The Bells Gang Up to Combat Cable

A new fiber-optic standard will lower the cost of rewiring the U.S.

Telecom revolutions have a way of sneaking up on you. They often start quietly in research labs, boardrooms, or legislative halls. The latest upheaval may be upon us -- and it's the result of rare industry cooperation.

In late May, Verizon Communications (VZ ) SBC Communications (SBC ) and BellSouth (BLS ) announced that they would jointly develop standards that will allow them to roll out ultrafast fiber-optic lines right to customers' doorsteps. By working together on setting standards -- much as they did in the '90s with DSL -- the Bells figure they'll be able to dramatically chop the costs of bringing fiber to the home. And that, in turn, should speed its rollout and give the Bells a lift as the battle with cable rivals over the markets for broadband and phone services heat up.

None of that will happen overnight. Deploying fiber nationwide will be costly and could take 10 years. But it's a mission the telcos must accomplish. Already, the cable companies have jumped ahead of the Bells, with 60% of the broadband market and a host of high-end digital-video services. Many are now pushing packages that include Internet, digital TV, and phone service, for example.

The Bells are counting on their fiber initiative to help keep cable in sight. All three have begun to lay fiber in select neighborhoods, including a Verizon project in suburban Virginia. Fiber to the home would boost connection speeds by a factor of 20, making current DSL and cable broadband services run like mules next to a Kentucky Derby champion. Faster lines could unleash an explosion of new services, ranging from video-on-demand to more realistic games. "A few years from now," says Danny Briere, CEO of researcher TeleChoice Inc., "we'll look back at this [pact] as a milestone."

Perhaps -- but the cable giants are hardly sitting still. On June 13, Pace Micro Technology, which builds digital-TV gear, unveiled a device the size of two cigarette packs that connects to a subscriber's set-top box and converts analog cable signals into digital. Selling for less than $80, compared with the usual $300 or more, the device will allow cable operators to offer cheaper high-definition TV, plus video-phone and fast Net service to customers reluctant to pay for such advanced offerings today. That means the cable giants could be even further ahead in broadband by the time fiber to the home becomes widespread.

Moreover, fending off their cable rivals isn't the Bells' only motivation for rolling out fiber. Their traditional voice business is no longer the earner it was. Average revenues fell 4.2% in 2002 and, according to UBS Warburg (UBS ), will drop 3.5% more, to $94.2 billion, this year as businesses spend less and users go wireless. The carriers need the boost -- even though they acknowledge that the standards agreement is no panacea for the battered sector. "The industry didn't get in this ditch overnight," says William L. Smith, BellSouth's chief technology officer. "And life won't be great again with the wave of a wand."

Still, the pact gets the ball rolling. With a single standard, equipment makers will be able to develop and manufacture the necessary gear -- optical switches and routers -- for far less. The joint effort is expected to lower the cost of installing fiber-optic gear to a single-family home from the current range of $1,500 to $3,000 to below $1,000. Says Ross K. Ireland, chief technology officer at SBC: "That's the reason for the three companies aggregating."

To further cut costs, the telcos will start deploying fiber in new subdivisions and to urban apartments and condo complexes, where the density makes the economics more appealing. For each company, the annual capital investment would add up to roughly $1 billion.

Before they shell out more money, though, the carriers are looking for help on the regulatory front. They want assurances from the Federal Communications Commission that they won't have to sell access to their fiber-optic networks at deep discounts to rivals, as they must do now with local voice service. The FCC is expected to clarify its rules soon.

The last time the Bells got together to reduce rollout prices, it paid off. A single standard for DSL in the 1990s let suppliers cut their prices, as expected. The carriers then aggressively marketed the new service. Today, 7.6 million households have DSL. When revenue-starved suppliers start bidding for the fiber contracts in July, it will be "a very positive step forward," says Jay C. Fausch, a senior director of marketing for French supplier Alcatel (ALA ) Indeed, it's just the sort of positive step that could spark a badly needed telecom revolution.

By Roger O. Crockett in Chicago, with Charles Haddad in Atlanta and Steve Rosenbush in New York

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