Cable Tech

Verizon's FTTP Demo Helps AFC

The town of Keller, Texas, got its name in 1882 when its citizens agreed to name their hamlet after a foreman of the Texas and Pacific Railroad, which had just bought a right-of-way through the town for $25. In exchange, the railroad made Keller a stop on its line, though judging from the town’s current size -- just over 19,000 -- a commercial explosion failed to ensue. (The previous name of the place was "Athol," however, so the townsfolk probably made a good choice.)

Let’s hope better fortunes befall Keller as it prepares to let another big business exercise its right of way. Verizon Communications Inc. (NYSE: VZ) today will host a press conference in the town to report the progress of its fiber-to-the-premises (FTTP) deployment in Keller. In addition, the company is expected to announce eight other states where it plans to roll out FTTP this year as it pursues its much-touted goal of running fiber past 1 million U.S. homes by year’s end.

The event could bolster confidence in Verizon’s FTTP rollout among investors and industry watchers -- a positive, if intangible, result. But the carrier’s FTTP equipment vendor, Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), stands to gain a more concrete benefit: a goose to its stock price. During the past three months, doubts about Verizon’s FTTP deployment and its relationship with AFC have driven the equipment makers’ stock down 44 percent, from $27.50 to $15.50 (see AFC/Verizon Glitch Alleged). Investors got particularly spooked in February when AFC had to pay a $2 million penalty for late delivery of software to Verizon. But yesterday, after Verizon announced its upcoming press conference in Keller, AFC’s shares closed at $17.50, up 11 percent from the previous day’s close.

“To me, this [press conference] is just confirmation that AFC has received this contract, and it isn’t like early DSL, where you got a contract and nothing happened -- this is actually taking place,” says Joe Noel, an analyst at Pacific Growth Equities Inc. “I think Verizon is going to stick their neck out tomorrow and say all of this is happening, we’re committing a lot of capital to it -- and it’s such a public statement that I don’t think Verizon is going to be able to back off from this and next month say, ‘Oh, we were just kidding.’ ”

Verizon has already shown that it is putting its money where its mouth is. In a conference call with analysts on April 27, the company’s management said that more than half of the $2.6 billion that the carrier spent in the first quarter of this year went into three areas: Enterprise Advance (its network services for businesses), Evolution-Data Optimized (its wireless broadband Internet service), and FTTP (see Verizon Excels With DSL). “It certainly sounds like they’re going to be spending money on FTTP,” Noel says.

To date, fiber to the home has been a nonstarter in the U.S. A recent report by Deutsche Bank AG estimates that fewer than 200,000 U.S. homes are passed by fiber. Yet the bank’s analysts argue that there is “simply no alternative” for Baby Bells than to deploy FTTP if they hope to compete against voice, data, and video services from cable, satellite, wireless, and voice-over-IP carriers. The question is whether enough subscribers will sign up for the Bells' video and data services to cover the carriers’ costs. Deutsche Bank estimates that if a Bell company can penetrate 15 percent of the residential video market and receive $40 in average revenue per user, it can recoup its investment in FTTP in 10 to 15 years.

Of all the Bells, Verizon has made the strongest commitment to FTTP, pledging to spend $1 billion on its deployment this year. Its rollout in Keller should reassure shareholders of AFC, which has a contract to supply FTTP equipment to Verizon through 2008 (see AFC Finalizes Verizon FTTP Contract). The equipment maker expects to generate $20 million to $30 million in FTTP revenue this year, the bulk of it coming from Verizon. Next year, Verizon plans to run fiber past 2 million additional homes, and as a result, AFC’s FTTP revenues in 2005 will more than double to $89 million, according to the estimate of Simon Leopold, an analyst at Morgan Keegan & Company Inc.

Any rise in stock price that AFC gets out of today’s Verizon news will be a “double-edged sword” for the equipment maker, Leopold says. AFC’s chairman and CEO, John Schofield, recently explained to Leopold why a sale of the company might make sense (see AFC Chief Says Sale Makes Sense). “Positive news on FTTP makes the company more attractive as an acquisition because that’s a growth engine, but it also raises the stock price, making an acquisition more expensive,” Leopold says. With AFC’s stock at $17.30, its market capitalization stands at $1.5 billion. Its likeliest acquirer, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), has $1.2 billion in cash and would have to acquire AFC with a combination of cash and stock.

— Justin Hibbard, Senior Editor, Light Reading

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lastmile 12/5/2012 | 1:45:57 AM
re: Verizon's FTTP Demo Helps AFC The "Baby Bells" have long regarded networks built on fiber optic cables as the ultimate weapon to fight off challenges from cable companies and new competitors. Such networks could carry video on demand, telephone calls and Internet downloads at speeds more than 30 times faster than today's fastest home broadband links.

Wall Street analysts put the cost of connecting one customer to fiber at between $1,300 and $1,700, compared with $1,000 for a conventional phone line.

This information is a copy from recent press releases regarding FTTP/VZ. In terms of cost the difference between a conventional phone line and fiber is catching up fast. FTTP/FTTH is inevitable.

JoeBagadonuts 12/5/2012 | 1:45:57 AM
re: Verizon's FTTP Demo Helps AFC It seems that once a month we are treated to press coverage that flouts FTTP and by default, AFC, but with no real skepticism by the writers or the Street analysts who claim to know something about this market. Answer me this....

Why do the BOCs need to spend upward of $2,000 in wiring costs per subscriber just to get into the CATV business (and that equipment costs a whole lot more) if all they are going to command in revenue is an extra $60-70 per month in revenue that they then have to kick back a substantial portion of in the way of programming fees?
Scott Raynovich 12/5/2012 | 1:45:56 AM
re: Verizon's FTTP Demo Helps AFC JoeBag,

Your points are well taken. Last fall we wrote the definitive report on this, which I thought was cool-headed, hype-reducing anlysis:



BigBubble 12/5/2012 | 1:45:55 AM
re: Verizon's FTTP Demo Helps AFC Yeah, FTTP might be inevitable but the excitement over this is gone. Margins on the equipment for FTTP has been cut to a point that even if it happens , equipment vendors won't make much. I would not be surprised that some of the vendor's selected by Verizon sell out on this. It would be a good exit strategy.

JoeBagadonuts 12/5/2012 | 1:45:53 AM
re: Verizon's FTTP Demo Helps AFC Video on demand is a joke. Period. End of story. Secondly, who cares if you can download stuff 30 times faster? You would need radically improved CPE in the home to do it and not to mention some radical network upgrades elsewhere. Lastly, what makes you think that people are going to shell out big $ to buy content more so than what they already are?

Stop listening to Wall St.. Those idiots have no clue as to what they are talking about. First of all, all we can talk about here are new builds, not replacement. If we have learned nothing over the past few years is that BOCs do not replace old technology. Secondly, the new builds out there are being subsidized in part by builders of new home sites.

Lastly, when are people ever going to learn that believing what you hear in a press release is like believing in the tooth fairy?
mrcasual 12/5/2012 | 1:45:52 AM
re: Verizon's FTTP Demo Helps AFC Forgetting VOD as a specific app, FTTH is really about content and service delivery.

Think of it, if the cable companies start getting decent uptake on phone services, along with TV and internet service they already provide, then the RBOCs are in trouble. The cable CO's have an advantage in that they are inherently "broadband capable" to every house they serve, not withstanding the limitations of the distribution plant. They currently offer broadcast video, internet, etc. If they can successfully offer phone service, then as a consumer, you can pay for on service bundle that gives most (all ?) of what you want.

The RBOCs have been limited to DSL because they service the vast majority of their customers via twisted pair. Until recently they had no incentive to roll trucks and dig trenches to deploy fiber.

For the RBOCs to really play in this game they need to start offering content / services in line with what the cable guys do, i.e. broadcast TV, PPV, maybe some VOD over and above the internet and phone services that they currently provide.

Of course all of this is subject to a regulatory swamp that will make lawyers rich for years to come.
stephenpcooke 12/5/2012 | 1:45:48 AM
re: Verizon's FTTP Demo Helps AFC The one thing that cable MSO's can't match the main telecom carriers on is wireless. The MSO's have the broadcast TV/entertainment which the carriers don't. The MSO's are starting to scratch the surface of wire-based telecom services however they will find it incredibly difficult to get into wireless services (frequency licenses, etc.).

Regulation, or lack of, in the near future will play a big part in shaping the communications industry of the next 20 years (as well as developing the two biggest markets on the planet).
Steeler 12/5/2012 | 1:45:45 AM
re: Verizon's FTTP Demo Helps AFC if you believe all the FTTP nonsense, then you probably believed this....

MAY 19, 1994

* Bell Atlantic to Build Interactive Digital Network; *
* Customers to Receive Video Entertainment *
* and Information Services *

Washington, D.C. -- Bell Atlantic (NYSE: BEL) today launched a
program to begin building its full service network, the Bell Atlantic
Network (BAnet), in six major markets within 18 months and in 20
mid-Atlantic markets within five years.

The company announced it has selected suppliers for the major
components of the system, and Bell Atlantic is taking other steps to
create this powerful, open and flexible network. As a result, Bell
Atlantic customers will be the first in the nation to receive video
services provided by their local exchange carrier over its own network.

"We will start by offering video programming, including
entertainment, news and other information services over the new system,"
said Jim Cullen, Bell Atlantic president. "The system will be capable of
two-way service, and it will carry both traditional analog and digital
information as well as the new interactive services. We plan to make
interactive multimedia television (IMTV) available starting 1995. While
we have conducted trials, this will be the first commercial IMTV

Bell Atlantic alone among the regional Bell companies has the
authority to offer its customers video services, having won a court ruling
in August 1993 to provide video programming in its own service area.

Stu Johnson, Bell Atlantic group president -- large business and
information services, said, "Bell Atlantic video programming will be
better than cable TV, with more choices, higher quality and packages of
programming tailor-made for individual customers. Finally, consumers
will have a real choice for home video services without being held hostage
by a single cable TV provider, trekking to the video store or settling for
the limited broadcast fare."

Bell Atlantic today announced four major steps in launching BAnet:

* Bell Atlantic has selected AT&T Network Systems (NYSE:T) as prime
contractor for the project. General Instrument (NYSE:GIC) and BroadBand
Technologies (NASDAQ:BBTK) will also help build BAnet. This construction
program is part of Bell Atlantic's $11 billion capital program for the
next five years.

* The company also announced that BAnet will be deployed in six major Bell
Atlantic markets starting in 1995. Those markets are northern New Jersey,
the Philadelphia, Pittsburgh, Baltimore, Washington, D.C. metropolitan
areas, and Virginia Beach, Va. Bell Atlantic plans to offer the service
in the rest of its 20 largest markets by 1998.

* Bell Atlantic will file soon the documents required under section 214 of
the FCC code to be permitted to build video dialtone networks of this

* Bell Atlantic is supporting a multi-industry coalition, the "Open
Set-top" Executive Interest Group, representing major technology and
service providers. The group will work to create standards so customers
can use one set-top terminal to receive broad band services from a variety
of video information providers. The industry group will be formed under
the Corporation for Open Systems International which will coordinate this

Bell Atlantic's BAnet will have tremendous capacity with the
ability to carry hundreds of video channels. Under FCC rules, BAnet is a
video dialtone network and open to all who wish to offer their services on
it. The system will carry information and entertainment from Bell
Atlantic as well as services offered by others.

"Our interactive digital system is flexible in three important
ways," Jim Cullen said. "First, customers can choose the programmers,
providers and specific services they want; second, BAnet includes a
variety of technologies, and third, our 'just-in-time' deployment plan
means we can deploy BAnet where and when it makes good business sense for
us and our customers."

Bell Atlantic will rely on a variety of technologies in its full
service network. The company will use a switched digital hybrid
fiber-coaxial platform, a switched digital fiber-to-the-curb platform or
an ADSL (asymmetric digital subscriber line) approach which employs the
copper network already in place. The companies who will help build the
network under this strategic deployment plan responded to a Bell Atlantic
request for quotation issued Dec. 8, 1993.

AT&T Network Systems will be the systems integrator and prime
network contractor for the project. In addition to assuring that all
aspects of the network -- from central office to home terminal -- work
together, AT&T will be the major network equipment supplier.

Richard A. McGinn, president and chief operating officer of AT&T
Network Systems, said, "Our goal as prime network contractor is to help
Bell Atlantic rapidly offer consumers connections to BAnet, an open and
flexible network that will provide a whole new world of interactive
multimedia services."

General Instrument will provide the next generation analog and
digital addressable set-top terminals capable of supporting interactive
multimedia. GI will also provide end-to-end access control, encryption
and digital compression technologies. In support of AT&T and as a
subcontractor, GI will provide video distribution equipment.

BroadBand Technologies, a subcontractor, will provide network
elements to support switched digital fiber-to-the-curb architecture.

"We are delighted that Bell Atlantic has once again selected our
system as an important element in their broadband deployment," said Salim
A.L. Bhatia. president and CEO of Broadband. "Switched, digital video
over fiber-to-the-curb will enable Bell Atlantic to offer unique and
truly interactive services to its customers."

"We will begin building our new network predominately using the
AT&T/GI approach," said Larry Babbio, Bell Atlantic executive vice
president and chief operating officer. "However, we will build those BBT
systems that are already planned in New Jersey, and we expect other
deployments using BBT's switched digital fiber-to-the-curb systems as the
multimedia market develops."

"Under our just-in-time deployment strategy, we will put the
essential elements of the full service network in place, and we will add
the final link from our network to the home -- cabling and electronics to
actually deliver service to an individual customer -- only when the
customer wants it," Babbio said. "Furthermore, the flexibility of this
network allows us to offer IMTV services as soon as markets are ready for

Babbio said ultimately today's telephone services will be fully
integrated with the new system. "Our customers will have the same
reliable, high quality, low cost basic telephone service they've always
had, but they also will have the opportunity to use advanced IMTV
services," Babbio added.

The Bell Atlantic strategic deployment plan builds on earlier
company announcements of its intention to make broadband interactive
multimedia services available to up to 8.5 million homes in the company's
mid-Atlantic region by the end of the year 2000.

Bell Atlantic is the established leader in developing video
services for telephone systems. The company has unique experience as a
result of its technical trials, its wide deployment of fiber optic systems
and its deployment of advanced telephone switching and other systems.
The company is building a digital production center in the Washington area
at Reston, Va.
Y2KickIT 12/5/2012 | 1:45:43 AM
re: Verizon's FTTP Demo Helps AFC FTTP is real, look at Japan.

RBOCs have no choice, in fact they may be too late. They have to maintain the copper plant even though line counts and customers drop away to triple-play cable companies, and voice lines drop to cell phones.

FTTP has lower OPEX and CAPEX is about the same. The problem is that to build out fast enough will impact the bottom line and stock price for years, not to build out fast enough and you continue to lose market share while have unused copper plant you can't abandon adding to the pain.

The only other option is voluntary structural separation. Divest itself of the CO and local loop as a separate company.
lastmile 12/5/2012 | 1:45:42 AM
re: Verizon's FTTP Demo Helps AFC Scott and Steeler:
Exactly 10 years ago
1.FTTP/FTTH did not exist.
2.The telecom act of 1996 did not exist.
3.There was an abundance of revenue from basic telephone service.
4.No one heard or talked about VoIP.
5. Fact: 10 years later The RBOC's need to upgrade just to survive.
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