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 guys 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.
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 Oct. 21, Verizon Communications Inc. (VZ) was expected to announce plans to build fiber systems in six Eastern states from Massachusetts to Virginia. Along with lines Verizon is already stringing in Texas, Florida, and California, the company expects to 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. (SBC) 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 Oct. 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 from $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, the No. 4 Bell, Denver-based Qwest Communications International Inc. (Q), 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% a year -- according to UBS Warburg (UBS). And now that Cablevision Systems (CVC), Time Warner Cable (TWX), Cox Communications (COX), 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 (N.Y.)-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 voice-over-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% 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.
That may be an exaggeration. Yet there's little doubt the telecoms are struggling to stay in the race. Verizon has opted for an ambitious and costly plan -- building fiber directly to the home at an estimated cost of $800 per household. On its all-fiber network in Keller, Tex., Verizon is already offering a $54.95-a-month package of phone and Internet service at speeds up to 30 megabits per second -- about 10 times faster than most cable modems. Verizon claims it could hike that speed to a sizzling 100 mbps networkwide -- though it won't try until new applications demand it.
In contrast, SBC is taking the more cost-efficient option of extending fiber lines into neighborhoods -- but not to individual homes. Cable operators take a similar approach, building fiber to neighborhoods and then connecting to homes using coaxial cable. SBC's strategy, which costs about $300 per household, uses a souped-up version of today's DSL technology to speed signals across copper wires in the final stretch, delivering data to the house at up to 25 mbps. "I don't know why a customer would need 100-megabit speeds that transfer the Library of Congress in a second," says SBC Chief Executive Edward E. Whitacre Jr. No. 3 telecom BellSouth Corp. (BLS) is implementing a similar strategy to serve about 1.3 million homes by next year.
NEXT STEP: CONTENT
No matter where the fiber ends, the Bells say their systems will thrill digitized households. The picture they paint: Sis and Mom could be watching separate bandwidth-hogging high-definition TV shows while Junior plays a graphic-rich Web-based video game and Dad chats on the phone. At the same time, a TiVo-like device could be recording two other HDTV channels.
Cable execs say they can match that, but the Bells claim their technology gives them an advantage. Rather than broadcasting 500 channels at once to a mass audience, as cable does, the Bells will store programming at a central server to send upon an individual user's request. The result, the Bells say, will be personalized content for micro-audiences: a local high school could load video of its football games for Moms and Dads to view, when they want, in a specific town.
Sounds nifty. But to make money, the Bells will have to offer top-tier entertainment. Both Verizon and SBC will launch cable-like TV services next year. Verizon has hired cable-programming exec Terry Denson from Insight Communications Co. (ICCI), the ninth-largest cable company, to line up programming. And Verizon's partnership with satellite provider DirecTV Group (DTV) and SBC's with Echostar Communications (DISH) give each a taste of the TV biz. Yet the telecoms may be in for a rude surprise. Media execs note that delivering Desperate Housewives is a lot trickier and costlier than delivering a dial tone. Says Time Warner Inc. (TWX) CEO Richard D. Parsons: "Content is expensive."
Whether or not the Bells ever make money with TV offerings, it's clear that Web-surfing, phone-addicted couch potatoes will be the big winners. With both cable and phone companies offering everything digital all the time, consumers will be bombarded with more choice -- and maybe even lower prices. Imagine that.
By Catherine Yang in Washington, with Tom Lowry in New York, Roger O. Crockett in Chicago, Peter Burrows in San Mateo, Calif., and bureau reports