Alcatel Wins as Verizon Focuses on Fiber to the Business (ALA, CSCO, VZ)

A recent article in Forbes Magazine perpetuates the widespread notion that Verizon’s major objective with its fiber to the premises activities is to cater to the residential market with triple play services. While this aim is an important one, the RBOC’s real commitment is to deliver fiber to as many large businesses as possible.

One has to take a close look at the map to figure out the essential strategy. Within its legacy footprint (original Bell Atlantic and NYNEX territories), Verizon is installing at least 90 percent of its optical infrastructure in close proximity to the Interstate-95 highway corridor from Boston to Richmond. The bulk of the Fortune 1000 enterprises are located around this I-95 pathway. It is interesting to note that this plan of action has been in place at the company since the 1980s while it waited for a more favorable regulatory climate. The FCC’s decision not to force the incumbent phone companies to unbundle fiber in the access portion of the network was the key change for Verizon to pull the trigger on its blueprint.

For the first time in its existence, Verizon is looking to become the number one provider of managed data service offerings to major businesses – not only along the east coast, but also throughout the country. Traditionally, it had just been more or less an order taker without any special expertise in selling to the big enterprise customers. The acquisition of MCI has helped Verizon in supplying it with human talent that is much further out on the learning curve in serving the requirements of large business customers.

Stock Impact

The Forbes article states:

Among the companies best poised to take advantage of this is Alcatel, which RBC rates "outperform." The research firm said Cisco Systems may want to consider divesting its optical access unit, since it hasn't performed well.

Here's my perspective:

• Verizon (VZ): The level of risk associated with fiber to the home (FTTH) has been greatly exaggerated by the Street in that the potentially high margins by focusing on businesses will make up for any long payback windows in providing video services to residential subscribers.

• Alcatel (ALA): Mark Sue quoted in the Forbes piece appears to be correct in being bullish about Alcatel. There is no doubt that it is Alcatel’s business to lose on the access front at AT&T/BellSouth.

• Cisco Systems (ALA): While Sue is correct in his evaluation of Cisco’s performance in the optical space, the supplier might still feel compelled to remain in the space because of its desire to provide an “end-to-end