Scott Moritz

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Bells' Fiber Plan Looking Frayed

Scott Moritz

Phone giants Verizon (VZ Quote), SBC (SBC Quote) and BellSouth (BLS Quote) have been promising investors a fiber-optic future, replete with premium-fetching advanced services such as high-definition video and ultra-fast Internet access.

Given the state of the Bells' crumbling local phone business -- a problem exacerbated by customers' flight to wireless and the looming presence of cable rivals -- a bold fiber strategy certainly gives the big telcos' fans something to ponder.

Yet while few observers dispute fiber's capacious potential, many have questioned the wisdom of the Bells moving right now to take on the huge expenses associated with rewiring homes. These people note that the cost of upgrading just a million homes to fiber can cost as much as $1.5 billion -- money the Bells may be loath to spend in these hypercompetitive times.

"They have to sell the hype," says analyst Sam Greenholtz with Telecom Pragmatics. "Everyone has to have that warm feeling that they will get fiber to the home."

The Thaw

Wall Street has certainly felt the warmth. Indeed, after four years of spending cuts, investors are eager to see some prospects of a new buying cycle triggered by so-called FTTP, or fiber to the premises.

The Bells are already years behind cable giants such as Comcast (CMCSA Quote) on fiber-optic upgrades. Now, the local phone giants must buy some time and show they aren't still slumbering as they play catch-up, say industry watchers.

Excitement about the potential for massive fiber upgrades has already helped attract investors to stocks such as Advanced Fiber (AFCI Quote) and Corning (GLW Quote), as analysts make guesses about key suppliers and the size of the industry's war chest.

A lot of big numbers have been bandied about. UBS analyst Nikos Theodosopoulos estimates that if Verizon hits its fiber rollout target next year, it will have to spend $3.2 billion on the effort. Theodosopoulos predicts that suppliers such as fiber cable maker Corning and networking gearmakers ADC (ADCT Quote) and Advanced Fiber Communications would be the beneficiaries of this presumed windfall.

A Verizon representative declined to comment on the estimates but said the company expects to spend between $800 million to $1 billion on its FTTP plan this year.

Wiggling

All that said, industry observers say that while the Bells have enjoyed some flattering attention for their big fiber strategy, a closer look at the plan shows there's plenty of wiggle room in terms of actual spending.

Verizon, for example -- the leader with its FTTP campaign -- has a target of "passing" a million homes with fiber this year. It aims to pass between two million and four million homes by next year. That's not a number of actual connections, however -- it simply counts up the residences that potentially could be served with the fiber network.

Meanwhile, the nation's No. 2 telco, SBC, has an even more nebulous four-year plan to take fiber into half its customers' neighborhoods. Never mind that SBC's fiber strategy stops short of the home and instead relies on good old copper wire connections to carry a faster signal.

Observers say keeping the plans ill-defined serves the Bells' purpose. There's a subtle line between fueling a fiber frenzy and disguising the bleaker reality of the Bells' fiscal constraints.

Take Verizon, which at the moment carries some $42 billion in debt: Observers say the company isn't in a position to bump up its $12 billion capital budget by very much. The company's fiber plan, to some degree, will be funded by money that normally would have gone to its conventional network rebuilding budget, say analysts.

Meanwhile, SBC and BellSouth are sinking huge sums into a very different growth area: They're putting up $41 billion through their Cingular wireless venture to buy struggling cell-phone rival AT&T Wireless (AWE Quote).

Dollars and Cents

Meanwhile, any fiber rollout that does take place could take any number of shapes, observers say.

"It won't happen overnight, and in the meantime there will be alternatives," Greenholtz says.

SBC, for example, has an impressive-sounding four-year, $5 billion fiber-to-the-node plan that will extend its optical network further out into half the communities within its 13-state region. From those nodes, SBC will use the existing copper lines with beefed-up digital subscriber lines or possibly an Ethernet technology to bump speeds up enough to handle video signals.

Verizon has selected three communities in three states for its FTTP service, and the company promises six more states by year-end. The company plan is to overhaul central offices to make them fiber-ready. These are big neighborhood branch offices or network hubs that serve hundreds of homes and businesses located within a short radius of the facility.

Initially, actual fiber to the home will be largely limited to new housing developments where the telcos substitute fiber for copper.

"It comes down to dollars and cents," says analyst Greenholtz. "They are going to pick areas with the right mixture of businesses and homes."