Verizon CEO Lowell McAdam on when we'll get 5G, why our bills are so expensive, and why it bought AOL

In the four years since Lowell McAdam became CEO of Verizon Communications, the company has expanded 4G LTE service, bought AOL to add content and advertising technology, and has been one of the most aggressive in breaking up the television bundle of channels.

We talked about all that and why my bill is so expensive when we sat down recently at Business Insider's IGNITION 2015 conference.

(Edited for length and clarity.)

Henry Blodget: We talked to Brian Roberts of Comcast about this whole impending competition possibly between cable and wireless. But first your CFO said at an investment conference that you might be buying Yahoo. Yes?

Lowell McAdam: I don't think he exactly said that. Our view is their board hasn't decided what they're going to do. As far as we know, it's not for sale. And I'm pretty sure if it turned out that parts of it or all of it were for sale, we'd look at it just like we look at anything in the digital-media area at this point because it's so hot.

Blodget: If you were to look at it, what purpose would it serve for you? You just bought AOL. Why did you buy AOL and what would Yahoo do?

McAdam: If we look at our strategy, it is three tiers. Have the best connectivity you can have out there. Own certain platforms that drive a lot of traffic to your network. So our Go90 platform, and AOL's ad platform, fits into that perfectly. And then the third tier is a few areas where you want to get to content, or solution, or application, so that you can show that broad area of the ecosystem.

Healthcare Internet of Things is one of those because we think that will drive a lot of traffic to the network. So AOL fit in perfectly with that strategy. And if there were pieces of Yahoo that augmented AOL, perhaps, but again that's way premature. Their board hasn't made any decisions and there've been no discussions and we're not getting ahead of our headlights here. We've got plenty to do.

Blodget: So you have AOL, maybe Yahoo or other digital media. Brian Roberts bought himself a wonderful suite of cable networks. Is that something we can expect you to do?

McAdam: You have to look at the assets that you have. And we have tremendously strong assets between Washington and Boston, the wireline side, on the fiber side. And fiber's going to be absolutely crucial as you go forward. But our strongest asset - frankly - is the mobile network. And we cover every square inch of the US. We've got 108 million customers at this point. So we're much more of a mobile-first play.

That's why we've gone with our Go90 platform and AOL, especially as we go into the fifth generation, which will deliver up to 1 gigabit of throughput. So today the average network is about 5 MB of throughput. This is a 200-times improvement in the speed, so it opens up every one of these technology cycles, opens up broad new product sets.

Blodget: One of the things we talked about with Brian Roberts is that he's created this amazing interface, X1. It's in some ways superior to Netflix. A challenge for Comcast and the other cable providers is they're regional. They can't go outside their areas. I can't get it in New York. You could offer me something that I can get because anybody in the country can get it.

Is that the ultimate vision of where we go? Will you have a front-end interface to television that will be everything that X1 is, except available to anybody?

McAdam: That's why we've sold off some satellite properties on the wireline side, so we can concentrate on Washington to Boston. And if you look at the quality of our network, I think everybody recognizes that Verizon's network is the best. So as you shift into these new-use cases, like video, like the Internet of Things, we think mobile's the way to go. And that's why Go90's so important for us.

Blodget: You just launched it, Go90. What is it? Where is it going?

McAdam: It's not just a video platform - it's a social-networking platform based on video. We have the NFL deal. We just cut a deal with the NBA, so we'll have ... many more games than you've seen before. But the interesting thing is we can get many things like Comedy Central that are distributed in certain places, but we've also got some premium content now - AwesomenessTV, which is owned by DreamWorks.

Driving at a very low cost, driving a huge number of views. Some of the episodes will come out at 6 o'clock on Saturday night. By 10 o'clock, they have more views than some of the cable-news stations do in an entire month. The 300-channel bundle is going to continue to break down. And as we do, we'll be able to provide some long form but more geared toward millennials, more short-form content like "Guidance" and other series like that as we go forward.

Blodget: And is the idea that Go90's content will be exclusive? I have to open the app to get to it, or will it be distributed on YouTube and Facebook and all the other places that folks are streaming on?

McAdam: The interesting thing about all of this is that the models are changing so rapidly. The key for us is to have assets that are easy for people to get to and they want to use. So Go90 right out of the gate will have certain things that are exclusive to Verizon, but you can download it if you're a Sprint customer or T-Mobile customer, and they're doing that. Things like the AwesomenessTV - exclusive content. My view is you premiere it on Verizon, but then you quickly distribute it, even globally.

Blodget: So you just launched it. How many people use it?

McAdam: We're not going to give out any specifics on customers until we get into 2016 because we literally started advertising for it over Thanksgiving. But I would just say the subscriber counts are higher than we had predicted, and the most important thing is the number of times people revisit the site.

And one of the things I say is it's a social-video network, so that if you're watching an NBA game and you want to literally go in and clip that footage out and send that to your social network, you can do that. Starting next week, we're going to have the Mariah Carey Christmas special - eight episodes exclusive to us. So you can clip and share that.

Blodget: How do you develop something like this within Verizon? It's very difficult historically for large companies that do one thing to compete in this space. If you want this to be a social app, there are 5,000 brilliant young people in Silicon Valley who do just that, are trying to come up with that. How do you think that happened?

McAdam: The first thing is we've got the view that we need to disrupt ourselves because you think of a telecom company as not one of the most agile.

We've got the view that we need to disrupt ourselves because you think of a telecom company as not one of the most agile.

So we had a strategy, in this case, where we wanted to create a media company to deal with the digital millennials that are our there. And so we have literally a couple thousand people in Silicon Valley who are working with some of these startup companies that you're talking about, and then the real issue for us is not what do you do, it's what don't you do.

If you remember after AT&T bought DirecTV, which I would argue is a very good purchase for them, there was a lot of "Verizon should go buy Dish." That's not our strategy. We're trying to skate to where the puck is going and it's not in a declining linear play - it's in digital, snackable, mobile-based content. So we use those things as a filter and AOL as a cornerstone to build on and we've got a wide array of products that are scheduled to come out next year based on that.

Blodget: The branding around Fios is fantastic. Everybody has this impression that it's lighting fast, so I asked Twitter what I should ask Lowell McAdam, and people said, "Are we going to get Fios to more people in New York City?" "When's it going to be full city?" "I want this. So when is it?"

McAdam: Our biggest challenge with Fios is building it out. And you know we look for opportunities to learn, and I think Google has done us a favor by showing that the standard licensing agreement with the cities is probably not sustainable because, again, people do not want 300-channel bundles and the economics won't work for that.

I'll give you a factoid on our Custom TV, which is averaging 40 to 60 channels. It became 40% of our volume the minute we launched it. And it doesn't have all the heavy weight of these sports channels that you have to pay for, whether you watch or not, and some of the 13 channels that come along with those. So we've seen that grow.

So skinnying down the bundle helps the profitability, driving more broadband helps the profitability, and, frankly, I think a big breakthrough is going to be when we start doing 5G because that allows you to cover many more homes without having to actually go into the home to provide the services.

I think a big breakthrough is going to be when we start doing 5G because that allows you to cover many more homes without having to actually go into the home to provide the services.

Blodget: So what is 5G? When are we going to get it? And how much is it going to cost us?

McAdam: If you look at the first generation of wireless, it really lasted about 15 years before we went to the second generation. When we implemented the fourth generation, which allowed us to do all the smartphones and the videos, the time between that and going to the fifth generation is going to be four years. So the cycle just continues to move faster and faster and faster - 5G is much more designed for video. We call it more use-case defined.

When you think of the thousands of devices in the Internet of Things, when you think that today 70% of our traffic is video and year-over-year our volume has grown 75%, no one sees that slowing down. So bigger capacity, faster response times. Latency is very important when you think about autonomous cars and things like that - 5G will really change the game, and I think will be another spike of growth in the wireless industry.

Blodget:
And so when do we get it?

McAdam: I showed my board the service in November, and you don't ever go to a board with something that's not real. We'll be piloting it more broadly. San Francisco, we'll be there. We'll have it in New York. We'll have it in Boston.

I expect to have our Basking Ridge campus up in January, and then rolling it out more commercially later in the year, and then commercially more in 2017 and beyond.

Blodget: And so when you have good nationwide coverage with this, you will be able to go and sell the bundle that you just referred to that you concurrently sell to 5 million Fios households and sell it to everybody?

McAdam: My point is I'm not sure it would be the bundle because I think millennials don't want them. We have about 300 folks in Southern California who are working on media and I asked them, "How many people have this traditional cable bundle?" Ten of them raised their hands. Everybody else does everything over the internet.

So I'd argue no, we won't be taking the standard bundle, and I know you have Les Moonves here. Les is one of the thought leaders in how to take his content and package it more for mobile and make it more over-the-top centric. And I'm hopeful that more of the content providers will go that way.

Blodget: And one of the things we talked with Brian Roberts about was the fact that it turns out that only a relatively small percentage - maybe 10% - of mobile data is actually consumed outside of home and work. And Brian talked about cable maybe moving into offering mobile phones and connectivity. Do you see much more head-to-head competition over time?

McAdam: I guess it depends on the model. I think the key is the technology will be there to offer an integrated, seamless product. So far, the bundle has been a bottom of the bill discount. I believe mobile-first video will take off inside and outside the home. The question is how long does it take for this to sort of come down? Is the 300-channel bundle going to be around for a decade? I tend to think not. I think it's more three to five years.

Blodget: So let's talk about pricing. I was recently informed that our family bill - we're working with a competitor of yours - is now over $300 a month because, of course, each child needs their own device with their own data and they can't quite figure out when it's Wi-Fi. Plus, I pay over $200 to the cable company, so $500 a month total to get all this stuff and I'm sure I could get the price down. But you're going to roll out this 5G, which I'm going to want instantly. How much am I going to be paying you in 10 years?

McAdam: Ask your family how many of them are willing to give up their mobile phone.

Blodget: Nobody. This is the problem, I concede. It's going to be the last thing other than food we give up. So, how much are you going to take from me going forward?

McAdam: We're going to have to see how the models evolve. AOL does a lot of ad insertion. Advertisers are very excited about that. You're starting to see programs literally completely supported - all the data usage supported by a company. So our friends at AwesomenessTV are doing a series set on a cruise ship called Royal Crush completely subsidized by Royal Caribbean cruises because they're trying to have teens see that cruises can be cool.

It's kind of those of you that are more my age and remember "The Love Boat" stories ... years ago. That's the millennial version of that. So there's a number of models. Subscription will be one, data will be one, but I think ad-supported and then completely sponsored will be in the mix as we go forward. I think your bills are still not going to be a lot lower than they are today. At least I hope.

I think your bills are still not going to be a lot lower than they are today. At least I hope.

Blodget: And that's OK. Like I can probably handle the current bill, but all these things you're talking about I'm going to want. And the other thing that I noticed as I was cramming for this interview was your wireless business has a more than 30% profit margin. How much do you need? And when you've got two competitors in the market who are frantically trying to undercut you at any turn, does that begin to have an impact? I mean, do you have any pricing concerns down the road?

McAdam: We get that price is always critical. But look at what Verizon's had to do in wireless and wireline - about $18 billion every year invested into the network. And so you have to get a return on that or you're not going to be able to do things like 5G. You have to have a network to deliver that, and as you go forward it's going to be more important because you're going to rely on it for healthcare and things like that. So you want us to be investing in the network.

So if you look at what we return to shareholders and what we reinvest, I think it's a model that has to continue. People pay for quality.

Blodget: And how much going forward will owning content matter to that?

McAdam: It's a little bit. It's the same philosophy we would have whether it's distribution or networks or stores. You need to own enough of that to understand what drives the usage, but the key for us is the best network carrying traffic. Platforms that enable those applications to seamlessly go on the network and have just a few of those applications and content is all we're really interested in.