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Technology Industry

Cable vs. Fiber

Fiber Optics Weekly Update, Nov 5, 2004

In the titanic battle to control the flow of data to U.S. households, the Bells fight back by offering video via phone lines

In the long-running contest for the digital future, cable has been hitting home runs while the telecoms are just coming to bat. In the last eight years, the cable companies have spent $85 billion to tie fast digital pipes to the home. With their bolstered capacity, they offer hundreds of channels of video, movies on demand, high-definition TV, and, of course, high-speed Net access. And in their most direct challenge to the Baby Bells yet, cable providers are aggressively pushing digital phone service over their networks.

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It's enough to give a telecom exec an anxiety attack. But now the Bells are gearing up to fight back. Just as the cable industry is going after telecom's bread-and-butter voice business, the Bells are about to wage war on cable's home territory: video. Their ace: ultrafast fiber-optic networks that match or surpass the capacity of cable's digital system. On October 21, Verizon Communications Inc. announced plans to build fiber systems in six Eastern states from Massachusetts to Virginia. Along with lines that Verizon is already stringing in Texas, Florida, and California, the company expects o bring fiber connections directly to 3 million homes with expensive, state-of-the-art technology by the end of 2005. The estimated cost: $2.4 billion. A week earlier, SBC Communications Inc. said it will accelerate its $4 billion to $6 billion fiber network build-out using less expensive technology; it plans to reach its goal of wiring 18 million homes, or more than half those it serves, by 2007.

The endgame isn't yet clear. Faced with the steep costs of fiberizing their networks, the two big telecoms haven't decided whether to try to match cable's reach: That industry already has the pipes in place to serve some 90 million households nationwide. Even so, with the Bells' fiber push, two behemoth industries are locked in a titanic battle to control the flow of digital data to American households--be they TV signals, telephone calls, or Web pages. Today, those services are a $134.5 billion market, according to researcher Yankee Group. But with fiber's enhanced bandwidth and the promise of services no one has yet dreamed of, that spending is almost sure to grow.

As early as 1996, with passage of the Telecommunications Act, many envisioned that cable companies would sell phone service and telecoms would sell TV packages. But only now, after many failed attempts in the last decade or so, are these industries truly going head-to-head: Cable can already serve all the homes Verizon and SBC want to equip with fiber.

The Federal Communications Commission helped set off the contest with a series of decisions--most recently on October 14--freeing the Bells to make massive investments in fiber without having to lease portions of their networks to competitors at a discount. Now, by replacing miles of old copper wires with superfast fiber, the Bells can deliver to consumers telephone dial tones, high-speed Web access, and, for the first time, TV shows, to fend off cable operators offering the same bundle. "We want to build a network that's future-proof," says Mark A. Wegleitner, Verizon's chief technology officer. "Fiber is the right answer."

It's an expensive bet with no guaranteed return. Digging up streets and flowerbeds to install fiber is costly, ranging form $300 to more than $2,000 per home, depending on the technology, according to Carnegie Mellon University. Some telecoms have already lowered their sights. After failing to generate adequate returns by offering TV over fiber-to-copper networks in Colorado and Arizona, number-4 Bell, Denver-based Qwest communications International Inc., is sitting out the current craze. CEO Richard C. Notebaert says he's willing to install fiber only in new housing developments. "When you go in to do a tear-up or an overlay, the economics don't work," he says. Instead, Qwest is betting on upcoming WiMAX wireless data transmission.

Other phone companies argue that they have little choice. With their core local-calling business under assault from wireless phones and now voice-over-Internet, the Bells' local phone revenues declined by $15 billion from 2001 to 2004--a drop of 7 percent a year--according to UBS Warburg. And now that Cablevision Systems, Time Warner Cable, Cox Communications, and other cable companies are beginning to offer phone service over their pipes, the Bells' losses will accelerate. By 2008, nearly 20 million subscribers will route their phone calls over cable, up from 2.8 million at the end of last year, according to estimates by market researcher IDC.

Even as the telecoms unspool their fiber, aggressive cable players are already feasting. Bethpage, New York-based Cablevision Systems Corp., which will go toe-to-toe with Verizon's fiber-to-the-home rollout, was the first cable operator to offer voiceover-Internet to its entire 4.4 million home market in the New York City area last year. And Atlanta-based Cox provides phone service to 1.1 million of its 6.3 million subscribers by offering 10 percent discounts on local phone carriers' rates. Tom Rutledge, Cablevision's chief operating officer, predicts that "it's going to take [the Bells] 10 years" to catch up.

Technology Industry

Cable vs. Fiber

Fiber Optics Weekly Update, Nov 5, 2004

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