DSL Prime: A Tale of Two RBOCs

One's investing and the other isn't. That explains an $18 billion difference in market cap from similar assets.

by Dave Burstein DSL Prime [January 30, 2004]

Seidenberg:
"Absolutely no fear about moving down the broadband path"
Adam Quinton asked why Verizon was investing in fiber and expansion while SBC and BellSouth were holding back. Ivan was clear:

"This is the core of what all the leadership of Verizon believes. I'm a big believer in investing in our business. Resale and bundles are not enough. You have no control over customers and margins if you do that. Our responsibility is to create the network, by building. We were first into long distance, and now everyone is doing that. We were first to differentiate our wireless with a better network, and now we lead the industry. We're not worried about cable competing. We're ready for the game. We will get to 50 and 100 Mbps."

Wall Street agrees, with Verizon opening a $18 billion gap over SBC in market cap. For four years, the prices were nearly identical. In the last 18 months, SBC invested about $6 billion less in their network, raised dividends, and is disinvesting through a stock buyback.

The underlying assets of the companies are remarkably similar, with roughly the same subscriber and income potential. Verizon has stronger wireless, SBC has much less debt. SBC hoped drastic cutbacks to raise short term investor payback was the right strategy; the market is seeing that stupid for the future, and Quinton has a "sell" rating on them. The experts often have it all wrong on where stock prices will go, but I am sure dis-investing is wrong for the company's future.

Babbio "Broadband access to every customer
Expand DSL availability by 7 million lines"
I almost jumped for joy at Larry Babbio's slide 26, with the quote above. He put "Drive increased DSL penetration" as the first consumer priority. "Greater DSL availability" was the lead on network policy. Verizon extended coverage to 80 percent in 2003, and the 7 million lines planned for 2004 will match the 90 percent plans of Bell Canada and Telstra. Germany, France, UK, Japan, and others will soon be at 95 to 98 percent, especially as repeaters become cheaper.

Bobbi Henson of Verizon writes, "It will include a combination of new COs, RTs, improved loop qualification processes, etc." DSL Prime has reported these costs as reasonable, and the investments as profitable.

Where Whitacre promised to go before
Ed Whitacre in 1999 made a similar promise, to get to 80 percent in 2002 and "all our other customers, possibly using other technologies, a few years later." He spoke watching how the technologies develop. Since then, DSL equipment has become so affordable it's the natural choice wherever wires are in place. By later this year, the Bells will be buying DSLAMs for $50/port that have 25 percent more reach and 5 to 15 times the performance of what was available in 1999. Bill Smith of BellSouth tells me their Navini trials in Daytona are going well, and fixed wireless may have a role in some places; 1 to 4 percent are perhaps best served with satellite.

Mike Powell again has called "affordable broadband to all Americans" his highest priority. Powell (and the press) should ask the former Chairman, Bill Kennard, about the commitments Whitacre made directly to him. Whitacre should honor his word.

SBC to 6 Mbps
"A 1.5 to 6 Mbps package teetering close to cable's $45 price point," Karl Bode or Broadband Reports notes as "unsubstantiated rumors," but backs the story with confirmed details of SBC offering similar through DSL Extreme and Sonic.net at $45 to $69. My first headline had a question mark, but thinking through the logic of the decision I decided the move is inevitable, sooner or later. SBC has been a leader in reducing costs through peering and upgrading their wide area network, including aggressively purchasing dark fiber out of district. It makes sense to leverage those costs for a more attractive consumer offering. I've reported directly from Yahoo BB and Korea Telecom that the backhaul costs go up only a dollar or two with the higher speeds. Cable is at 3 Mbps, going to 5 and 9 Mbps. Bode also observed that the cable "speed increases" merely get the cable side back to the 10 Mbps of the 2000 @Home network. Broadband Reports is breaking more net and telecom stories than many major newspapers.

"Adverse selection" can affect costs, skew analysis
If only a few self-selected users get the higher speed, they could well each raise costs more than the dollar or two I report. When the high speed costs $179, presumably many who pay the price are addicted to the net. It's only with a large group that the average user with 6 or 20 Mbps adds little cost. The speed is wonderful to have when you need it (downloading Microsoft patches, game trials) but little used the rest of the time. Web surfing rarely goes faster than 1 Mbps at most sites. After building a library, most reduce their downloading.

Going for 400,000 quarters
To reach the projected 5 million at yearend 2004, SBC will need to match each quarter the 377,000 they achieved in Q4 of 2003. They've now reached 14 percent penetration in California and 10 percent over all. 2003 DSL/Internet revenue was $1.8 billon. Availability went up from 66 percent to 75 percent during 2003, and will hit 80 percent end of the first quarter. The incremental investment was so small they didn't even break it out of capex.

Copyright 2004 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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