Online Extra: Verizon: Stumbling But Unbowed

CEO Ivan Seidenberg knows investors have their doubts. He vows, however, that the telecom giant's investments will pay off in 2006

The stock of telecom giant Verizon Communications (VZ ) is down 22% in 2005, while the Dow Jones industrial average is only 5% lower. Verizon CEO Ivan Seidenberg admits that he has to do something about that sagging share price -- but it won't involve changing strategy. Seidenberg is determined to keep spending aggressively so Verizon can become a leader in the world of broadband communications.

He vows that 2006 will be the year in which Verizon proves it's on the right path. "Until you execute, you allow all the gossip and conspiracy theories to take over," Seidenberg says. "2006 will be the year where we control the performance of the business better. We'll be judged based on performance."

BusinessWeek Computers Editor Spencer E. Ante recently sat down with Seidenberg to discuss all the moves that Verizon is making to respond to the Internet upstarts, SBC Communications (SBC ), the cable companies, and a host of other challenges. Edited excerpts of their conversation follow:

How is the Internet changing the way Verizon operates?

The VoIP [voice over Internet protocol] providers change the form of communications, and therefore change the way we make profits from revenue streams. That's the reason we're doing things in a very big way, like providing our own broadband connections -- things like DSL and fiber. We're heavily investing in wireless. We're heavily investing in similar software. We're also providing voice-over-the-Internet -- VoIP -- services. It's not the death of anything. It just forces us to change faster.

There will always be a need for communications. But the form will change. We will have to be more wireless- and broadband-centric, than voice-centric, no question.

There's debate over the rate of change, though. Will the classic voice service eventually be free, not just decline? Will the revenues go away?

A lot of prognosticators out there are making Chicken Little arguments. In the last 10 years, we've created a $30 billion wireless business. So we're not sitting on our hands. During that same period, telecom revenues have shrunk maybe less than 10%.

So while revenue streams are being displaced very quickly, other ones are popping up. But it hasn't deteriorated to where it's out of business. And we've been taking costs out, so even though the business top line has shrunk, it's still producing significant cash flow and is profitable.

We have to stay away from the extreme viewpoints. Yes, we are obligated to find new solutions. That's why we are making a very big play in broadband. We think broadband will eventually create new revenue streams for us the same way wireless did 10 years ago.

The most frustrating thing for me is that our customers are so much more accepting and pleased with what we are doing [yet our stock is down] (see BW Online, 9/28/05, "Verizon: We've Got To Fix It"). We're winning surveys. We have never won so many awards. We're very confident we have a winning formula.

What are the new broadband revenues that could be created?

We've offered game sites, music downloads. We're in an early first-mover stage of people figuring out what the next generation of stuff is. Could every phone call be a video call? We can help make that happen.

There are categories of things that will explode. We'll carry it, we'll distribute it, we'll provide security for it, we'll host it, and in some cases we can be an investor in it. So I think there are plenty of places for us to grow our value once we get our network up and running.

AT&T (T ) President David Dorman said that MCI (MCIP ) no longer has an advantage in Internet expertise, that your edge is long gone, as shown by the departure of Vinton Cerf to Google (GOOG ) (see BW Online, 9/8/05, "Cerf's Up for Google"). Is that true?

You got to be kidding me. I don't think one person defines an entire company. There's plenty of expertise.

Dorman also said that while you have a considerable international asset base at MCI, you are not executing on it. Is that true?

How does he know? If you look at the results over the past couple of quarters, even the past couple of years, AT&T is shrinking faster in the enterprise space than MCI. There is room for further expansion in international. MCI has focused on the wholesale business the last few years. If you listen to the MCI people, the applications they are strong on are hosting, storage, and call centers. And they have rolled those out internationally.

Why did you want to acquire MCI over AT&T?

The focus, size, and overlap of MCI with us made it a better fit. We could absorb them more easily. It's not an issue of the quality of AT&T. I accept that AT&T is a great company. We acquired MCI because we think we will be in a position to grow faster than we were growing before -- and growing faster than we think SBC-AT&T will grow. That remains to be seen, but that's our view.

Were you annoyed that SBC lowered it DSL prices before Verizon?

Give SBC some credit. They lowered the price on DSL quicker than we did. We weren't ready with our systems to do it as quickly as we would have liked. Now we're seeing great results from it. We didn't do it a minute before we were ready because we would have seen great customer problems.

You recently reorganized your company to become more focused on the customer. Why did you do that? How important is that effort?

We're organizing ourselves around our customer segments: consumer, broadband, enterprise, and wireless. Our compensation and capital are geared to those segments.

We're working with our suppliers and partners to drive quicker changes. Every quarter we get new innovations from our suppliers. As we go into 2006 we'll be able to spend less capital to do the same thing. This "customer-first" issue to me is more powerful than people realize.

You've got to be close to the customer. And then adjust strategies. It defines why we're doing what we're doing. In the final analysis, beating my peers doesn't get us any points to go to heaven. Winning their customers gets us points to go to heaven.

Edited by Patricia O'Connell

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