Verizon Does Enterprise Data
Wall Street has been eagerly anticipating the announcement, hoping that it would mean a boost in capital spending that could help catapult some telecom equipment vendors -- and maybe even the industry at large -- out of its current depressed state (see Verizon Talk Stokes Stocks). In that respect, the announcement was a colossal disappointment.
Verizon largely just affirmed what everybody already knew -- that the telecommunications business is migrating gradually from revenues based on voice services to those based on data. Then it pointed out that a new focus on data services doesn't necessarily mean new spending.
“We don’t foresee a lot of major new [spending] here,” Verizon CEO Ivan Seidenberg said on a conference call addressing the announcement today. “This is an extension of our existing business… We already have capacity out there… We have a lot more facilities than people realize.”
Seidenberg also denied that the New York-based carrier was planning on buying other carriers or their facilities to expand its backbone. “In this environment, we can build it better and faster than by buying someone else’s legacy network."
The money issue was the largest disappointment, as leading data equipment stocks had ramped in anticipation of the announcement.
“The stocks have been over-hyped,” says George Notter, an analyst with Deutsche Bank AG. “Investors are looking for a reason to buy stocks this week whether the reason is real or not. This would have been the first time in a very long time that an RBOC was jacking up its capex.”
"All they did was re-bucket the money they already have in their budget,” says Network Conceptions LLC analyst Phil Jacobson. “It sounded like there’s hardly any money being spent.”
But while the announcement might be a big disappointment to investors and equipment vendors, the strategy could be a good move for Verizon. The enterprise space is a lucrative market. According to Eduardo Menasce, the president of Verizon’s enterprise solutions group, the market is currently valued at about $117 billion, and it should reach $170 billion over the next five years. Today, long distance accounts for about $35 billion of the enterprise market, he said, speaking on today’s conference call.
By offering new services like data storage, business recovery, network security, network management, and remote access, ultimately with a national reach, Verizon is looking to take a bite out of a market that has traditionally been dominated by large long-distance players like AT&T Corp. (NYSE: T), Sprint Corp. (NYSE: FON), and WorldCom Inc. (OTC: WCOEQ).
"After many years of all the ILECs talking about bundling services to customers, it’s finally starting to happen,” says i2 Partners LLC analyst Andrei Jezierski.
“This move allows them to compete head-to-head with players like AT&T and WorldCom and a company called Equant (NYSE: ENT; Paris: EQU),” says Jeff Kagan, an independent analyst based in Georgia. “This allows them to be… a national player.”
As several of the long-distance providers struggle with financial difficulties, Verizon has received federal regulatory approvals to offer long-distance services to about 90 percent of its customers, and the company says it expects to get the rest of the approvals by the end of the first quarter of next year. The carrier claims that it already serves nearly 10 million long-distance customers and that it’s the fourth largest long-distance provider in the country.
AT&T says it isn’t worried by Verizon’s push into its market space. “Good luck!” says Mike Jenner, AT&T’s vice president of managed services, in reaction to Verizon’s announcement. “They certainly don’t have the experience, and they also don’t have the assets."
Jenner scoffs at Verizon’s assumption that it can launch these services without spending a lot of money, pointing out that AT&T has spent about $35 billion on rolling out similar services over the past four years.
While Verizon will start off targeting customers in its traditional region, stretching from Maine to Virginia, it is also building out its backbone to serve markets in territories historically served by other regional Bells. Menasce says that the company will be interconnecting "islands," like Dallas, Los Angeles, Seattle, and Tampa, through a national backbone over the next 18 to 24 months.
Some observers say Verizon’s new enterprise strategy could be the first step towards truly differentiating among the different regional Bells.
Despite the lukewarm reaction, some data-equipment stocks remained warm following Verizon's conference call. Clearly, Juniper Networks Inc. (Nasdaq: JNPR) and Cisco Systems Inc. (Nasdaq: CSCO) are seen as the two hottest contenders for most of the edge routing portion of Verizon's data network. Juniper was up $0.079 (1.14%) to $7.00; and Cisco was up $0.70 (6.03%) to $12.31.
“This is positive from a sentiment perspective,” says Steven D. Levy of Lehman Brothers. “But we didn’t expect much out of this announcement. I think some investors were disappointed.”
— Eugénie Larson, Reporter, Light Reading
(Senior Editor Marguerite Reardon contributed to this report)