Bus 588
Current event report
Michael Liu

Last week, Verizon Communications Inc sold off about a quarter of its wireline telephone and Internet operations (WSJ). The company sold its assets to Frontier Communication Corp, a regional telephone company, for $10.5 billion, and the deal leaded Verizon to exit the wireline phone service market in Texas, California and Florida. Also, in order to withdraw from the local wireline phone service market completely, Verizon left millions of FiOS customers who the company spent around $23 billion and 10 years to develop. These customers are roughly 1.6 million fewer FiOS internet subscribers who are about 24% of the company’s total, and around 1.2 million fewer FiOS video customers who are about 21% of the company’s total. Moreover, Verizon also finished a $5 billion deal with American Tower Corp, a cellular-tower company, last week. American Tower would gain exclusive right to lease and operate over more than 11,000 of Verizon’s cell towers, and Verizon would continue to have access to reserve capacity on the towers. (WSJ). These two deals of Verizon were caused by many factors. Ultimately, there are three reasons why Verizon sold its asset.

The first one is because the change of its company strategy. In recent year, along with the development of mobile device and the improvement of wireless network’s speed and stability, a growing number of people using mobile device to connect with internet. The stable growth of wireless market let Verizon have more and more commercial opportunities. As the biggest mobile carrier in United State, the last year’s revenue of Verizon’s wireless business accounted for about 69% of total company’s annual revenue (WSJ). The wireless business has become the core business of company. In addition, Verizon is exploring new technologies to deliver video service over its wireless network. These technologies will provide a better experience for customers and let Verizon has more core competence in the future. From the textbook, the levels of diversification of Verizon has changed. Before the deal, Verizon has a moderate to high levels of diversification because the revenue of its core business is less than 70% annual revenue. But, after the deal, Verizon narrows its other types of business and expand its wireless business over the next few years. So, the company will have a low levels of diversification in the future, and the corporate-level strategy will become to the dominant business diversification strategy. The undersell action of Verizon will let the company focus its pivot of business on wireless market, enhance its core competence and create more profits in the future.

The second reason is because businesses of wireless have less regulation than wireline phone business. New rules proposed by the Federal Communications Commission and backed by President Obama to regulate Internet lines as a utility contributed to the company’s decision to sell (WSJ). These new rules, as we known related to Net Neutrality, will let internet become free and open. All users will have same internet service, such as high connection speed and no contents limitation, and network carriers can’t provide different wireline service based on different monthly service fee. So, these new regulations will limit Verizon’s wireline business and decrease the company’s revenue potentially. As Verizon Chief Executive Lowell McAdam said, “an important consideration was the current regulatory uncertainty and the potential impacts on future investments of a reclassification of broadband under Title II” (WSJ), stripping part of wireline phone service can let Verizon avoid potential business risks and let company transfer its resource to develop its wireless business.

The last one reason is because Verizon need capital to repay a debt. Last year, Verizon completed the $130 billion acquisition of Vodafone Group PLC’s half of the two companies’ U.S. Wireless joint venture (WSJ). Also, Verizon cost of $10.4 billion in wireless licenses the company bought in a record-setting government auction last week (WSJ). The acquisition and wireless licenses’ deal are important for the company to develop and expand its wireless service. So, the undersell action of Verizon is helpful for company to pay back debt and invest to new wireless project.

Overall, Verizon’s two deals are decided by company’s strategy goal, the change of corporate-level strategy, company prospects, and market demand. These deals are helpful for Verizon to concentrate its resource, consolidate its market position, and make more profit in the future.

Reference
Knutson, Ryan. (2015, February 5).“Verizon Pulls Back From Wireline, Internet Businesses; Telecom Giant’s $10.5 Billion Asset Sale to Frontier Hastens Shift Toward Wireless Operations”. Wall Street Journey.