Investor’s Business Daily

Thursday, October 30, 2003

“Fiber Still Binding Gear Makers”

Bells Delay Big Rollouts

Telecom carriers’ plans might yet bring riches to fiber-optic suppliers

by Mike Angell

Contrary to earlier hopes, makers of fiber-optic networking gear no longer expect any quick payoff on what still cold, at some point, be huge fiber-to-the-home contracts.

The three biggest U.S. local phone companies in May put out a joint request for proposals, bids on gear to equip homes with super–fast fiber-optic connections. Such fat pipes would offer customers voice, video and data and give the Bells an edge on cable companies in providing fast Internet service.

Soon thereafter, shares of many telecom gear makers rose on hopes the carriers would spend many millions of dollars to bring fiber links to homes. Some early estimates said the three local carriers, which also are the three largest regional Bells, could spend $700 million a year outfitting homes.

But Verizon Communications Inc., SBC Communications Inc. and BellSouth Corp. of late have dampened expectations on fiber deployments. They want lower prices and better regulations before installing the gear.

Telecom gear maker executives now say they’ll likely have to wait until 2005 to profit on the big home fiber rollout.

Fast, But Not That Fast

2002 2003

US HOMES WITH FIBER CONNECTIONS 22,000 64,000

Source: Render, Vanderslice & Associates

“Copper wires took 90 years to reach most U.S. homes. Coaxial cable took 50 years,” says Mike Render, president of telecom research firm Render, Vanderslice & Associates. “Fiber will be much faster, but it will take a number of years.”

The phone companies are in no rush to install home fiber links, also called passive optical networks.

On a conference call last week with analysts to discuss third-quarter results, executives from SBC said installing fiber to older homes isn’t economical due to the costs of the gear and uncertainty over whether the Bells would have to share the connections with other carriers. It does make financial sense, says SBC, with new home developments. It’s much easier and cheaper to put in the fiber then.

That in itself could be a substantial effort. Some 1.7 million new homes are expected to be built in the U.S. this year.

But an SBC spokesman this week said the company’s new-home fiber installations would be on a “small scale” for now.

On its most recent conference call, also last week, BellSouth said it still wants clarification from the Federal Communications Commission over whether home fiber connections would have to be shared with rivals. To spur competition under the 1996 Telecommunications Reform Act, incumbent carriers do often have to share their networks, for fees largely set by regulators.

Regulations Slow Rollout

“It would be highly desirable to reinvest particularly in new technologies like fiber and broadband,” BellSouth Chief Financial Officer Ron Dykes said on the call. “The confusion created by regulation makes that an uncertain decision.”

When BellSouth does invest in fiber to the home, it might not use the gear specified in the May announcement. BellSouth already has about 900,000 home customers served by fiber equipment that reaches the curb, not the house. BellSouth’s chief technology officer, Bill Smith, says curb fiber might in some cases be a better bet than home fiber.

The to-curb gear differs a bit from to-home gear, as do the regulations that providers must follow for such installations.

“Home fiber is great for some larger lots,” Smith said. “If you have a multi-dwelling unit, curb fiber may be the best solution.”

Verizon appears to be the closest to moving forward on fiber to the home. A Verizon spokesman says the company is close to announcing which company, or companies, will supply its home fiber gear.

Executives did not mention anything about fiber in their earning conference call on Monday.

A recent report from Lehman Bros. Says telecom gear maker Advanced Fibre Communications Inc. might be the main vendor for the Verizon contract.

Advanced Fibre, which teamed with cable network gear maker Harmonic Inc. on the Verizon bid, isn’t the only company vying for the home fiber deal. France’s Alcatel SA is also considered a contender for Verizon’s home fiber deal.

Prices Will Fall Fast

How much would home fiber contract help gear makers?

Lehman estimates Advanced Fibre could see its sales rise $38 million to $150 million a year for several years if it became Verizon’s main vendor for home fiber.

The company reported total sales of $344 million last year.

Advanced Fibre Chief Executive John Schofield says the pace of the fiber rollout is as he expected. He says sales of home fiber gear should be “meaningful” in 2005.

Home fiber will be a profitable business, though prices are expected to fall sharply, Schofield says.

He expects some fiber gear to follow a price curve like that of digital subscriber line equipment. Carriers use DSL to provide fast, broadband, Internet service over normal copper telephone lines.

“When DSL was first installed in 1999, it cost about $500 per subscriber,” Schofield said. “Today, it costs $50 to $75.”

In May, home fiber gear cost about $1,000 per home. BellSouth’s Smith says the ideal price for the phone companies would be below $300 per home.

“We’re seeing vendors hit the threshold levels we set,” Smith said. “There are some other areas where we can work together and drive down costs.”

Most carriers plan just service trials with home fiber next year, not big installations.

But after next year, fiber should start coming to more homes, either underground or, at times, strung overhead from utility poles.