Inside Verizon’s Fiber Plans

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Faced with a declining base of residential and business telephone lines, Verizon Communications Inc. has launched an ambitious fiber-to-the-premises buildout to deliver high-speed data, voice and even video services to its customers.

The move represents a fundamental transformation from copper-based plant to a fiber-based architecture on the wireline side that will complement Verizon’s growing wireless business.

“We’re passing 1 million homes by the end of this year, across nine states,” said Sean Strickland, executive director of Verizon’s FiOS video product-line management. FiOS stands for fiber-optic services, which will allow Verizon to deliver its customers telephone service, data at rates as high as 30 Megabits per second and video content.

FIRST THREE SITES

Verizon began its FTTP construction in Keller, Texas; Tampa, Fla.; and Huntington Beach, Calif. It will spend $800 million in those communities, plus six other states, to hit the million-homes-passed mark in 2004.

Another 1 million homes are scheduled to be built in 2005.

“This is not a trial,” Strickland said.

Verizon already is actively selling voice and data services in Keller, including the 30-Mbps data product.

Video will come next year, according to Verizon chairman and CEO Ivan Seidenberg.

“We are putting in some headends and getting ready to offer a video product in the first half of next year,” he told a Goldman Sachs & Co. media conference last week. “We’re getting ready to launch.”

Seidenberg said the FTTP build is a way for Verizon to bust out of the constricted-bandwidth environment of copper, allowing it to offer expanded data offerings and video content to compete with cable.

Verizon has a realistic construction schedule, Strickland said. “We developed the processes to be more efficient in this scale of build and balanced that against the capital budget. The goal is to build as quickly and efficiently and economically as we can.”

VENDORS, SERVICES

Verizon contracted with Advanced Fiber Communications to provide optical line transmitters and optical network terminals on either end of its fiber build. The ONT provides Verizon the ability to offer video, voice and data services.

The ONT includes a coaxial cable interface for eventual video services, a terminal for wireline phone and an RJ 45 jack for data. Homeowners would run standard CAT-5 wiring from their PC to the ONT, typically mounted in the garage, for direct access to high-speed data service.

“We can set up multiple PCs on that router,” Strickland said, and do wireless or wireline routing. A second OLT/ONT vendor will be named next year, Verizon said.

Seven companies are supplying Verizon with fiber: Corning Cable Systems, ADC Telecommunications Inc., Preformed Line Products Co., Tyco Electronics, Sumitomo Electric Lightwave, Pirelli Communications Cables and Systems North America, and Fiber Optic Network Solutions.

In Keller, Verizon is offering plain old telephone service and three tiers of data service that mirror cable, and far exceed digital-subscriber-line transmission rates.

There is a 1.5 Mbps downstream service available for $29.95 a month as part of a bundle. A second service at 5 Mbps downstream and 2 Mbps upstream is available for $39.95 a la carte, or for $34.95 a month as part of a phone bundle.

The 15-Mbps downstream, 2-Mbps upstream service is priced at $39.95 a month a la carte and $34.95 within the bundle.

Verizon also has a super-sized offering — 30 Mbps downstream, Mbps upstream — for $199.99 per month, a la carte.

CONTENT DEALS

In addition to the increased speed, Strickland said Verizon is offering content and applications in the lower tiered packages, including content from Real Networks Inc., Microsoft Corp. and WildTangent.

“It enforces the value of the broadband connection,” he said. “We have a multipronged approach. We call it valued-added services, which includes security, remote premise mentoring, etcetera. We have an initiative to develop a bevy of partnerships that will be integrated into offering.

“The premiere partnership is with MSN,” he said, including Microsoft’s Encarta encyclopedia, Microsoft Money, a Major League Baseball package and MSN Video clips. “That’s our premium partner.”

He added: “We are aggregating our own set of content providers. We have a deal with Real Networks and WildTangent [for games].” Some of that content is available at an additional charge, he said.

Strickland said Verizon is working on its video offering, having hired former Insight Communications Co. executive Terry Denson last month.

“Terry has provided a lot of great insights into the structure and strategy to work that’s been done,” he said. “The reception has been very positive from programmers.”

Verizon is no stranger to the video business. It owned GTE Corp.’s video operations in Florida and California, before selling them off. And chairman Seidenberg has served on the board of Viacom Inc.

It’s presumed Verizon will offer a full set of video channels, plus video-on-demand, HDTV and digital video recorder service, but executives are playing their cards close to the vest.

“We recognize there is a table-stake requirement out there,” Strickland said. “We’re not trying to reinvent the wheel. There is a customer experience expected by the marketplace.”

VIDEO GEAR DUE

Video, of course, will require video equipment. Cable-equipment vendors say privately that Verizon is looking at traditional headend gear to handle satellite signals, as well as specific technology for HD and VOD, for instance.

All that would, of course, require a set-top box. Both Verizon and Motorola Inc. have declined to comment on a report issued in August by Needham Co. analyst Anton Wahlman that Motorola had won the set-top deal for Verizon’s video business.

Motorola wasn’t selected for other parts of the contract, Wahlman wrote, so he speculated that Verizon would throw the set-top deal Motorola’s way as a make-good. Verizon also is a large buyer of Motorola wireless phones, so a set-top deal could be an extension of existing customer premise equipment deals that Verizon can leverage for strong pricing.

In any case, some familiar cable names will likely end up supplying Verizon with equipment, even if the transport structure — fiber and optical-line transmitters — looks a bit different from cable’s.

“They are looking at headend gear,” said one cable-equipment vendor. “They will need IRDs [integrated receiver/descramblers].”

The MPEG-2 (Moving Picture Experts Group) video could be sent through Internet-protocol transport streams on the single strand of 860-Megahertz fiber Verizon plans to use for video.

“They could run it through an IP decoder instead of a QAM,” said one vendor. “It would be MPEG-2 through UDP-IP,” or user datagram protocol-Internet protocol.

Verizon could buy standard VOD video servers with Gigabit Ethernet outputs. The telco could then use the UDP-IP streaming protocol to transmit VOD content. “The set-top box, pump and transport network needs to support it,” said one cable-equipment vendor.

Fiber changes the topology. “There is no more [quadrature amplitude modulation],” said the vendor. “And they have enough bandwidth, they don’t have to do switched broadcast.”

Vendors said it’s important to Verizon to match cable and direct-broadcast satellite.

“They have to be equal,” one said. “They have no choice.”

PROGRAMMERS HAPPY

And that’s good news for programmers. Viacom Inc. co-chief operating officer Tom Freston spilled the beans on Verizon’s video headend in Tampa at Goldman Sachs’s conference, forcing Seidenberg to comment on it the next day.

Freston predicted Americans will have their choice of two DBS and two wireline competitors going forward. “All that bodes well for companies like Viacom,” he said, which have lots of programming assets for use in different platforms, including wireless.

Another programming executive, however, took a more cautious view, remembering instances in which telcos promised to launch video, but didn’t. “We have been left at the altar before,” said one.

Still, said one, “pure content is a good place to be. The pipe is somewhat of a commodity. Content isn’t a commodity.”

Verizon, of course, is already in the video business, through its partnership with DirecTV Inc.

“DirecTV is very important to us,” Strickland said. “We’re not going to take it lightly,” when asked about selling video through DBS and through its own FTTP plant.

“My objective is to make a product that’s more compelling than anything out there,” he said, but added, “We want subscribers to choose the platform that’s right for them.”

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