Copyright 2005 Investor’s Business Daily, Inc.
Investor’s Business Daily
May 25, 2005 Wednesday
Verizon Communications is in talks with EarthLink and other Internet service providers to lease them access to the speedy fiber-optic network Verizon is building.
Verizon and the other Bells already lease ISPs access to their digital subscriber line networks.
That’s because they have to, as per federal mandate.
Federal network-sharing rules don’t apply to fiber-optic wires. Fiber, far faster than DSL, is slowly replacing copper phone lines. And the Bells, ISPs themselves, didn’t profess any interest in leasing their fiber to others — until now.
“We’re in the process of working out agreements with a number of ISPs,” said Peter Castleton, Verizon’s executive director of broadband services. “As we enter new markets with fiber-based services, we’re working with ISPs that are prominent in those locations.”
Though Castleton wouldn’t provide many details, several factors are at play. Verizon might get more revenue, which would help it pay for the costly fiber buildout.
But a legal case lurks.
ISPs have been pushing for access to all broadband pipes, including fiber. The U.S. Supreme Court is reviewing ISP access to high-speed cable networks, in a case known as Brand-X.
The Brand-X decision could have big ramifications for phone companies and cable operators. By making its own deals, Verizon could get more favorable terms now than it might be forced to give later.
“Neither EarthLink nor Verizon can have a high degree of confidence about the outcome of Brand-X,” said Blair Levin, an analyst at Legg-Mason. “This may be the moment both want to negotiate, because they don’t know where they’ll wind up.”
It is a gamble, but Bernstein Research analyst Jeffrey Halpern says Verizon’s strategy makes sense from both regulatory and financial points of view.
He says Verizon could try to offload some of the expense of connecting consumers and small businesses to ISPs. Each fiber hookup costs a few hundred dollars, Halpern says.
“The devil is in the details,” said Halpern. “Verizon stands to benefit from a recurring wholesale revenue stream without having to bear all the upfront connection costs.”
And Verizon’s strategy could play well at the Federal Communications Commission, where the Bells have been pushing for deregulation.
“Regulators have tried to take a more hands-off approach (with fiber) and see how the market develops,” Halpern said. “Clearly Verizon’s (ISP stance) supports that regulatory approach.”
Over the next several years, Verizon plans to upgrade much of its local phone network to fiber-optic wiring. Verizon’s fiber service, which it calls FiOS, offers consumers and small businesses faster Internet access as well as pay TV.
Its fiber network reaches 1 million homes, but Verizon says it will be available to 3 million homes and small businesses by year’s end.
Verizon’s tack differs from that of its top rival, San Antonio-based SBC Communications. SBC is upgrading its phone network, using a mix of fiber and faster DSL. But it’s been on poor terms with ISPs for years, fighting rules that force it to share its network at what it considers less than market-rate prices.
Dave Pacholczyk, an SBC spokesman, said: “We’re always open to talking to ISPs about win-win partnerships. We just want to make sure it’s the marketplace that sets the terms of any arrangements.”
Verizon says it leases to several hundred ISPs. Its biggest wholesale DSL customer is EarthLink.
A national ISP such as EarthLink should be in a better position to bargain with Verizon than a small ISP, analysts say. Atlanta-based EarthLink confirms it’s in talks with Verizon over access to its fiber network.
“It’s really in the beginning stages of negotiation,” said Chris DiNatoli, EarthLink’s director of broadband vendor management. “It’s about understanding what they’re offering, when and how much it would cost.”
EarthLink has more than 5.4 million Internet customers. A third get broadband, either DSL or cable modem service.
Verizon’s fiber build-out generally targets high-income areas that meet its criteria for investment. Many ISPs cater to small businesses.
“They have a special relationship with customers in their footprint, and we see them as an opportunity for us to expand our reach with broadband products,” Castleton said. He says Verizon expects most ISPs leasing its DSL access will migrate to its fiber network. He says Verizon could wind up with more wholesale customers because “fiber enables a broader suite of services.”
Verizon’s fiber network delivers data speeds ranging from 5 to 30 Megabits per second. Cable modem services top out at around 5 Mbps, and most DSL at 3 Mbps. But cable firms are boosting data speeds, too.
Phone and cable firms are racing to deliver a package of video, ‘Net access and phone services.
Legg Mason’s Levin says how much EarthLink would pay is key. “At some price, using the ISP as essentially a marketing (tool) makes sense for Verizon,” he said.