, XO's included, is neither a big revenue or margin business. "You don't spend $1.8 billion to just become better transport player -- it's not really worth it, especially in the long haul where there's plenty of competition," Washburn said.
But owning a fiber network will change how Verizon acquires capacity and competes. Verizon has been lacking its own Dense Wave Division Multiplexing (DWDM)-capable national network. It has instead over the years sourced it from third parties. This stands in contrast to competitors AT&T, CenturyLink, and Level 3, which own their own DWDM long-haul networks down to the fiber, and XO, which has fiber along Level 3's rights of way -- "a nice national footprint."
For Verizon, the writing was on the wall, Washburn said. While it's historically done OK sourcing its fiber, "you start looking around at who has the big national fiber networks that are left now, that they own down to the fiber and the conduit" and it's pretty much just AT&T, CenturyLink, Level 3, and XO. "So all that industry consolidation has meant that Verizon has had fewer and fewer options for getting its fiber capacity.
"Hyper competition is probably not going to keep driving prices down in the long haul, so they needed to do something. This is a nice bet, or hedge, to say, 'Now we have our national fiber, too, right down to the conduit, and we can come to market as an equal player.' "
David Rohde, senior consultant with TechCaliber Consulting, said he understands Verizon's motivation to purchase XO's wireline business, as well. While Verizon has the advantage of being a local carrier with a national presence, its market valuation has been lower than Level 3's. Why? Rohde explained: "... we're talking about building entrances as the currency of choice and that's been Level 3's focus -- in all metros, without regard to historic territories. XO comes with 4,000 of these (nothing like Level 3's 40,000 plus) but it starts to get at Verizon's need to be 'smoother' nationally with where they can go directly in."
Additionally, this may be a way for Verizon to squelch the rumors that circulated late last year about the potential sale of its enterprise wireline business, Rohde said. "... although again that's because at the moment they can't remotely get anyone to pay them what they (rightly) think it's worth."
Any other carrier that had been eyeing XO -- which Rohde said "should have been sold long ago" -- is probably now looking at Zayo Group, which pieced together a pan U.S.-Canadian fiber network, including with the acquisition of Allstream in January. Zayo is "building like crazy (although a lot of it is dedicated, expensive projects with one of the national wireless carriers)," Rohde wrote in an email to me.
XO, on the other hand, hasn't "kept up with the level of last-mile buildouts and success-based network investments that notably Level 3 has done," even as it works to finish its integration with TW Telecom, which is purchased in October 2014, Rohde said. Nor has XO been consistent in its bidding on SIP or MPLS deals, in terms of level of activity and quality of proposal, he added.
Owning its core fiber will make "horse-trading easier" for Verizon, giving it leverage in negotiating wholesale agreements and rates. "So again, it's a hedge as well as a pricing strategy," Washburn said.
Via email, a Verizon spokesperson said the company considers this move "an economic way to acquire some of the fiber we need both for cell densification and for Verizon Enterprise Solutions."
Verizon and other cellular carriers are engaged in "densification" programs aimed at adding more capacity to their existing networks. Verizon needs the fiber backhaul facilities to complement its densification efforts, as well as to support 5G deployment, the spokesman said.
As for XO enterprise customers, the Verizon spokesman said they become Verizon customers, but provided no further detail.
Beyond the fiber, Verizon said it is leasing XO wireless spectrum "with an option to buy XO's entity that holds its spectrum by year-end 2018." XO has 102 licenses in the 28 GHz and 39GHz bands, covering roughly 45% of POPs, the Verizon spokesperson noted. "This is spectrum in bands we can use for early testing on 5G in some markets, so we intend to lease spectrum for R&D purposes."
But the wireless spectrum might be difficult for XO to sell off, Washburn said. It's more of a "nice-to-have secondary technology" for Verizon than anything else at the moment, Washburn said.
In the press announcement, Verizon and XO noted that as the pursue regulatory approvals "XO will continue to operate independently."
Editor's note: This updated post contains additional industry analyst insight.