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Greenholtz Opines on Verizon’s Enterprising FiOS Project
05/01/2006
An interesting new study by BIA Financial Network and Telecom Pragmatics Inc. says that, contrary to conventional wisdom in the telecom industry, Verizon’s access strategy is not based on delivering fiber to residential customers, but rather it is centered around the deployment of high-speed bandwidth links to as many large enterprise customers as possible. xchange Editor in Chief Paula Bernier recently spoke with Sam Greenholtz, principal at Telecom Pragmatics, on the details. XC: What is your professional background in telecom?SG: I have been in the telecom business for nearly 33 years. The majority of that time was spent at what is now Verizon. Most of my time was spent in the engineering and new technology groups.I retired in 2001 and have worked in the consulting and analyst field since that time — first with a company called CIR Inc. and then with Mark Lutkowitz; we co-founded Telecom Pragmatics. XC: Are you calling Verizon’s FiOS FTTH project a Trojan Horse for its business strategy?SG: In the very broad terminology, that would be a correct statement.They are very serious about FTTH as a product offering, but the real money is in business services, and this is providing them with a clear-cut path to doing just that. XC: What information led you to that conclusion?SG: That conclusion has come from talking with various people directly involved with the FTTH project both at Verizon and at companies that supply services or have contracts with Verizon for FiOS.When I first started to study the map of the placement of fiber services, it was very clear that the vast majority of current projects and those being planned were in the I-95 corridor that runs between Boston, and Richmond, Va., in the Verizon footprint. (The Verizon footprint that I am speaking to is the old Bell Atlantic and NYNEX territories.) It basically covers a 40-mile-wide swath along that route. There are some exceptions, but very few. You have to remember also that the large majority of major business in the Verizon footprint is also located within this same area. XC: Why would Verizon put the focus on consumer FTTH services instead of on the business effort?SG: The FCC said to them, ‘If you build fiber-optic routes to supply residential areas with broadband services, we will not force you to unbundle them for use by your competitors.’ Therefore, it only makes sense to take full advantage of the ‘offering’ and, at the same time, cover your most important customers (business) with the ability to have fiber optics right outside their front doors.XC: Do you think Wall Street is aware of this?SG: Not fully. I think they have focused too completely on the FTTH services (FiOS) and ignored the real money-maker, which is the higher-bandwidth services that all businesses will be able to take advantage of in the near future. I have read extremely critical articles concerning Verizon regarding the so-called waste of money that is taking place with this buildout. If they took into account the total picture that is being delivered, I think they would appreciate the forethought that Verizon has given this program.XC: What affect would it have on Verizon financially and in terms of its stock value if this became general knowledge?SG: Well, we don’t advise on stocks and/or prices, but certainly in terms of the positive impact it will have on the long-term ability of Verizon to provide new and faster services to the business community, the impact would have to be extremely positive.XC: Do you think the FCC is aware of this? Would they care?SG: Probably, but again they are accomplishing want they wanted, and that is high-speed broadband service to the general public. Do they care? Not today, but if in the future Verizon would decide not to extend the fiber further out into less-populated areas because of higher costs, then they will probably have something to say. Again, this has to be provided to the entire footprint if we are to allow Verizon to compete against the cable companies. This cannot be a ‘cherry picking’ service-provisioning project. They are going to have to be responsive to the entire service area.XC: Your study says the FTTB effort will make up ‘expected shortfalls’ on the FTTH. What shortfalls are you referring to?SG: The cost of providing the service has been higher than Verizon would like it to be. They recently published some numbers that said the total cost to provide a customer with FiOS averaged $2,600 in 2005, and they projected those costs to drop to $1,605 in 2006. If you go back to the original RFP and the rhetoric that surrounded FTTH, they were saying that it would be less than $1,200. However, if you factor into the revenue picture the additional income from the FTTB initiative that will be generated because of the fiber you placed while building out the FTTH project, then this makes up for those shortfalls.XC: You say the vast majority of the RBOC’s installations of fiber within its footprint are along the Interstate-95 highway corridor — and that most of the large businesses in its territory tend to be located within 20 miles of either side of I-95. What technology will Verizon use to go the last 20 miles or less to those businesses?SG: They will deploy fiber to the buildings. There really is no reason not to, and it only makes sense to do that for all the reasons we have been discussing.XC: Verizon is selling FiOS services like hotcakes in Keller, Texas — having grabbed more than 20 percent of the local paid-TV business just three months after its September launch. What have you heard about take rates for triple-play bundles and telcos’ penetration for TV services?SG: They have been very good. I think the success rate may have even caught Verizon by surprise. People that have the service have given it excellent reviews, and the demand in those areas targeted for deployment and awaiting franchise approvals has been very good.XC: How can anything but a price war be the end result in an industry in which telcos are going head-to-head with cablecos (and also, increasingly, DBS providers) with the same basic collection of services?SG: A price war is probably going to be the ultimate decision maker. However, because of Verizon’s deep pockets and their dominance in the business market, they will provide a very formidable opponent for the cable companies. I am not sure that the cable companies will be able to afford a prolonged price war. I believe that this will eventually lead to an active M&A market in the MSO arena.XC: 2006 is xchange magazine’s 10th anniversary and the 10-year anniversary of the Telecom Act. What are your thoughts on how the Telecom Act of ’96 played out and the status of the telecom environment today?SG: I would have to say that the Telecom Act of ’96 did not achieve the goals that Congress established. It did give the RBOCs a shot in the arm and allowed them to get back into the competitive arena. But it is very clear that it also did great damage to some areas of the business. Long haul comes to mind; of all the players in 1996 very few survive today and those that do are primarily playing to a very specific market.XC: On a more personal note, what were you doing 10 years ago?SG: I was looking at new products such as DWDM. It is really amazing where we were in 1986, then in 1996, and then today. It boggles the mind to realize the advances that have been made in this industry.XC: What has happened in the industry over the past 10 years that helped lead you to where you are now?SG: I guess the biggest thing would be the opening of the marketplace. Without competition and the ability of the industry to be open to everyone, we would still be a monopolistic company without a lot of incentive to provide new services and products. De-regulation is the catalyst that has provided the ability to move into new fields and to provide new services to the general public. It hasn’t been all that long ago that we thought color telephone sets were the greatest product to hit the marketplace. Dick Tracy’s wrist phone is here today!XC: About 10 years ago the telecom industry was starting to talk a lot about delivering interactive TV services. Why did that all fall through?SG: Cost. We could never make a case that provided a reasonable payback period. VDSL, PON, etc. — all have been introduced and make the cost much more attractive and the providing of service much easier.XC: Why now, about 10 years later, are companies like Verizon talking about fiber and video services again if they’re not serious about it?SG: I don’t think that statement is accurate. Verizon is serious. They realize the potential and the value to their bottom line. I think that the point is that they have also found the perfect solution to many other problems by taking advantage of an offer that allows them to deploy as much fiber as necessary so that their customers will be able to get the broadband services the government wants them to have. The real issue is the same old theory that you learned in Business 101 many years ago: 20 percent of your customers provide 80 percent of your revenue. That 20 percent is the business market, so Verizon is making a concentrated effort to provide service to the residential market and still provide the best possible service to its business customers.XC: How do you think things will play out in terms of winners and losers on both the residential and business services front in the next 10 years?SG: Many things will change over the next 10 years. As we have seen in the last 10 years, the marketplace has undergone a major reorganization, and there is nothing that indicates this is going to change going forward. Business will always be a big winner because of the 20/80 rule. Residential customers will face the most challenges of all. Can a customer living in a rural area expect to see the same services that the urban and suburban customer receives? Probably not, because the cost of providing that service is just too high. However, with the advent of wireless services, much has and will continue to change in that area. Expect continued consolidation in the telecommunications world and expect to see the cable companies, Internet businesses, and telcos all start coming together as the competition heats up.
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