Well Connected
Verizon Communications Inc.

Verizon Communications is betting its future on fiber-optic technology in an audacious bid to compete head-to-head with cable companies around the country. But the company's ambitions have been frustrated by the need to go from county to county to reach franchise agreements in order to launch fiber-optic TV services. Cable companies won similar franchises decades ago.

Verizon and fellow telecom giant AT&T have been pushing for a revision of the 1996 Telecommunications Act. Legislation to ease franchising rules passed the House in June but is stalled in the Senate. The bill would allow Verizon and other telecom companies to offer voice, data and pay-television service nationwide without local agreements but by applying for franchises with the Federal Communications Commission.

In the meantime, Verizon has sought changes at the state level. California, Indiana, Kansas, New Jersey, North Carolina, South Carolina, Texas and Virginia have passed legislation to allow statewide franchising. Similar bills have been introduced in Florida, Michigan and Missouri. Since Verizon launched fiber-optic TV services in Keller, Texas, in September 2005, it has accumulated more than 130 franchises, covering more than 3 million households in nine states.

AT&T operates in fewer states that have passed such legislation than Verizon does, and it has not actively sought franchises, potentially leaving Verizon in better shape should the telecom legislation fail in the Senate.

Since 2004, Verizon has invested about $4 billion rolling out fiber wires in communities from Texas to California and New York, according to analysts. In September 2006, it announced it would spend $18 billion by 2010. The eventual aim is to swap out all its traditional copper wire connections.

Former Rep. Thomas Tauke, R-Iowa, who is now Verizon's executive vice president, said at a summit in Aspen, Colo., in August 2006 that the company is delivering the fastest Internet access in the marketplace. "Customers go online at speeds up to 50 megabits per second on a network capable of evolving to 100 megabits and beyond," he said.

The rivalry between video newcomers and already established cable companies in the same market could end up benefiting consumers. In 2003, a government study examined the impact of competition on cable rates and service and found that "cable rates are substantially lower (by 15 percent) than in markets without this competition."

But the telecom legislation that would speed up bringing in new customers has stumbled over the issue of "network neutrality." Since 2003, the Federal Communications Commission has eased regulations on the "Baby Bells," the seven regional phone companies that were carved out from the old AT&T monopoly in an antitrust settlement in 1984. The deregulation has stoked fears that dominant telecommunications and cable companies would discriminate in the speeds with which they offer Internet connections, favoring their own services and their clients' services.

Net neutrality advocates — including lobbyists from eBay, Google and Yahoo! — say Verizon and AT&T could also impose fees on Internet content providers.

Verizon says it would not block consumer access to Web sites, but it opposes legislation preventing it from doing so. In January 2006, Ivan Seidenberg, Verizon's chairman and chief executive officer, said at the International Consumers Electronics show in Las Vegas that providers of bandwidth-intensive applications should share the cost of operating broadband networks. "We have to make sure they don't sit on our network and chew up bandwidth," he said.

Neutrality rules scare Bell companies, and an analysis of their FiOS, or fiber-optic service, financial statements demonstrates why. Currently, Verizon spends $873 to string its wires past the average home and an additional $933 to send technicians and physically connect wire to a customer's home. Because only 15 percent subscribe to FiOS, that averages $6,753 per customer.

By 2010, Verizon estimates that the cost will drop to $700 per home and $650 per connection. But even assuming this best-case scenario, in which about 40 percent subscribe to its FiOS Internet or TV service, the cost per customer would average $2,400. It would still take about two years to recover costs from a customer who takes all three services: voice, video and broadband data. "Verizon is betting on getting money from someone else besides the end-users," says University of Southern California economist Simon Wilkie, the former chief economist at the FCC.

Verizon was formerly Bell Atlantic, one of the original Baby Bells. Bell Atlantic nearly doubled its size with its 1997 acquisition of fellow Baby Bell NYNEX Corp. for $25.6 billion, at the time one of the biggest takeovers in corporate history. The company then merged with GTE Corp. in a $53 billion deal in 1999.

Verizon rose to the top of the wireless business in 2000, when Bell Atlantic combined its wireless operations with those of Newbury, England-based Vodafone Group Plc. The new company was the first with a nationwide wireless footprint and common digital technology. Verizon Wireless is now a separate company.

In January 2006, Verizon completed its acquisition of independent long-distance carrier MCI, formerly WorldCom, a cash-and-stock transaction valued at nearly $8.5 billion. It now owns more than 270,000 domestic and 360,000 international route-miles of fiber-optic cable in more than 140 countries.

In 2002, when MCI operated as WorldCom, the firm went bankrupt after illegal accounting practices, including the largest corporate fraud case in the nation's history — a total of more than $10 billion in inflated profits.

Verizon operates 48.8 million access lines in 28 states and Washington, D.C. The domestic operation provided almost 50 percent ($37.6 billion) of Verizon's 2005 operating revenue. Verizon Wireless's joint venture with Vodafone Group has the second-largest U.S. wireless customer base after Cingular Wireless, with 51.3 million Verizon subscribers at the end of 2005. The number of subscribers nudged up to 54.8 million by mid-2006, according to a Goldman Sachs report. The service ranks among the best in wireless customer satisfaction and attributes its reputation to network investments and upgrades. Outside the U.S., Verizon operates 5 million access lines and provides wireless services to about 31 million customers.

— Alejandra Fernández Morera, Drew Clark

October 2006

Sources: Company Web site, Government Accountability Office Web site, Hoover's online, J.D. Power and Associates, National Journal, Securities and Exchange Commission filings

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