The Verizon/Comcast cooperation depicts the odd circumstances driving telecoms partnerships, says Julio Puschel

Telecommunications is a dynamic market, and although every year we hear that the market will be slowing down and M&A is over, it gets turned completely upside down again. The latest news is of a Verizon Wireless partnership with Comcast, Time Warner Cable and Bright House Networks. Comcast and Verizon are well known for their fierce competition in several US markets, based on their ultrabroadband and TV services.

So what is driving two long-time competitors into such a major collaboration?

First of all, it is important to analyze what has initiated the partnership. Verizon Wireless is extremely committed to its LTE strategy, which prompted it to acquire spectrum from SpectrumCo, of which Comcast owns about 63%, for US$3.6 billion in December 2011. This was a clear move to keep Verizon ahead of its main mobile competitor, AT&T, in a promising LTE scenario, and it also prompted Verizon to see Comcast as a potential partner in other respects.

In addition, Comcast will benefit from a more robust mobile infrastructure that will enable it to employ a more significant multiplay and multiscreen strategy. Verizon’s mobile brand and retail reach/structure will also push Comcast multiplay products, and in addition it is possible that Comcast could launch sub-brands via an MVNO agreement with Verizon Wireless.

So everything looks good and promising from Verizon Wireless’ and Comcast’s perspectives. But what is on the horizon for Verizon’s FiOS?

Verizon has been struggling with its FiOS strategy, with FiOS broadband customers representing only 34% of its total broadband base (which accounts for about 15% of the market), and FiOS TV limited to 3.9 million customers, compared with Comcast’s 22.3 million. There are several reasons for the FiOS struggles:

• The investment required to deploy an FTTH network in a country as big as the US is extremely high, and the take-up might not happen quickly enough to justify those investments.
• There is still not a big demand for ultrabroadband speeds.
• FTTH strategy needs to focus on areas with the potential for significant take-up, justifying the investment. Consequently, the potential to take a more “mass market” approach with the service is limited.
• There are still some challenges to bringing fiber into densely populated cities with a significant number of apartment buildings, where there is a significant disposal income for such ultrabroadband services.
• In 2012, the company has showed signs of slowing down its fiber investment, after spending almost U$23 billion so far to upgrade its network.

Verizon already offers multiplay services via parallel networks, including an agreement with DTH TV provider DirecTV. This is a good alternative to FTTx, because Verizon can still rely on its xDSL services while offering a good-quality TV services with DirecTV.

Although Verizon has the capability to offer a quadruple-play bundle in some areas, via FiOS TV and DirecTV, it hasn’t been able to fully integrate fixed and mobile plans because of gaps in pay-TV coverage. The Comcast partnership will solve this problem, by adding Comcast cable infrastructure. Verizon will be able to add a third network alternative to its offer (starting in areas where it does not offer FiOS), enabling it to market its mobile services to a relatively high-ARPU subscription base, while enabling Comcast to effectively include the fourth screen missing in its strategy.

The Verizon/Comcast agreement is not as odd as it appears, since partnerships are essential to enabling communications service providers to survive in such a competitive market. These collaborations will force the companies to focus on their core market offers while being able to remain competitive by offering different services through different platforms/networks. It is a sign of how challenging it will be to balance fixed and wireless investments, because of the significant investment demands coming from LTE and fiber, and to fit LTE into the multiplay strategy.