March greetings from Cedar Rapids, Kansas City, and Fort Lauderdale, the site of this year’s Metro Connect 2026. Pictured is Jim with (l-r) John Cankar (GravityPath, Jacobs, FMHC), Jennifer Fritzsche (Greenhill, Wells Fargo) and Davis Herbert (CreditSights, Wells Fargo) at Monday night’s dinner. We covered a broad range of topics and enjoyed some of Ft Lauderdale’s finest food. It was terrific catching up with many colleagues at the show (which drew over 3,500 attendees – not bad considering Mobile World Congress and Lumen’s Investor Day were also going on this week).
This week, after a full market commentary, we conclude our earnings analysis with a few questions of our own that need to be addressed. These are in addition to those presented in previous Briefs (here and here).
The Fortnight That Was
The Fab Five is back above $1 trillion in losses for the first two months of 2026 after a down week. Over 60% of that YTD loss is attributable to Microsoft, whose market cap is now below $3 trillion. Alphabet, Meta and Apple are only down single low digit percentages even with high capital spending. The Fab Five are not moving in lock step in 2026.
The big news this week was OpenAI’s $110 billion round which closed on Friday. With this funding, the company is now valued at $840 billion. Major participants included Amazon (also an investor in Anthropic), Nvidia, and SoftBank. With their investment, Amazon now becomes the largest Fab Five investor (Microsoft had participated in previous two rounds but not this one – a joint release with OpenAI reiterating their commitment to the company was also issued on Friday). This fundraise is a prelude to OpenAI’s plans to go public later this year (more on that here).
That was not the only event making headlines on Friday, however. The FCC approved the $34.5 billion merger of Charter and Cox (news release here and combined company footprint nearby). The FTC and several larger states (California, Arizona, Virginia, others) still need to approve the transaction prior to closing, but the FCC is an important hurdle to clear. With substantially all of Charter and Cox already on 1 Gbps speeds or greater, the legislative lens now moves to affordability and other issues. Fortunately, Verizon’s January 2026 California PUC approval to acquire Frontier provides a blueprint for Charter. We anticipate final closure around Labor Day.
Coincidentally, this happens to be the timeline for Nick Jeffery’s start at Charter Communications as Chief Operating Officer (announcement here). This announcement surprised many in the industry given a) Frontier’s fiber focus (vs. hybrid fiber coax); b) Cox and Charter have several qualified candidates that could have filled that role, and c) Nick isn’t likely the only member of the Frontier team that is going to join Charter – he will bring a few additional teammates who know how to implement the “Frontier formula.” His appointment speaks to the transformational change that Charter will need to undergo to compete against tomorrow’s competitors. Chris Winfrey, Charter’s CEO, realizes that fresh thinking is going to be required, and Nick is an excellent choice.
On the macroeconomic front, we received a host of reports showing that inflation (at both the producer and consumer levels) is still hanging around. Here’s the latest chart for producer prices for final demand (through January):
This chart begins in 2022 to provide a “before and after” view for both the Biden and Trump administrations. From January 2022 to January 2025, the PPI final demand (less food and energy) increased 11.4% or roughly 0.42 index points per month. From January 2025 to January 2026, the index increased 3.6% or 0.53 index points per month. This is not headed in the right direction.
Here’s what’s driving the change per Friday’s release by the Bureau of Labor Statistics:
“Over 20 percent of the January increase in prices for final demand services is attributable to a 14.4-percent jump in margins for professional and commercial equipment wholesaling. The indexes for apparel, footwear, and accessories retailing; chemicals and allied products wholesaling; bundled wired telecommunications access services; health, beauty, and optical goods retailing; and food and alcohol retailing also moved higher. Conversely, prices for system software publishing fell 12.2 percent. The indexes for guestroom rental and for apparel wholesaling also decreased.”
Using the capital increase analysis in the last full Brief, the increase in wholesaler margins shouldn’t be a surprise. Margin (percentages) may not be growing as fast for a company like (fiber provider) Corning since they already had a mix of sales to large companies like AT&T and distributors. But if the wholesalers can squeeze an additional 5-7% margin selling fiber and other materials to a smaller telephone companes (funded by BEAD), they will do it. This logic could also apply to smaller data center builders and constructors who are building routes to support hyperscaler budgets. As those budgets rise dramatically (and delivery timelines trump budgets), should we be surprised that wholesaler margins rise as well?
The impact of AI capital outlays to Real Gross Domestic Product growth is meaningful – somewhere between 0.5-0.8% of total 2025 growth. Any cost increases are largely capitalized and amortized over many years (from a tax perspective, however, they are expensed in the year they are incurred). When higher costs translate into higher monthly recurring costs for Artificial Intelligence services is anyone’s guess.
Bottom line: The sources of increases in PPI are important to understand, because how and when they translate into higher consumer prices varies widely. If our hunch is correct (and we think it is), the laws of supply and demand are showing up in the latest data, and very little of AI-driven cost index increases are going to translate into 2026 or 2027 consumer price increases (until AI is in full bloom). The possible exception to this could be residential electricity prices (latest table on costs by state is here).
Note: Even after BEAD funds are allocated in the first half of 2026, there remain significant (> $100 billion) in infrastructure monies from the Inflation Reduction Act (IRA) that will compete for the same machinery and equipment (and capitalized labor) that hyperscalers are demanding.
Q4 Earnings Review (Part 3) – Unanswered Questions
A lot of information was shared about the state of telecom on the latest calls and investor days. We have discussed Verizon and T-Mobile strategies (and identified a few gaps) in the last two Briefs, but there remain several unanswered questions. Here are three that we think are important to consider:
- How will Verizon monetize their out-of-region (which now includes Frontier) networks, specifically their investment in the One Fiber initiative?
- How will AT&T merge their Lumen acquisition with a) core operations and b) the legacy AT&T construction machine? Also, can Internet Air + wireless achieve 30% penetration outside of the expanded fiber markets?
- Is Comcast now the best partner for the hyperscalers?
Verizon’s hidden asset: One Fiber
In 2015, a small group of Verizon’s executives began to plan for a meaningful out-of-region deployment of metro fiber. In 2016, the initiative had a name (One Fiber) and executive champions (Sowmyanarayan Sampath, who was Chief Product Officer at that time, and Kevin N. Smith, Verizon’s Vice President of Technology Planning and Development).
The driver of out-of-region densification was owner’s economics. Verizon wanted to have greater cost predictability as they were rolling out 5G networks, and many customers were asking for direct fiber connectivity to Verizon’s global network. A single deployment would ensure that capacity was built once for multiple customer needs.
Nearby is an example of the densification of an area in Houston, TX in mid-2020 that Jim used with a client. By the end of 2020 Verizon had pulled fiber throughout Hyde Park, and by the end of 2022 nearly every street in Houston had Verizon fiber.
These maps are no longer public, and the original 60 market list has morphed into a larger fixed wireless and Fios availability website. While we don’t know the exact densification in each market, we do know that Verizon has purchased and deployed “nearly all” of the 12.4 million fiber miles they committed to purchase from Corning and 10.6 million fiber miles they bought from Prysmian (announced May 2017). Combine that with the 1.2 million fiber route miles acquired through XO (closed Feb 2017) and the picture becomes clear: There’s a lot of underutilized fiber in Verizon’s out of region markets. Some of it is being used for Fixed Wireless and enterprise customers, as well as Verizon’s own cell towers and small cells. But, unlike their peers who are fiber constrained in many/most markets, Verizon appears to have excess supply.
By our estimates, Verizon likely pulled 20,000 route miles of fiber in their One Fiber initiative across these 60 markets (roughly 60% of this was at a lower density 864 count with the remainder at 1,728 count). We think wholesale sales were minimal, which means there’s excess fiber already deployed that could have value to AI deployments.
How will Verizon monetize these assets? We think Verizon owes investors an answer.
How quickly will Lumen come into the AT&T fold?
AT&T closed their purchase of Lumen’s fiber assets a few days after they announced Q4 earnings, inheriting four million locations passed with fiber and only 25% penetration (and only 20% of those are currently AT&T wireless customers). While those figures pale in comparison to AT&T Fiber markets (41% and 40% respectively), there’s a lot of in-market work required prior to turning on the sales and marketing acquisition spigot. Here are some comments on the Lumen integration hurdles that their CFO, Pascal Desroches, made last week at an analyst conference (transcript here):
“So we think we have a huge opportunity to capitalize on that asset and to really improve penetration and drive additional convergence. It’s going to take some time. Through the good work of our legal team, we were able to close this candidly a little faster than we even thought. And so right now, the work that is being done is build, — adding to the distribution in the area to drive more penetration, also adding to things like field tech to ensure that we’re able to meet with the higher volumes we expect. And all that work is underway, and I would expect, as we make all the way through the year, we will be able to get through to a normal operating cadence that we do — we see in our own footprint.”
Mobilization of the right resources is the key to demonstrating revenue synergies, and the Lumen transaction is all about growth. We are confident that legacy AT&T deployments (both spectrum for AT&T Internet Air as well as AT&T Fiber) will go off without a hitch. But it seems like they may have been caught off guard by the speed of the approval process. Pascal goes on to emphasize the “ramping” nature of both Lumen integration and AT&T Internet Air expansion.
AT&T cannot afford a significant hiccup (e.g., a prolonged Lumen outage). But they also need to be fleet of foot (and a 5 million homes passed deployment engine is very robust). We think that more integration and expansion resources would be money well spent in 2026 (because the impact to 2027 is immediately accretive), and would prioritize a faster integration over share buybacks.
Separately, we are not confident that AT&T Internet Air is fully integrated into existing AT&T expansion planning, let alone the Lumen markets. It needs to be to maximize the brand impact of any launch.
Comcast’s assets have unique value to some hyperscalers
Our question to Comcast has lone been “What is Comcast’s conglomerate discount? Is it worth it?” Until recent transactions (specifically Warner Brothers), Comcast hasn’t been receptive to broad restructuring.
But the company has a dense metro base (Chicago, Atlanta, most of FL outside of Tampa, Pennsylvania/ New Jersey, Washington DC, Philadelphia, Pittsburgh, Seattle, Portland, Denver, Salt Lake City, San Francisco and many more), produces long and short-form content, and has theaters and theme parks. Best of all, they have an outstanding commercial services network that gains market share nearly every quarter.
The concept of end-to-end connectivity is very powerful to a company like Microsoft or Meta. We would like to know which hyperscaler Comcast thinks would be the best partner and the value of their assets compared to other alternatives.
That’s it for this week. In the next full Brief, we will discuss the 10-K and conference call comments on capital spending. In the meantime, if you have friends who are interested in being notified each time we publish a Brief, please have them sign up at www.sundaybrief.com.
Go Davidson College Basketball and Sporting KC!
Important disclosure: The opinions expressed in The Sunday Brief are those of Jim Patterson and Patterson Advisory Group, LLC, and do not reflect those of CellSite Solutions, LLC, or Fort Point Capital.