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Verizon's Equalizer vs. the Cable Guys?

By Alex Salkever Somebody tell the cable guy to start searching for kryptonite, because Larry Babbio just turned into Clark Kent. Verizon's president and vice-chairman unveiled plans at a speech on Friday, May 9, that could help supercharge his ailing DSL broadband strategy and gain back market share from the cable companies. Cox (COX), Comcast (CMCSA), Time-Warner (AOL), and other cable providers have thus far trounced the telecoms in the race to sign up subscribers for potentially lucrative market selling zippy, always-on Internet access.

That could change in a hurry if Babbio's secret weapon works out. That would be the phone booth. Verizon (VZ) has thousands of these white elephants littering street corners in urban population centers up and down the East Coast. Babbio hopes to turn them into Wi-Fi hot-spots accessible to Verizon DSL (digital subscriber line) subscribers. He isn't the first to consider this option (see BW Online, 1/30/03, "A Wi-Fi Payoff from Pay Phones?"), but Babbio's plan, if executed well, has simple brilliance.

Here's why. Wi-Fi is fast becoming a key part of broadband networks at home and at work. Hardly anyone who has Wi-Fi up and running says they could never go back wired-only access. Wi-Fi's addictive utility gives Babbio and the other Baby Bells an incredibly enticing carrot to get more people to sign up for DSL broadband: Package Wi-Fi along with it.

GRUNT WORK DONE. Further, constructing big, public Wi-Fi networks from scratch to cover cities would be time-consuming and prohibitively expensive. To give you an idea, building out U.S. cell-phone networks has cost tens of billions, and they require far fewer access points than a Wi-Fi network. But Verizon and other Baby Bells have already done much of the grunt work with their existing pay-phone networks.

For the past few years the Baby Bells have watched in dismay as the cable-TV companies have grabbed the biggest share of the business for consumer broadband Internet connections. According to research firm Strategy Analytics, only a little over 6 million of the 18 million U.S. households with high-speed connections use DSL supplied by Verizon, SBC (SBC), and other Baby Bells. Plus,

cable companies have posted operating profits on high-speed data services in the 60% range, according to investment bank CIBC. By their own account, the Bells have failed to do this (see BW Online, 4/21/03, "Saving the Bells' Broadband Bacon").

Enter Wi-Fi. No doubt, it's the hottest tech innovation since the Internet itself in terms of public adoption (see BW Cover Story, 4/28/03, "Wi-Fi Means Business").

According to research firm Cahners/InStat, shipments of Wi-Fi cards for laptops and desktops, as well as Wi-Fi routers and access points, rose 160% in 2002, to 6.8 million units. Shipments of similar Wi-Fi hardware for businesses sick of running cables increased 65%, to 11.6 million units. Prices are falling quickly, and performance and range are improving. Both trends should encourage sales further.

3G MARRIAGE? People who have Wi-Fi at home or work often to seek out "hot spots" -- public access points -- in coffee shops, airports, and other places. Hence the moves by McDonalds (MCD), Starbucks (SBUX), and major hotel chains to give Wi-Fi access to customers either as a paid or free service. As Wi-Fi growth continues apace and, equally important, as it becomes built into every laptop, the market for this type of mobile access should blossom.

That's precisely the dynamic Babbio hopes to tap to drive sales and profits -- and not just from DSL users. As technology that allows inter-operability between Wi-Fi and planned 3G cell-phone systems emerges and improves, a hot-spot network could easily integrate with, and even replace in many locations, 3G wireless-phone coverage. This would save Verizon a mint, as 3G requires much more expensive construction outlays and maintenance.

At the same time, Verizon could better capitalize on the billions it has already spent to roll out DSL to most big cities in the Northeast. As it is now, the Bell has plenty of broadband capacity but not enough customers.

SUBSCRIBERS NEEDED. Cable broadband, however, remains somewhat more reliable than DSL and is easier to manage in general. Phone companies use dozens of types of phone lines, but most of cable's infrastructure runs on a single standard. That makes operating a cable-broadband network far less complex than a DSL network.

Using Wi-Fi can help the Bells offset that advantage. Even with a more expensive network, Babbio's strategy would work if it helps him hit the 3 million broadband subscribers -- a 60% increase from current levels -- required for DSL profitability at Verizon. And DSL technology works far better and costs much less to operate than it did even three years ago.

With Wi-Fi, Babbio has the potential differentiator to batter his cable competitors. Want to go the park and log on at top speed? Verizon could crow that it can let you do so, but your cable company can't.

NOT ENOUGH CASH. Nor can the cable companies hope to match the Bells with a competing hot-spot network anytime soon. They would have to secure rights-of-way from landlords and business owners, involving massive amount of legal wrangling. It would also mean mobilizing fleets of installation teams and buying huge amounts of new equipment.

That's if the cable companies could even raise the money. After a decade-long spree to upgrade their networks for higher-speed broadband and premium digital-cable, most face heavy debt loads and are selling off assets to please investors. So raising billions more to mount a serious Wi-Fi attack isn't really an option.

The cable guys could align with a mobile-phone company to provide some sort of Wi-Fi coverage, such as Starbucks' deal with T-Mobile. But cell-phone carriers, too, are saddled with debt and hardly in the position to roll out a comprehensive network of the type Verizon could simply by tapping its phone booths.

FREE RIVALS. AT&T (T), IBM (IBM), and Intel (INTC) have jointly launched a big effort to build a massive network of hot spots. Dubbed Cometa, the company has made a splash with plans for a 20,000-node national network. But according to many analysts, it remains undercapitalized to achieve any type of serious national penetration (see BW Online, 12/13/02, "America as Wi-Fi Nation? Not So Fast"). The only other commercial competitors are small, independent startups such as Boingo, which have insufficient coverage and lack access to the megacapital needed to build big networks.

In fact, Verizon's biggest worry may be the community groups that are already building Wi-Fi hotspots in New York, Seattle, San Francisco, and other cities largely for free use by the general public. Should they gain critical mass, it might be hard for Verizon and other Baby Bells to compete. Business customers, however, aren't going rely on a nonprofit for a valuable service.

Add all of this up, and Babbio just might have a growth opportunity for Verizon. That would be much needed as its total number of customers has begun to decline, and revenues have started to erode in key markets. In areas where cable companies have begun offering local-phone service, they've grabbed up to 25% of the market from the Baby Bells, according to industry trade publication DSLPrime. That's not even counting the people who ripped out their second phone/modem line to get cable broadband.

MORE VAPOR? The other Baby Bells and most of the telecom sector will be watching closely to see what happens. If Babbio's announcement turns out to be vaporous and Verizon doesn't put its money into the Wi-Fi phone booths, then someone else will undoubtedly come in and seize the opening.

To date, Verizon has promised more on broadband than it has delivered, both in terms of money spent to upgrade its networks and adding new customers. But if it follows through on its phone-booth transformation, Babbio might be remembered as the superhero who helped rejuvenate what many people consider a relic of the pre-Internet Age. With reporting by Jane Black

Salkever is Technology editor for BusinessWeek Online

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