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BELMONT, Mass. — On a quiet residential street in Belmont, Mass., a small town 11 kilometres northwest of Boston, a Verizon Communications Inc. technician has spent more than five hours hooking up one home to the U.S. telephone company's new digital television and Internet network.
He has run a fibre-optic cable from a nearby telephone pole to new equipment mounted on the house, torn out and replaced the old coaxial cable inside the house, and tested the network.
By midafternoon, one small television set in the kitchen is up and running. But the technician still needs to sort out glitches with other TVs and a personal computer before the job is complete and he can move on to another house the next day.
That one home encapsulates both Verizon's challenges and opportunities as it seeks the holy grail for telecommunications providers: a TV service that can break the lock cable operators have on the market.
If everything goes as planned, Verizon believes it will be able to persuade phone subscribers to stay and spend more by adding Internet and TV services, rather than switching to other “triple-play” packages — phone, Internet, and TV services — offered by the cable companies.
Verizon, however, is making a colossal wager to achieve that vision. It's spending $23-billion (U.S.) on the most extensive rollout of fibre-optic cable of any North American carrier. That's more than 20 times what Bell Canada is investing to install more fibre in its network.
The difference is in the size of the upgrade. Verizon, unlike other big phone carriers in the United States and Canada, believes the traditional copper infrastructure won't cut it for TV and Internet services in the future. While carriers like Bell are mostly bringing fibre to a “node” or local point in the neighbourhood (FTTN), Verizon is going straight to the home.
It's a tough but crucial call for carriers as they decide how much bandwidth customers will really need. Nobody wants to be caught out with speeds that are too slow, or tons of costly capacity that sit idle.
To critics, Verizon's strategy doesn't make economic sense. Its share price has suffered, rising just 5.6 per cent over three years, trailing the massive gains of U.S. peers AT&T Inc. (44 per cent) and Qwest Communications International Inc. (102 per cent).
But others believe it's a matter of time before all carriers follow Verizon's lead. Verizon, based in Basking Ridge, N.J., doesn't appear to have any regrets about deciding four years ago to bring fibre to the home (FTTH). In fact, it would like to move faster.
“I'm more confident today then I was four years ago,” said Paul Lacouture, executive vice-president for engineering and technology for Verizon's telecom group, citing the development of bandwidth-hungry applications and client response.
“I'm constantly trying to figure out ways we can build it faster,” he said. “The biggest complaint I have is, ‘why aren't you in my neighbourhood yet?' ”
Why are phone companies moving into the mature TV market? It's all about defence. Their bread and butter, land-line phone service, has come under attack in recent years from cable operators.
The battle's body count so far: The cable firms have poached more than seven million phone customers in the U.S. and 1.45 million in Canada by the end of 2006, according to Moody's Investors Service.
FTTH will eventually deliver speeds of more than 100 megabits per second (Mbps). That kind of bandwidth would allow a family to simultaneously watch two high-definition channels, digitally record an HD show, browse the Web or download files, and use other, yet-unknown applications. It would blow past the 25 Mbps or so that FTTN can deliver.
Observers agree phone companies need a TV service to stay in the game. Consumers want to pick up a discounted triple-play package of phone, Internet and TV services from one source.
“When the triple play is clearly the only way to go, you really have no choice,” said Brahm Eiley, president of Convergence Consulting Group Ltd. in Toronto. “The proof is in the pudding. The cable companies have had an unbelievable run. Most of the telcos have not.”
But while cable companies have used one technology — voice over Internet protocol (VoIP) — to roll out phone service, things aren't so simple for telecoms when it comes to TV.
There are a number of ways for carriers to enter the television market. Reselling a competitor's satellite service is one option. Another is bringing fibre-optic cables to a central point in a neighbourhood and then delivering TV service through IP technology (IPTV) over the copper wires. Or carriers can install fibre right to the home. The latter method is the costliest, but provides the most bandwidth, an important consideration in an Internet-dominated world.
While carriers debate the merits of both approaches, cable firms are making their fast networks even quicker. Montreal-based Vidéotron Ltée, for example, is testing an Internet service with speeds of up to 100 Mbps, one of the world's fastest. In contrast, current, copper-wire speeds are about three to five Mbps.
The path to Verizon's FTTH strategy began in 2000, which was still the early days of high-speed Internet. The company saw a time when it would need to offer new products like TV, and started to examine the future of the existing technology it used to deliver Internet service over copper wires.
“Nobody really thought we were going to have the stomach to go out in five years and do another huge plant upgrade,” explained William Garrett, Verizon's director of technology for broadband at their lab in Waltham, Boston's tech hub.
After the techies won management over, Verizon embarked on a seven-year project in 2004 to run fibre by 18 million homes in the areas where it offers phone service.
“We have a service which is exceptionally competitive to the video offering” of cable companies, Mr. Garrett said.
The effectiveness of FTTN, the approach that Bell and other U.S. carriers have taken, depends on how close a home is to the last part of fibre in the network. The further away, the lower the bandwidth.
“Probably, fibre-to-the-node is good for today's applications, however it will not be able to support high-intensive multimedia applications,” predicts Abdallah Shami, an assistant professor at the University of Western Ontario's department of electrical and computer engineering. As an example, he pointed to a situation where HD, online games, health care and security applications are all active in a house at the same time.
To boost bandwidth speeds closer to 50 Mbps, carriers using FTTN plan to use copper-pair bonding, a method that hasn't yet been widely deployed.
Verizon believes those kinds of technological decisions are behind it, so it can now focus on developing new products. In a two-storey model home in Waltham, Verizon displays the services it will offer on FTTH, which has one dedicated wavelength for broadcast TV and two other wavelengths for voice and data applications and IPTV.
The TV in the kitchen, for example, gives viewers watching a Rachel Ray cooking program the option of accessing information related to the show, such as the recipe for Black Pepper and Asiago Scones.
The upstairs TV features a golf game that will be available through Verizon's on-demand service. It lets customers, who don't have expensive PlayStation or Wii systems, play games on their TV.
While Internet applications could also be accessed on the TV, clients don't want to do the same things as on their PC, said Joanne Lacourse, a director of technology at Verizon. They want to look at family pictures, not surf the Web.
“It's a social thing versus a solo thing,” Ms. Lacourse explained.
While these future products are undoubtedly cool, FTTN is a lot more affordable. Bell is spending $300 (Canadian) per home passed, compared with Verizon's $1,000, according to consultant Mr. Eiley. The figures exclude the costs of connecting to the house,
To help finance what it calls FiOS — for fibre-optic services — Verizon is selling off assets. But it still can't afford to bring fibre everywhere, and will resell satellite TV service to some 15 million consumers.
Some observers believe it's wise for carriers to wait and see what kind of killer applications develop that require FTTH speeds before making major spending commitments.
“To make the gamble to rip up the plant and put in fibre, that's an expensive endeavour,” said Toronto-based DBRS analyst Rory Buchalter. “It's got to be demand-driven before they'll do it.”
Still, other observers are concerned carriers that wait may also be taking a risk because they could have less money to spend on a network upgrade if they continue to lose customers in the local phone market.
Phone companies will have to go with FTTH eventually, Mr. Eiley believes. “HD will be part-and-parcel of what we do, and the amount of action going on in the Internet makes companies that offer higher-speed Internet access more attractive,” Mr. Eiley said.
“You can choose one of two approaches: The less-cost approach, where at some point you might have to do a radical redress of the network, or you can bite the bullet. From our perspective, we think Verizon has the right approach.”
National Bank Financial analyst Greg MacDonald agrees that high Internet speeds are crucial. In a note to clients last week, he suggested Bell's parent BCE Inc. could use proceeds from the recent sale of its satellite arm to speed up the deployment of its FTTN network or even push fibre deeper into the network. Bell declined to comment.
Bringing fibre to the home is a time-consuming process. So far, Verizon has installed 370 million feet of fibre-optic cable in 16 states.
Last week in Belmont, it was Nick Rizzuto's turn. The 73-year-old retired maintenance worker for Harvard University is already a Verizon phone customer.
He reckons his cable service with Comcast Corp. cost him about $42 (U.S.) a month, and he complained about the unclear picture on his TV. He expects he'll now pay about $90 to $100 for Verizon's phone, TV and Internet services.
After a week, Mr. Rizzuto's only criticism is he doesn't want to pay for channels he doesn't use, such as the roughly 15 channels that are reserved for local shows but don't have any programming. He's hoping that will change in the future. “That's where technology comes in, where you can get individual channels you're interested in,” he said.
But over all, Mr. Rizzuto says he is satisfied with Verizon's TV service. “This is very clear and there's no interference,” he said. He reports his Internet service is also working fine.
So far, so good, for customers like Mr. Rizzuto, but it's still early days for fibre-optic services. By the end of 2006, Verizon had 687,000 FiOS Internet customers and 207,000 FiOS TV clients.
Those subscriber gains, however, came at a cost. Verizon's fourth-quarter profit fell 38 per cent, hurt by costs for the FiOS network. Some analysts are concerned costs could be higher than expected in the future. And they also say it's still not clear if FiOS will stem phone losses.
Nevertheless, Verizon says the earnings dilution from FiOS will peak in the current quarter, and then start dropping. By 2009, Verizon expects FiOS will generate operating profit.
“I think we're on a very good path with our cost and the revenue numbers look pretty solid,” Mr. Lacouture said.
