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SBC: Tying Up Rivals with More Cable?

By Roger O. Crockett The competition may be heating up fast, but SBC Communications (SBC) Chairman and CEO Edward E. Whitacre smiled broadly after delivering the June 22 keynote speech at the telecom industry's annual trade show, SuperComm, in Chicago. Stretched out on a conference chair in a curtain-walled space adjacent to the ballroom, he told BusinessWeek Online that SBC will lead the way in redefining telecom communication, with the aid of technologies such as Voice Over Internet Protocol (VOIP) and high-speed wireless service.

As evidence, Whitacre announced that SBC would invest $4 billion to $6 billion, beginning this summer, to string fiber-optic cable closer to millions of customers. The effort would plunge fiber deeper into residential neighborhoods and make offerings such as video more easily available. In addition, SBC plans to use an Internet platform by Microsoft (MSFT), dubbed Microsoft TV, to experiment with delivering video service to residential and business users. "There's no future in being just a phone company, no matter how large," Whitacre declared in his speech.

SHORT OF DOORSTEPS. The moves to transform SBC will help it compete with rivals that are unleashing similar services. The outfit has been under growing pressure from cable operators that already have video service and are beginning to offer phone calls over the Net. Other telcos, such as Verizon (VZ) and BellSouth (BLS), have announced their own multibillion initiatives to build fiber networks through neighborhoods.

In the past, Whitacre has been cautious about fiber deployments. He has only committed to string fiber to optimum points in new housing developments. Unlike Verizon, he eschews rolling fiber to residential doorsteps because of the disruptive construction and installation costs involved. And even with this new initiative, "we're not going to the doorstep," says Whitacre. "We don't want to tear up everybody's streets."

That doesn't mean SBC's service won't be robust, however. While BellSouth's fiber service now delivers content at up to 5 megabits per second, Whitacre expects SBC customers to get 15 to 20 megabits per second with the new technology. That's much faster than the several hundred kilobits per second available from DSL. And when the fiber is combined with video-switching platforms like Microsoft TV, it'll be enough to deliver digital TV, DSL, and voice service over the Net simultaneously. Promises Whitacre: "It'll be really really good prices."

TOO CAUTIOUS? Why now? Recent regulatory decisions within the Bush Administration in Washington have allowed SBC and other incumbent local providers to negotiate new wholesale prices of various pieces of their network and -- more important for the Bells -- they won't be forced to lease their lines at a deep discount (see BW, 6/28/04, "Telecom: The Day After"). "With the confiscation gone, we can get our money back," says Whitacre. "Things are looking better."

Maybe. But some worry that SBC's plan for video strikes too cautious a note. The plan is to reach half of the SBC customer base over a five-year period -- a fairly extended rollout. And don't forget that at this stage the investment is merely a trial. The Bells "don't move fast," warns Craig Easley, director of service-provider marketing for equipment maker Extreme Networks (EXTR). "It's going to take a very dramatic push from the cable operators for [the Bells] to get into the residential market with video."

Not everyone is so sure that pumping money into fiber is best for SBC right now. Though it's imperative for SBC to have a video play, it already partners with Echostar (DISH) to offer customers DISH satellite TV service. SBC says it's signing up thousands of customers and growing rapidly with DISH in its bundle -- a service that requires little capital spending. Moreover, "by waiting a little longer, SBC could see fiber and equipment come down to more mass-market price points," says Greg Gorbatenko, an analyst with Marquis Investment Research.

"NOT PERFECT YET." Whitacre is unfazed, however. He's hungry to build SBC into a 21st century telecom, and video is the last move in the battle to beat the cable operators. He's not even worried that they're deploying an alternative voice service via Net technology. "They don't have any choice," he says, implying that's the only way cable players can compete with what he regards as SBC's superior service. Plus, he crows: "It's not perfect yet. Voice over IP is not going to get our business taken away."

SBC is testing the technology, and though it hasn't announced a residential strategy for voice over the Net, it's expected to in the coming months. Letting that wry smile ease back onto his face, Whitacre says: "It's not like we don't understand it." Maybe it won't be like the boom years, but Whitacre's optimism suggests that exciting times lie ahead. Crockett, of BusinessWeek's Chicago bureau, is covering the telecom show

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