As SBC & BellSouth Play Fiber Catch-Up With Verizon, Which Stocks Win? (BLS, VZ, SBC, ADCT, ALA, MOT, TLAB)

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Includes: ADCT, ALA, BLS, GLW, GOOG, HTHIY, T, TLAB, VZ
by: Sam Greenholtz

Sam Greenholtz (Telecom Pragmatics) submits: In stark contrast to the recent past, Verizon has been installing Fiber to the Premises (FTTP) gear into its network like there is no tomorrow.

Shockingly, the carrier has even publicly indicated that it would consider taking money out of the wireless (and non-FTTP, wireline Capital Expenditure (MUTF:CAPEX) budgets) to be used for extending fiber out. In fact, it is thought that Verizon’s current policy is to fund fiber in the last mile before other service offerings where it is not in direct competition on these services such as Voice over Internet Protocol (VoIP) and where government regulatory agencies do not have oversight. With the amount of work that is being done on FTTP, Verizon has even gone to the extreme of paying outside repairmen overtime (12-hour days/weekends) to keep up the overall network.

Always in lockstep with Verizon, SBC back in 2003 at least initially gave the appearance of being as serious as the larger Regional Bell Operating Company (RBOC) on FTTP. However, it is our understanding that SBC eventually became swayed by economics. As much as 80 percent of an RBOC’s plant is between the Remote (NYSE:RT) and the home and it has just not been considered worth the huge expense to replace the majority of the existing copper installations for an insufficient payback. The cost analysis done by SBC (and BellSouth) indicates that the best way is to get bandwidth up to the RT and convert it to electrical – still being able to zip it in with at least 20 to 30 megabits – which is good enough for now to do a competitive triple-play service (assuming they do get into IPTV (Internet Protocol Television) in a big way).

As with BellSouth, SBC does not have a network configuration comparable to the I-95 corridor to help facilitate FTTP deployments. One could argue the highways going north to south in California would suffice, except that the state Public Utility Commission (PUC) would be highly unlikely to even begin to cooperate with the idea of such a targeted approach. Both RBOCs will be looking to utilize Fiber to the Home (FTTH) in a small way with a number of new-build neighborhoods.

Compared to the public pronouncements in the late ‘80s by BellSouth (it had fiber to the home installations dating back to at least the mid-1980s) that FTTH was going to take over the world, in more recent times, the Incumbent Local Exchange Carrier (ILEC) has been consistently skeptical about the technology having any chance of proving itself on cost in the foreseeable future. BellSouth has a very tight, results-orientation on deliverable parameters from vendors, meaning that it is extremely conservative and practical when it comes to new technology. Yet, since this RBOC is furthest out on the learning curve in deploying deep fiber (almost entirely Fiber to the Curb (FTTC)) with about a million residents served (at least 90 percent of its residential customers are within two miles of a fiber strand), its extremely grim doubts about FTTH need to be taken very seriously. In fact, BellSouth apparently believes that even the cost of FTTC for overbuilds is prohibitive and it is just about a wash (meaning very attractive) with copper in greenfield locations.

Despite the stances of both RBOCs on FTTP, the impact of Verizon’s feverish movement toward the technology could have a significant impact, especially on arch-rival, SBC. SBC actually stated at the FTTH Conference in Las Vegas that it might be interested in FTTP deployments beyond the originally stated greenfield applications. The RBOC is currently reviewing Verizon’s success rate and the significantly lesser Fiber to the Node (OTCQB:FTTN) bandwidth. A spokesperson said that SBC was very interested in rewiring large subdivisions and communities.

BellSouth appears to be as content as ever to stay the course with a FTTC solution -- although several key players in BellSouth are calling for a major review of the company’s policy in this matter.

Stock Impact

  • The RBOCs: All three of the RBOCs, especially Verizon (ticker: VZ), will in the very long term benefit because they will also be connecting a large proportion of their business customers directly with fiber to potentially become truly serious data communications providers. The big winner has to be Verizon because of the huge jump it has on its competitors, followed by SBC (ticker: SBC) and then BellSouth (ticker: BLS).
  • The Equipment Suppliers: The FTTP suppliers that have the best chance of remaining in the running for RBOC business are Alcatel (ticker: ALA), Hitachi (ADR: HIT), Motorola (ticker: MOT), and Tellabs (ticker: TLAB). (A wild card would be Nortel, especially if it purchases Calix or works out a very favorable OEM deal.) Moreover, both ADC Telecommunications (ticker: ADCT) and Corning (ticker: GLW) will continue to be awarded huge purchases of ancillary hardware. In the case of Corning, this is in addition to their strong hold on the fiber cable market. Corning’s newest venture into connectorized fiber optic products is sure to have a major impact on their bottom line.
  • The Cable Companies: The biggest advantage of FTTH is the RBOCs’ ability to offer a virtually unlimited amount of capacity to deliver ever-larger amounts of diverse programming being demanded by subscribers, giving them a significant advantage over the cable firms. However, the CATV firms will ultimately increase their network capabilities and be able to catch up to their new video competitors.

The article above was based on Telecom Pragmatics’ new Advisory: Fiber to the Premises: Unstoppable Train or Heading for Derailment. Sam Greenholtz is the lead author. For close to 30 years, Sam was at Verizon involved in vendor technical evaluation efforts and infrastructure deployment. For more information on this report, as well as others, please go to www.telecompragmatics.com and click on “Buy Advisories.