Traffic surge will test added capacity.

By Aaron Pressman
February 23, 2017

After Sprint and T-Mobile put all their marketing heft behind new low-cost unlimited data plans starting last summer, analysts said Verizon would have a hard time keeping up. Verizon had much bigger profit margins to protect and seemingly less available capacity to handle a boom in traffic.

But two weeks ago, Verizon surprised the industry by introducing its own unlimited data plan. Though priced slightly higher than the competition starting at $80 for one line, Verizon’s plan undercut its own prices for many of its data allowance plans.

Under the old system, for example, a $90 plan granted only 8 GB before hefty overage fees of $20 per additional 1 GB kicked in. The new plan is unlimited and has no overage fees, though data speeds can be slowed at busy times for users who consume more than 22 GB per line in a month.

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Clearly, the competition was eating into Verizon’s business. Last year, Verizon added 2.3 million regular monthly phone customers, about half what it added in 2015. Smaller competitor T-Mobile added 3.3 million. And Sprint, which was still losing such customers just over a year ago, managed to add 910,000 in 2016.

This year, the pressure continued as Sprint s and T-Mobile tmus cut prices and focused on negative ads against Verizon. In their Super Bowl commercials, T-Mobile compared Verizon’s data limits to S&M, while Sprint’s ad featured a man faking his own death to get out of a Verizon contract.

Within Verizon, it was becoming increasingly apparent that consumers wouldn’t stand for monthly data allowances anymore, particularly in the view of the new president of wireless, Ronan Dunne, an outsider brought in from running UK carrier O2 a few months back. Customers were becoming consumed with “data anxiety,” Dunne explained to chief network officer Nicki Palmer, a Verizon veteran who started in the 1990s when the company was still Bell Atlantic.

“When you looked at what customers really wanted, it was clear that they felt like they either had to choose an inferior network to get the unlimited peace of mind or basically have this data anxiety as he coined it,” Palmer recalled in an interview with Fortune.

As an outsider, Dunne didn’t carry the baggage of Verizon’s long-held opposition to unlimited plans (former CFO Fran Shammo was fond of calling them unneeded and uneconomic). But it was up to Palmer’s team to ensure that Verizon’s top-rated network could handle a surge in data traffic, which was already growing at a healthy clip, increasing 45% last year alone.

But as the analysts had observed, Verizon has less bandwidth per subscriber than its smaller competitors. So the plan to handle the surge from teenage customers suddenly free to stream all the YouTube, Snapchat, and Twitch.Tv videos they wanted couldn’t depend on simply letting the traffic grow.

Mailbox cell sites

Instead, Verizon vz has steadily been increasing the capacity and efficiency of its limited bandwidth by installing smaller cell sites in busy areas to augment the big cell towers, or macro sites, that the network used to depend on. Deploying thousands of small cells—Verizon won’t say just how many—required some creative thinking to create what the carrier calls a “low and tight” network design. Instead of needing one slice of airwaves over a long distance to connect one phone to a macro site, that same slice could be used by multiple phones over much shorter distances to connect to a bunch of small cells.

Transmission equipment could go anywhere it could connect to power and a fiber optic link, from street lamps to traffic light poles to even a mailbox in one California city with tricky zoning and placement rules.

“We call it street furniture—anywhere where we can attach our equipment and connect with fiber,” Palmer says. “It is very different as we go city-to-city.”

Other carriers are also moving to small cells, and none have disclosed exactly how many they’ve deployed. But Verizon has the biggest budget for building its network, and Palmer says the carrier has a two-year lead on the competition, a bold claim that’s tough to verify.

“We have far more small cells than any other carrier,” she says.

As more customers move onto unlimited plans, traffic is sure to increase. Sprint and T-Mobile had been downgrading the quality of streaming video for customers on their unlimited plans to save bandwidth, but Verizon’s plan allowed full high-definition video quality. That forced Sprint and T-Mobile to react to competitive pressure for once and offer HD video on unlimited, as well.

Palmer says she’s confident Verizon’s network can handle the surge without the overcrowding that plagued the industry six or seven years ago, when the first round of unlimited plans was available.

“It’s something we have down to, it’s not even an art anymore, it is a science,” she says. “We have expectations, we have capacity plans. It’s not something that I’m losing sleep over. It’s certainly something we know how to stay on top of.”

Decommissioning

Verizon also is slowly shifting spectrum currently dedicated to older, slower 3G and 2G technologies to 4G usage. Already 95% of its data traffic runs on the 4G airwaves, but about half of the carrier’s total spectrum is still assigned to the older, less efficient networks to handle customers with older devices. The company has already said it will completely decommission the older technologies by the end of the decade. But it could happen sooner.

“We are decommissioning,” Palmer says. “We’re not waiting until 2020, but as the spectrum becomes available market by market, city by city, we actively put it to use where we need it most.”

For more on Verizon’s new unlimited plan, watch:

In addition to the adding small cells, Verizon is also, like its peers, adding new gear to squeeze more speed out of the existing 4G LTE network. Some equipment can allow a single phone to use two or three different spectrum bands in combination, a technique know as carrier aggregation, that can reach download speeds of 300 megabits per second. That’s fast enough to download a typical HD movie file in about two minutes. Eventually, the techniques may allow speeds up to 1 gigabit per second, at least in theory.

Palmer is confident, but warns that in the real world consumers may never see the absolute highest possible speed, which requires almost unused airwaves and perfect conditions.

“That’s never what you’re dealing with,” she says, preferring to focus on optimizing for more common situations. “You need a good speed when you’re in the middle of New York City at noon on a Wednesday. That’s what we worry about.”

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