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Verizon Lay It on the Line
CEO Sticks By Costly Rollout of Fiber-Optic Network

By Arshad Mohammed, Staff Writer
Washington Post
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 up.

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 debt.

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 30 cents.

"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 routinely require.

"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 obligations.

"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."

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