Fiber-Optic Battle Lines
Bet on High-Speed Network
Pays Off for Verizon, AT
Still, Cable Looks Pricey
January 4, 2008; Page C14
Investors have taken their time to realize the phone
companies' diet needed a lot more fiber. A plan by Verizon
Communications to spend $18 billion over six years to install
high-speed fiber-optic lines directly into customers' homes was
initially regarded skeptically.
![[Views]](http://s.wsj.net/public/resources/images/MI-AO526_BVIEWS_20080103220001.gif)
The phone companies furthest along in their rollouts
are pummeling cable groups. Shares of Verizon and AT&T both rose
more than 15% in 2007, while shares in Comcast and Charter
Communications have fallen 35% and 62%, respectively. This trend
isn't over.
Verizon and AT&T both offer the so-called triple play:
phone, television and Internet service. While the big cable guys have
about 10 million customers for their phone service, the phone companies
are just getting started in video. AT&T has around 250,000 customers and
Verizon about one million.
Installing fiber may be costly, but it enables the
phone companies to leapfrog their cable rivals. While expensive to
install, fiber is cheaper to operate because many repairs can be done
off-site. Verizon claims a saving of around $900 a customer a year. More
important, a fiber connection to the home offers a faster Internet
service than the cable companies serve up.
Consumers are switching. And once they do, they don't
tend to return. Verizon says less than 1.5% of its video customers leave
each month. The early so-called subscriber-churn rate is about half that
of many cable companies.
Cable companies could bump up their investment to
compete. Cablevision and Comcast increased their capital-spending plans
last quarter. However, the average cable company has a prodigious amount
of debt. In the short term, it could be difficult for them to take on
much more in order to build better networks. Despite all this, the
average cable stock trades at a 30% premium to the big telephone
companies, based on estimated 2008 earnings before interest, taxes,
depreciation and amortization. This doesn't look right. Cable companies
may be overvalued or phone companies undervalued -- either way they
should converge over time. Playing that trend again in 2008 is likely to
reward investors.
***
• This column is written by
breakingviews.com1,
an online financial commentary site.
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