Are the billions being spent on the "last mile" worth it?

Jordan Golson — Tue, 19 Aug 2008 11:27:46 -0700

Verizon is spending $23 billion on its fiber-to-the-home, or FTTH, initiative. The service, called FiOS, will ultimately reach 19 million homes in Verizon territory, roughly half of the company's total customer base. Verizon's total estimated cost per customer? Around $4,000.

Verizon's FiOS is a particularly expensive high-speed data solution because it involves running fiber lines directly to an optical network terminal (ONT) on the side of the house, replacing the old-school copper network interface device (NID). Not only must technicians run fiber line through individual neighborhoods on the existing telephone poles (or underground), but whenever a new customer signs up for FiOS service, a tech must physically install the ONT. This process is time- and labor-intensive, but it sets up the customer with a very high-speed connection which could last them for years.

AT&T has a "competing" service called U-verse which attempts to do much the same thing -- but cheaper. Instead of running fiber all the way to the home, replacing all existing copper infrastructure, the company installs network terminals called VRADs which can supply a few hundred homes in individual neighborhoods. Then, AT&T techs use the copper lines already running to individual houses to go "the last mile." As a result, CapEx spending on retrofit installs is significantly cheaper than what Verizon is doing -- possibly more than 50 percent cheaper. On new installations, AT&T runs fiber all the way to the home in the same way that Verizon does for all FiOS installs.

Verizon's scheme is very expensive, but is -- theoretically at least -- more future proofed than AT&T's. Whereas AT&T's VDSL/copper wire solution works well enough for today's data needs, 25Mbps (50 Mbps is occasionally available depending on distance) falls short when compared to the data Verizon can push. Verizon's FiOS can theoretically be cranked up to 2.4Gbps/1.2Gbit on the newest equipment. Once Verizon has run fiber to a customer location, it won't need a speed upgrade for many years.

Though AT&T's install is cheaper per home, Verizon is OK with the additional spending. "The network ... is pretty future-proof," according to Verizon SVP Robert J. Barish. Not everyone approves of Verizon's scorched earth capital expenditures. Craig Moffett, an analyst with Sanford C. Bernstein told the New York Times "If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I'd have some seriously happy customers." Moffett claims Verizon will have blown $6 billion on the FiOS project after squeezing as much revenue as it can out of it.

David Barden of Banc of America Securities thinks Verizon is better off for the additional spending, and new investors will reap the rewards. He told the Times, "the 2008 investors owe the 2003 investors a debt of gratitude because the 2008 Verizon is in a vastly better competitive position than it otherwise would be."

As for AT&T? The company's step-by-step approach allows it to spread the capital expenditure spend over time. Its current U-verse product is good enough to compete with FiOS and Cable offerings available now and leaves AT&T the option to run fiber the last mile at a later date, when fiber prices may be lower. John Donovan, AT&T's CTO thinks the smarter choice is to get as much life out of existing copper lines as possible. He told the New York Times, "the ideal way to deploy technology is on the last day as fast as possible, because it gets more capable and cheaper every day."

Time will tell which plan -- Verizon's or AT&T's -- is better, but one thing's for sure. They aren't competing directly, so for the consumer, it doesn't really matter. If you live in Connecticut, you get AT&T. If you live in Massachusetts, you get Verizon. Your choice between the two is made based on geographical area. The only place the two companies are actually competing is on the stock market -- and the marketplace of ideas.

(Writer's note: Much of the sourcing for this article came from meetings I've had with AT&T, plus a pair of New York Times articles. Verizon's FiOS: A Smart Bet or a Big Mistake?, and A Bear Speaks: Why Verizon's Pricey FiOS Bet Won't Pay Off)

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