In a recent report, Mr. Moffett, one of Verizon’s most persistent critics, walked his clients through detailed projections of how much Verizon would earn from FiOS and how much it would save because the fiber network is cheaper to maintain than the old copper wires. He concluded that Verizon would be $6 billion in the hole when all was said and done.
Other analysts have reached different conclusions from the available data. Christopher Larsen of Credit Suisse calculates that if Verizon can get at least 20 percent of the potential customers to sign up for FiOS video, it will earn an acceptable profit.
And David Barden of Banc of America Securities argues that, for new Verizon investors, the return on Verizon’s original investment does not matter.
“If you are an investor today thinking about what the prospects of FiOS are tomorrow, you don’t look at what has been spent. You look at what needs to be spent,” Mr. Barden said. “The 2008 investors owe the 2003 investors a debt of gratitude because the 2008 Verizon is in a vastly better competitive position than it otherwise would be.”
Even if Mr. Moffett is right and Verizon comes out $6 billion behind on FiOS, that amount is almost lost in a company that has annual revenue of nearly $100 billion and spends $17 billion a year on capital improvements. Indeed, Verizon is dominated by wireless and business services. Service over wires to people’s homes makes up only 15 percent of its revenue.
One option that Verizon did not find palatable was just sitting still. Voice telephone lines are headed toward extinction, dropping 8.5 percent in the last year alone. And the speed of the digital subscriber line, or D.S.L., technology used to offer Internet service over copper wires has topped out at three megabits a second for many customers.
Meanwhile, cable companies like Comcast and Time Warner have been very successful in bundling Internet-based phone service with lots of TV channels and high-speed Internet service of 6 to 12 megabits a second. As consumers have demanded more video in their living rooms and on their computers, the cable companies have gained market share.
With FiOS offering current top Internet speeds of 50 megabits a second and a large menu of video offerings, Verizon is betting its packages will allow it to leapfrog over its cable rivals. Moreover, Verizon’s fiber network has the capacity to add more data speed, video channels and other services without rewiring.
The service has been particularly popular among the more sophisticated customers attracted by higher Internet speeds, said Karl Bode, the editor of BroadbandReports.com.
“Deliver quality technology and cutting-edge speed, and customers respond,” he said. “I’m preparing to move into a new home, and FiOS availability actually played a part in where I was willing to move. And I’ve probably been one of Verizon’s most outspoken critics over the years.”
The cable systems, in turn, are responding by cutting prices on voice service and developing new technology that can match the data speeds of FiOS and cram in more TV channels.
AT&T’s less radical approach essentially seeks to match, rather than surpass, the speed of cable’s Internet service. And while AT&T’s Internet-based video service has some fancy features, it can transmit only one, eventually two, HDTV signals to each home at once.
Because it is using less mature technology than FiOS, AT&T’s upgrade has gotten off to a slow start. At the end of the second quarter, AT&T’s video service, called U-Verse, had 549,000 customers, up from only 51,000 a year earlier. That is just a bit more than 10 percent of the homes that could buy the service.
John Donovan, AT&T’s chief technology officer, said the company might string fiber optic cables to its customers’ homes in the future. But he argues that it was a smarter choice to try to get as much life out of the copper wire as possible, betting the cost of fiber will drop over time.
“The last thing we want to do is overdeploy fixed capacity into the ground where there is no recovery for being wrong by putting in too much,” he said. “The ideal way to deploy technology is on the last day as fast as possible, because it gets more capable and cheaper every day.”