Verizon Targets High Speed, Wired or Not

Verizon Communications Inc. has grand designs for the biggest telecommunications market in the country.

The New York company, which has for years been a distant second to SBC Communications Inc. in California’s local phone market, last week announced plans to spend $3 billion over the next two years to upgrade its land-line and wireless networks. The aim: to make them work together at ever higher speeds, giving customers here and around the country new ways to consolidate and manage their phones, hand-held devices, laptops and other electronic gear.

Verizon plans to run fiber optic cable this year to more than a million homes nationwide. The company says it will also take nationwide a data-only wireless broadband service with speeds akin to DSL and that it will transform its switching gear to enable lower-cost Internet Protocol telephony, which transmits voice calls like e-mail.

Ultimately, Verizon hopes to sell local calling, long-distance and high-speed Internet services around the country without expanding its traditional land-line network much beyond the 29-state territory where it has local-service customers now.

Verizon is the nation’s largest local phone company, and its Verizon Wireless unit is the biggest mobile phone carrier. The company’s chairman and chief executive, Ivan Seidenberg, laid out the thinking behind the expansion plans in an interview with The Times. He also explained his objections to the rates that many states, including California, have set to foster competition for traditional residential service. The rates are intended to give competitors to the former Baby Bell monopolies access to home lines without requiring them to build their own networks.

Seidenberg has argued that the rates Verizon was allowed to charge AT&T; Corp. and other rivals for renting lines and gear was below Verizon’s cost.

In California, the company is asking state regulators to nearly triple the rental rates in urban areas -- and to raise them even more in rural regions. Regulators are expected to rule later this year.

Question: With your traditional land-line network in some of the most affluent markets in Southern California, would you expect that SBC some day will be competing in your territories?

Answer: We’re both all over the state in wireless. And we’re working our way to be all over the state in the business market. If they’re one of our competitors, fine, but we have plenty of competitors in wireless and in enterprise. I think in the mobile area, our prime competitors are really the cable companies and the wireless companies.

Now, I think what you’re getting to is what I hear a lot. Which is, until someone overbuilds the phone company, there’s no competition. And the answer is that’s not going to happen because it doesn’t make any sense. Cable companies don’t overbuild each other, but new technology comes in and you have satellite, and eventually you’ll have wireless and eventually you’ll have fiber. Competing by building yesterday’s platform is not a smart idea.

Q: So you can’t fault rivals for not wanting to build out old networks.

A: That’s a different question. Let’s look at it from your business. When people start competing with you through other forms of media, you rally around your core strength and you improve your content.

Now let’s look at some of the phone company competitors. They have no strategic framework, nor do they have a financial basis to do it. How could you be one of the most revered companies in the last 100 years and your whole strategy is to lease facilities from somebody else? That’s just nonsense. Now, you might make money on it for a little bit, but in the long term, it’s not a strategy where you control your destiny.

Q: It isn’t expected to be a long-term strategy, though, is it?

A: Where are they headed then? Look at cable companies. I think that cable companies and wireless companies are absolutely positioning themselves to compete for the consumer’s dollar. And that’s really where the game’s at. But the people who are leasing our networks, they are just sort of wandering around waiting for an accident to happen. I am not predicting anything. Leasing facilities from us to compete with us doesn’t help you against cable companies, doesn’t help you against wireless companies. It’s not a long-term thing.

Q: What’s the common thread in your plans to expand and upgrade your wireless and wire-line networks?

A: It’s digital convergence. What we believe is that, whether it’s wireless or wire-line, if we can bring high-speed services to the marketplace, people will invent lots of applications to use that. And we create economic wealth for us and we create, I think, lots of opportunities for people to participate in this whole digital convergence activity.

Q: Nearly everyone in the industry agrees there are too many players and that some will have to merge or go out of business. How long will that take and when will it start?

A: I think it started but we’re in a little bit of a lull right now because everybody’s afraid to make a move. But we don’t feel we have to do very much, except grow organically. If you asked us our first and primary business strategy, it would be to invest organically, which is what we’re doing. We are big enough at this point.

Q: Do Verizon’s recent plans put it in position to take advantage of all the technology available to become a one-source shop throughout the country, not just in the areas where it has land-line networks?

A: Over 125 years of running a phone company, every 30 or 40, there are [major innovations] in technologies. Probably the most disruptive thing that has occurred in the last five or six years has been the explosion of wireless. Wireless has changed things.

At first, wireless was additive to your basic phone at home. You had a phone at home, you used it; you had a cell phone, you used that. Now, what we’ve seen with wireless is, people have substituted. They’re not using the fixed phone as much. We now know we need to make future voice services more wireless-centric, and we’re doing that.

So what happens to the old phone business? It becomes much more of a broadband business. So we have to invest and turn that into a much more high-bandwidth, interactive, multi-megabit business, and we’re going to do that.

Q: So say I’m in SBC territory and have SBC for local voice calls. I have Verizon for wireless and I want to take advantage of a Verizon package that might include high-speed Internet, long-distance and local. I can’t do that.

A: The cable companies can offer that now. Do I have an obligation to provide local service to every town and city in the country? Why would I do that? Wal-Mart doesn’t even operate in every town. They go where they want to go. So why can’t I only go where I’m going to win?

Q: But if I’m already a customer, why wouldn’t you want to do a deal?

A: So your question is why don’t we do residential service in L.A. Why don’t I expand in these other markets? You know why? It’s a bad idea. As a businessperson, why would I do something that I know won’t make money?

Q: How do you get around the issue that in the end, we’re back to only a few major providers? The incumbents have such an overwhelming advantage over everybody else for the foreseeable future. How else will other players get in?

A: If you’re worried that the broadband market will be a natural market for three or four companies at most, I would agree with that. But I don’t think you’re going to get $100 billion of capital in 50 or 60 competitors. So I think we have to come to grips with the fact that these are capital-intensive businesses.

Now if you are concerned, and I would agree with you actually, that if we end up with only one broadband provider in the market, that’s not a good public model.

Q: Does the long-distance business even matter now because, with wireless, people don’t make a distinction between local and long-distance anymore?

A: No. The long-distance business doesn’t have the same growth trajectory that it did before, but it’s still a very good business. It’s still a $60-billion [business]. For us, it’s like telephony is to cable. It’s an incremental add-on to another business. So it’s an attractive business.