Lay It on the Line
CEO Sticks By Costly Rollout of Fiber-Optic Network
By Arshad Mohammed, Staff Writer
Wednesday, February 1, 2006
His company's stock has sunk, its debt has been downgraded,
and its investment in a new fiber-optic network is regarded
by some as a pipe dream, but Verizon Communications Inc.'s
chief executive is certain he is doing the right thing.
"This is almost religious . . . religious with proper
financial accounting," Ivan G. Seidenberg said with a laugh
during an interview this week.
Seidenberg, 59, is by no means a messianic executive.
Soft-spoken, self-effacing, and dressed in a sober suit and
crisp blue shirt, Seidenberg is faced with deep skepticism
on Wall Street about Verizon's multibillion-dollar
investment in a fiber-optic network to carry TV, high-speed
Internet and old-fashioned phone service.
Seated in his corner office in Lower Manhattan with
intricately carved maple paneling and a sweeping view of the
city skyline, the executive betrayed no hesitation about his
strategy, saying it was the best way to reinvent a company
whose roots stretch back to the opening of local telephone
exchanges in the Northeast in the late 1870s.
"When it's all said and done, the growth opportunity here
will be far greater than anybody is accepting at this
point," he said, suggesting that Verizon's fiber-optics
project could someday allow people to consult their doctors
by video link, to telecommute in numbers large enough to
reduce global warming and to enjoy services not yet dreamed
Doubts about the undertaking -- which is called Fios and is
expected to give consumers far greater bandwidth than
Verizon's main competitors now offer -- have helped drag the
company's stock down by more than 10 percent over the past
year and influenced Moody Investors Service's and Standard
and Poor's Corp.'s recent decisions to downgrade Verizon's
Analysts are particularly worried about the company's
spending on Fios as Verizon's traditional local phone
business shrinks -- it lost nearly 3.5 million lines last
year alone -- in the face of competition from cable,
wireless and Internet phone providers.
Company officials say the line losses are easily offset by
growth from Verizon Wireless Inc., high-speed Internet and
long-distance service. To Seidenberg, wireless is another
example of an area where the company had the vision to make
early investments over the objections of skeptics -- and now
it's driving the company's growth.
"Even 20 years ago, people never saw the full capability of
wireless, but yet there were people in the industry, some of
us . . . who believed that this was going to change
behavior, and you know what, [we] were right," he said.
Speaking softly but intensely, Seidenberg said 2006 is
likely to be the year in which the Fios investment drags the
most on Verizon's earnings per share, to the tune of 25 to
"You have to spend money to make money," he said. "It's
fair to say that in '06 we are hitting about a level of
dilution that would be about the maximum, and that from now
on out, we'll start to get better."
The company's second-ranking official, Lawrence T. Babbio
Jr., the vice chairman and president, said Verizon has made
significant progress in cutting the cost of installing fiber
-- which it initially estimated at $1 billion for the first
1 million homes.
Babbio said this fell by about 30 percent last year and is
likely to drop another 15 to 20 percent this year, so that
by the end of 2006, "we will probably have cut the cost in
half" from the start of 2005. He also said many investors
do not grasp how much cheaper a fiber-optic network is to
run than the old copper-based system, in place for decades.
Even as company officials are trying to reassure Wall
Street, they are pushing Congress and state legislatures to
make it easier for them to offer video by streamlining the
laborious process of negotiating franchises one by one in
thousands of localities.
If the company does not get some relief, Seidenberg said, it
will have to reconsider whether to serve small franchises
and might instead focus on big ones.
"This is the only threatening comment I'll make ....
Remember, there are some franchises that are big. So let's
take the city of Philadelphia -- it's big," he said. "Then
you've got all these oodles of them in the state of New
Jersey, or Virginia.
"So at some point, if we don't clean up this process, we
just won't be in a position to do all the things that we
think could be done," he said. "If we don't see some change
in behavior here, I think we are going to have to question
how much we can do and how fast we do it."
Asked if that meant he would focus on big franchises rather
than little ones, he replied, "It's something that we have
to think about."
His stance on streamlining the video franchising system is
fiercely opposed by cable companies, which had to go to
every locality in the country for approvals and want phone
companies to do the same.
Cable executives say they believe phone companies will
"cherry pick" by wiring only wealthy areas if they are not
forced to serve entire communities, as local franchise deals
"It's important to retain the local franchising process so
that there is a level playing field in the video industry,"
said Thomas M. Rutledge, the chief operating officer of
Cablevision Systems Corp., the sixth-largest U.S. cable TV
operator. "We encourage competition, but we think that
competition requires that the players have similar
"To allow someone to come through and just serve affluent
suburban areas, not the rural communities, not the poor
communities, gives the new provider a tremendous economic
advantage," Rutledge said in an interview.
The House and Senate commerce committees are considering
legislation that would make it easier for the phone
companies to enter the video market.
Regulatory analysts see little chance of a till passing this
year, citing the short congressional calendar, the
reluctance of lawmakers to enact legislation that would
anger either industry in an election year, and the
opposition of towns and cities reluctant to lose control
over the local franchising process.
"Why kick 30,000 hornet's nests?" said Scott C. Cleland,
chief executive of the research firm Precursor Group.
Winning franchising relief is Verizon's top legislative
priority this year, partly because it would allow the
company to deploy the network and earn a profit from it
faster, possibly allaying investor concerns.
"We recognize that we are making some bets," Seidenberg
said, speaking from his office in the soaring art deco
skyscraper built in the 1920's for the New York Telephone
Co., one of Verizon's predecessors.
"We don't consider them all that complicated because we have
done this for a hundred years."