SBC Ratchets Up PON Politics

If you're looking to wager on the outcome of the RBOC fiber-to-the-premises (FTTP) initiative, you might want to first check on who's giving you the odds.

In the latest development, Edward Whitacre Jr., CEO of SBC Communications Inc. (NYSE: SBC), this week appeared to backpedal on SBC's support of a closely watched RBOC FTTP initiative.

In a speech given at a Morgan Stanley conference in Boston on Tuesday, Whitacre indicated that SBC had no incentive to build out FTTP, which requires passive optical networking (PON), because the costs of equipment and trenching are still too high. He also criticized the Federal Communications Commission (FCC) rules that require RBOCs to provide a channel for competitors in every situation where it replaces copper with fiber (see Fiber Surprise in FCC Rules? ).

Political comments from Whitacre are nothing new. He's often lashed out against government regulations (see Whitacre: Regulations Will Wither). But his cautious comments run counter to the recent swell of hype and hope for FTTP, which has helped buoy the stocks of access players such as Alcatel SA and Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI).

In one sense, not a whole lot has changed. Few folks have assumed that the slow-moving RBOCs would plunge headfirst into aggressive PON deplyment. And SBC has long been thought to be the least aggressive RBOC on the PON front -- with Verizon Communications Inc. (NYSE: VZ) and BellSouth Corp. (NYSE: BLS) leading the charge. On June 19, SBC joined with BellSouth and Verizon in issuing a long-awaited request for proposal (RFP) for PON technology, set for resolution by the end of the year (see RBOCs Hungry for Fiber, Vendors Await FTTP Shortlist, and Analysts Narrow RFP Odds).

"SBC will likely wait and see how Verizon does," says Sam Greenholtz, a principal with Telecom Pragmatics Inc. "FTTP will happen, but it's going to be slow and they will only do the easy jobs first."

One other analyst says that SBC's recent comments are tantamount to backing out. In a note today on AFC -- which is said to be on the shortlist for the RFP, along with Alcatel, Motorola Inc. (NYSE: MOT), and Quantum Bridge Communications Inc. -- analyst Joe Noel of Pacific Growth Equities Inc. says: "Officially, while SBC is saying they are staying in the joint RFP, they are also indicating their intent is to participate as an observer only..." He views SBC as "not a real participant in the RFP/FTTP process. We believe this event greatly reduces the importance of this RFP to potential equipment vendors."

SBC may be using its moment in the Sun to pressure the FCC into throwing even more bones to the RBOCs to stimulate an FTTP buildout. Some analysts think this might be a mistake.

"My first reaction was that this... is a big blow not only to FTTP but to the telecom industry as a whole," says Danny Briere, CEO of consultancy TeleChoice Inc. "A lot of morale has been riding on the FTTP contract." By throwing down the gauntlet to the FCC, Briere says, Whitacre also made the PON industry feel "conned."

What about the other RBOC participants in the FTTP RFP? Verizon spokesman Mark Marchand won't comment on the Whitacre speech. But he says the RFP's still on, though no deployment plans have been revealed. Analysts may have speculated a lot, he says, but Verizon hasn't said what it will do with the RFP once it's done.

According to Brent Fowler, a spokesman for BellSouth, that RBOC is "committed" to the FTTP project and intends to keep moving on fiber buildouts.

Some view Whitacre's talk as an unpleasant but necessary wakeup call for those who insisted on viewing this RFP with rose-colored glasses. Others say it's just political banter, designed to get the FCC to ratchet up favorable rules to spur RBOC investment.

"My personal view is that the RBOCs don't have any real intention of doing FTTP," says Tom Nolle, president of CIMI Corp., a telecom consultancy. He has long held that the RBOCs are testing the waters with this RFP, but with no specific end in view (see A Closer Look at PON Econ).

On top of all this, Whitacre championed copper-based DSL (not FTTP or PON) as the "key product in our fast-growing data business" in Tuesday's talk. SBC has added 304,000 DSL subscribers in the second quarter of 2003, he said.

Whitacre apparently had lots more to say, such as that SBC would continue to cut its workforce and that 2003 capex would be about $5 million, the low end of its projected range. Unfortunately, SBC has pulled the Webcast from its site, so it's tough to determine just what went on.

SBC spokesman Selim Bingol says rumors that SBC is withdrawing from the RFP are exaggerated -- and he avers that SBC never stated its deployment plans. Further, SBC was hoping for "clarity" out of the recent Triennial Review from the FCC, and "it's not there." As a result, he says, SBC will deploy FTTP "selectively," next year, in "trials and small buildouts."

One analyst thinks there's a middle ground between being majorly devastated and too hopeful. "There will be some greenfield deployments next year," says Steve Levy of Lehman Brothers. After that, it's likely FTTP growth will increase among RBOCs. But the growth curve will always be small. There's no news in that. "You can't throw cold water where there's no fire," he says.

— Mary Jander, Senior Editor, and R. Scott Raynovich, US Editor, Light Reading

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firstmile 12/4/2012 | 11:26:36 PM
re: SBC Ratchets Up PON Politics Ed is playing the game. They are going to roll out PON. He is just working the system, just like he always has.

And don't forget...if he does not do a few things to make it seem like he is really serious, then we (they) will not take him seriously.

Just playing the game...
"I'll take one card Mr. Dealer"

fgoldstein 12/4/2012 | 11:26:36 PM
re: SBC Ratchets Up PON Politics SBC's latest pronouncement is further proof that it's impossible to satisfy an RBOC, or to get it to cooperate with the spirit of the Telecom Act.

There's little in the Act to justify giving them a monopoly over greenfield buildouts, let alone overbuilds. TELRIC pricing is supposed to reflect forward-looking cost, i.e., what a greenfield would cost, *with* a reasonable profit. So if there were absolutely no exemption to unbundling rules, they'd still be making a fair profit. Indeed, their anti-TELRIC argument, that forward-looking costs don't reflect historic investment, is irrelevant to new investment. And today, Uncle Charlie announced plans to rework TELRIC to make it even more favorable to the ILECs -- if TELRIC is not realistic, it can be fixed.

Yet not only is that not enough, Ed won't even accept a 99.44% exemption from competition on overbuilds, where CLECs are allowed one stinkin' voiceband channel out of a high-capacity fiber. Talk about spoiled brat! Veruca Salt wanted it all, too.

The reality is that they aren't going to do much FTTP because the numbers aren't good. FTTP costs too much. The incremental revenues from an overbuild aren't very high, compared to copper, so the return isn't very high. For green fields, CSA is still cheaper for voice+DSL. And while SBC doesn't do cable, HFC does triple play cheaper.

But that's just economic reality, not something SBC or VZ are used to dealing with. They'd rather spin it as Yet Another Reason to gut the Telecom Act that they supposedly agreed to seven years ago. But it's just that, spin.

The only way to get FTTP going would be to split the ILECs in two, dividing the Outside Plant (with CO buildings) from the service and switching. The loopco would then be free to market loops including FTTP (regulated, at cost-plus) to any and all service providers willing to use it. http://www.ionary.com/ion-redi...
splitEndz 12/4/2012 | 11:26:32 PM
re: SBC Ratchets Up PON Politics fgoldstein said "The only way to get FTTP going would be to split the ILECs in two, dividing the Outside Plant (with CO buildings) from the service and switching."

I guess that means you won't be voting for Bush in '04, and can't wait for Powell's term to be over. The only way what you describe would ever have a chance is with a new administration, and Copps as the new FCC Chairman.

I also don't see why you think such a forced split would be a driver to "get FTTP going." Seems like they'd just whine even more.
splitEndz 12/4/2012 | 11:26:32 PM
re: SBC Ratchets Up PON Politics "Whitacre indicated that SBC had no incentive to build out FTTP, which requires passive optical networking (PON), because the costs of equipment and trenching are still too high."

First, it does NOT require PON. Second, they have no incentive because they can't even get to double-digit take rates on DSL, and have extremely high churn, and they can't compete head-to-head with entrenched cable TV. Why would things be any different over a fiber? They have no incentive because they'd be throwing additional good money after bad business (for them anyway).

The funny thing is SBC has its "one and only," much hyped Mission Bay FTTP deployment with Alcatel gear. Obviously that's not going real well and the Alcatel gear is too expensive. Any FTTP comments made by SBC would basically refer directly to that, since that is the only exposure they have.
rjmcmahon 12/4/2012 | 11:26:30 PM
re: SBC Ratchets Up PON Politics Why would things be any different over a fiber?

Fiber is an enabling platform. Think Moore's law (or giving a 16 year old access to a Ferrari http://www.ferrari.com ) Fraudband enables very little. Think PSTN (or giving a 16 year old access to an electric disability scooter. http://www.allelectricscooters...

They [SBC] have no incentive because they'd be throwing additional good money after bad business (for them anyway).

SBC needs to decide who they are. Are they a public infrastructure provider in which things like commitment to serve are fundamental to purpose? Or are they a private goods and services company in which competition is used to motivate? SBC (and their misguided peers) claiming one thing while behaving like the other only stalls our entire economy. Who is going to take responsibility for that?
Spade 12/4/2012 | 11:26:24 PM
re: SBC Ratchets Up PON Politics Based on the recent market moves by SBC and previously BellSouth, teaming with satellite video providers, the real issue would appear to be that they have a serious lack of a sound business plan on how they will continue to survive as companies and grow within their territories. A move to team with Satellite TV providers removes a substantial portion of the revenue capability that FTTH brings to the table.

Cost points of new FTTH builds were already comparable, or more favorable, to DSL before the JPC bid, as proven by the telecom engineering firms not the vendors, so Whitacres contention that the costs are not there are not accurate from a pure stand alone perspective.

My contention is that they have not decided how they will continue to run their business or what it will take to survive faced with the competetive realities of the market place. The MSO's have to be loving this as the longer the RBOC's delay, the more time they will have to capture voice services and further errode the subscriber base of the RBOC's.
The Muni's will seedelay as an inevitable need to do it themselves and further errode the operators base. This erosion negatively impacts RBOC's capital expense budgets which will continue to put the RBOC's behind the curve for future infrastructure improvements.

Until these guys determine what they want to be when they grow up, the Rural ILECs, MSO, and Muni's will continue to drive the market. Verizon appears to understand this a little better, however, they also do not have a video strategy.

Maybe the FTTH vendors should be concentrating more heavily on the Rural, MSO, or muni markets as this appears to be the growth areas for FTTH. The RBOC's want to continue to play the political game with the FCC and when they finally wake up they will find that they are miles behind the rest of the pack and may not recover. There is a quality rule that applies to the way they handle this that will surely impact how and when they will move forward.

Fix it today, it will cost you a dollar. Fix it next week, 10 dollars, fix it next month 100 dollars. The further out it gets the less chance they will have the money to do it.
Y2KickIT 12/4/2012 | 11:26:02 PM
re: SBC Ratchets Up PON Politics It is clear the RBOCs are a failure. They are also now something not quite fish nor fowl.

rjmcmahon makes this point well, are a public infrastructure company, endorsed by the government to support the public good? Some TV ads support that view. Or are they the private company that can do whatever it wants, no matter how it effects you or the economy.

Structural separation, Divestiture II, whatever you want to call it, fgoldstein is correct, this appears to be the only course to fix the telecom marketplace, and a good start on the economy.

Why the comment on trenching? How is it different than deploying copper? What are the equipment costs? Has the RFP returned solid numbers?

Why can't they build a FTTP network at $2000 a sub when others are buying old cable networks at over $3000 a sub? Maybe they have no confidence that they can act as an MSO and sell it?

Politics indeed. You get the sense that what they don't steal with one hand they beg with the other.
dwdm2 12/4/2012 | 11:24:10 PM
re: SBC Ratchets Up PON Politics "... There are no killer applications, there is no willingness to pay and people are out of work...."

Actually, one could argue that FTTP could be used to create those 'jobs' whose absence is causing the FTTP get a blame of 'pipe dream'. What Telcos are doing is that they are making every effort to prolong milking their old cow (the copper) as long as they can.

Some bring up the chicken and egg problem: 'no killer app' so no need for FTTP, and others say 'no FTTx' so no killer app. Question is how long 'you' are going to let this go on...?
lighten up!! 12/4/2012 | 11:24:10 PM
re: SBC Ratchets Up PON Politics FTTP is a pipe dream. Lots of dope smoking going on here. There are no killer applications, there is no willingness to pay and people are out of work. That's the reality and if there's anything Telcos have learned from the bust, is to be overly cautious when it comes to smoke and mirror technologies.
rjmcmahon 12/4/2012 | 11:24:09 PM
re: SBC Ratchets Up PON Politics If the Bells want to compete with the cable TV companies and offer a cable TV type channel line-up, FTTP is the best way for them to go.

This a fool's game. There is no competition. Look at what technology offers and then look what these guys offer. The lack of competition becomes obvious.

The problem is markets fail to provision public goods.

Our situation is no different than a preindustrial society's need for good roads (or canals). Such societies will leapfrog ours if we don't wake up to this.

A couple more relevant excerpts from Adam Smith.

In the progress of despotism the authority of the executive power gradually absorbs that of every other power in the state, and assumes to istelf the management of every branch of revenue which is destined for any public purpose. In France, however, the great post-roads, the roads which maek the communication between the principal towns of the kingdom, are in general kept in good order; and in some provinces are even a good deal superior to the greater part of the turnpike roads of England.

Why would that be?

The proud minister of an ostentatious court may frequently take pleasure in executing a work of splendour and magnificence, such as a great highway, which is frequently seen by the principal nobility, whose applauses no only flatter his vanity, but even contribute his interest at court.

Unfortunately for us little people,

But to execute a great number of little works, in which nothing that can be done can make any great appearance, or excite the samllest degree of admiration in any traveller, and which, in short, have nothing to recommend them but their extreme utility, is a business which appears in every respect too mean and paultry to merit the attention of so great a magistrate. Under such administration, therefore, such works are almost always entirely neglected.

Can a flower bloom in the such a desert?

Unfortunately, for those of us living in CA, the way ahead is municipal action (and responsibility), but that power was gutted, due to housing speculation, with Prop 13 :-(

Tech recovery may turn out to be an oxymoron for our generation and our society. What can we do about it?

The thing I always keep in the back of my mind is, the endangered species list does exist. Not market forces, nor competition could ever create that. (Let's hope we don't join it.)
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