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Summary

Verizon has announced the $1.8bn purchase of XO Communications, one of the largest competitive local exchange carriers (CLEC) in the US. XO operates fiber networks in more than 40 major metros and a national network connecting them. Verizon has been a seller of local exchange carrier networks recently, but this transaction is a welcome signal of its commitment to the enterprise market. The deal includes wireless backhaul and spectrum, which will be useful to Verizon in its mobile network densification efforts.

Fiber networks for the enterprise market is just one benefit

XO Communications was one of the few remaining national CLECs in the US and a trade sale had been rumored for the past five years. Its fiber metro networks and national backbone will be of great help to Verizon in addressing its enterprise market. XO has fiber into more than 4,500 buildings with minimal overlap with Verizon’s current incumbent local exchange carrier (ILEC) footprint and coverage. XO has both enterprise and wholesale business units and has focused on the enterprise market, including some revenue from the fast-growing wireless backhaul business driven by wireless operators such as Verizon Wireless. Wireless backhaul demand is fueled by the 4G LTE networks and will grow with the deployment of 5G networks.

In addition to the enterprise and wireless backhaul business benefits to Verizon, which are themselves sufficient reason for the acquisition, a separate spectrum portion of this deal starts as a lease with an option to buy. Ironically, this spectrum, Local Multipoint Distribution Service (LMDS), was touted as a major wireless business opportunity in the early 2000s, but technical limitations meant it was never really a viable stand-alone wireless business. With the emergence of new technology and hard requirement for spectrum to fill coverage gaps, however, this spectrum may have found its perfect role in the densification and small cell efforts within Verizon.

Verizon has been in the news recently for selling its former regional ILEC assets to Frontier Communications and considering the sale of premium data center assets. This transaction is a more positive signal of Verizon’s investment road map. However, the telco needs to do more to convince enterprise customers of its overall commitment to their market, given other news including its potential data center sell-off and recent notice that it is to close its public cloud services. Verizon Enterprise Services is a global player in many enterprise service areas, but it needs to articulate what recent developments mean for its overall enterprise service portfolio and direction. XO customers will surely be asking for this information as they become Verizon customers.

Appendix

Author

Mike Sapien, Principal Analyst, Enterprise Services

mike.sapien@ovum.com

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