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September 3, 2013

Thought Leadership for the Wireless Industry
Hello all,

Among those who did not spend Labor Day weekend at the beach were top execs at Verizon, Vodafone, Microsoft, Nokia and their coterie of bankers and advisors. This is a significant day for the wireless industry in many ways. Each of the Verizon-Vodafone and Microsoft-Nokia deals has its particular motivations, but the common thread is that these two tech industry giants are betting big on wireless, and clearly want to be 'masters of their own domain'.


My thoughts on the Verizon-Vodafone deal --
why now, its impact on the market, and what it means for the future of Verizon, are in Part 1 of the Lens, below. Tomorrow, in Part 2, I'll explore the implications of Microsoft-Nokia.
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Impact of Verizon-Vodafone Deal
The Verizon deal is less of a surprise, as the two companies have been working on this on and off for nearly a decade. As has been reported, the deal is happening due to favorable timing and financial conditions. The lending markets are healthier, borrowing rates remain low but are inching upward, and the nearly 50% rise in Verizon's stock since 2007 gives the company additional currency. Verizon has been growing increasingly weary of throwing wads of its market-leading cash flow to Vodafone, especially since there has been practically no product or market synergy between the two.


Interestingly, as the discussions evolved over the past couple of years, Verizon decidedly tilted away from a more formal combination with Vodafone and toward extricating itself from any sort of partnership. Put plainly, Verizon likes its prospects in the U.S. more than Vodafone's in Europe. The European wireless market is intensely competitive, has lower margins, and is facing a giant capex nugget to upgrade to 4G. Plus, the economies of many of Vodafone's markets remain in a funk. 


I won't dwell on the financial aspects of the deal, which are well covered by the financial community and the media, other than to remind everyone that Verizon is borrowing a lot of money. Rather, let's discuss the implications of the deal on subscribers and Verizon's prospects going forward.

Impact on the U.S. Market

OK, first thing: Lowell has promised there will be no "Vodafone acquisition fee" or "deal breakup fee" on consumers' wireless bills next month. Kidding aside, one could look at the significance of this deal from a couple of perspectives. First, this is a bet on the U.S. wireless market, and a bet on wireless being the continued engine of growth for Verizon as a company. Verizon's legacy landline business has been steadily declining. Its FiOS network is built out and it is tracking its cable company peers with respect to the opportunities and challenges in that particular industry segment. The cable JV furnished needed spectrum to VZW, but we haven't seen much from a product synergy perspective, yet (plus the companies are treading the bundling and pricing waters very lightly).


Second, the deal is primarily a financial transaction. I am not expecting any material, near-term impact of the deal on the consumer-facing aspects of Verizon's business -- price plans, capex spend, and so on.


What is more apparent is that Lowell McAdam is laying the foundation for the next phase of Verizon's growth. He recognizes that the mainstream wireless market in the U.S. is maturing, and is also in the process of becoming much more competitive, with re-capitalized and aggressive competitors in Sprint and T-Mobile. He has seen AT&T making some big bets in adjacent markets, such as connected car and home security. In AT&T, he might also see a company that has been a little more innovative and nimble. And he sees that, given Verizon's sheer size, some big bets have to be made in order for the company to continue to throw off the type of growth that will continue to deliver healthy shareholder returns.


So, where are those bets going to be? Well, one has been in the enterprise/cloud space, led by veteran exec John Stratton. We have seen, in the past few months, some important contract wins, cementing Verizon as a player in cloud services.


Some other promising areas include:

  • Broader customer portfolio. Verizon still derives a disproportionate percent of its revenues from postpaid - one of the reasons it has been so profitable. But between AT&T/Aio/Leap, Sprint and its MVNOs, and T-Mobile/Metro PCS, and changes in the whole device procurement/ownership structure making switching more frictionless, Verizon will have to find creative and profitable ways to grow its share in that segment.

  • Content. Verizon has the opportunity, with broadband, TV, and wireless assets, to be a leader in the evolution of "content everywhere" services. As was evidenced by another "big deal" this weekend, the agreement between CBS and Time Warner, tectonic changes are occurring in how content is being priced, delivered, monetized, and distributed. Verizon has the opportunity to be a maverick here, and has already signaled some intentions in that direction.      
  • Big Data. Verizon has dipped its toes in the water of big data, with the establishment of Precision Marketing Insights. There is a lot of opportunity for Verizon here, given the multiple touch points it has with customers. A 'big data' challenge itself is how to develop a unique data play that leverages the combined assets of what are currently distinct, business units, operated rather independently, and with some restrictions on what can be shared across them.      
  • Future of Broadband. As those who read my stuff regularly will recall, I believe that over the medium to long term, fixed, Wi-Fi, and mobile broadband services will merge, at least for a certain percentage of the market. There is a lot of upside, in my view, for the operator that can profitably own as much of that subscriber's network connectivity time as possible -- finding the right formula for delivering the best connection, for a particular context, at the most favorable economical cost to the customer and the network provider.       
  • Wearables/Quantified Self. Wearables and the quantified self are one of the "next big things" (see my recent column, Wearables, Hip or Hype?). There are myriad opportunities for to make a major play here, such as being a source and store of data for the quantified self.

Two big questions here when thinking of the future of Verizon. One, is whether Verizon wants to (or can) become an "ecosystem" company, in the vein of an Apple, Google, Microsoft, or Amazon (who, incidentally, have plans to get into the network access business in some form). Right now, Verizon customers see the company as a network service provider, not as the anchor point for the breadth of broadband connectivity or purveyor of a broad suite of digital media and services. McAdam hinted at a more holistic customer view in his call with investors this morning.  


Second, is whether the financial obligations of the Vodafone transaction will leave Verizon with the wherewithal to do other major deals in the near future. A major acquisition is probably in the "less likely" category, as a result of the consuming elements of the Vodafone deal. Look for a series of smaller acquisitions, and additional creative partnerships, like what they've done with the cable JV and Redbox, over the next couple of years. Also, keep your eyes on AT&T, which will certainly also spread its wings in an accelerated manner.

Wearables: Hip or Hype?
On the eve of Samsung's planned smart watch announcement in Berlin, here are my thoughts on the evolution of the wearables market. Click here to read
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