FIBER'S FIRST FORAY (FINALLY)

Nobody in the industry or on Wall Street believes it, but the beginning of the FTTP buildout is here. The tectonic plates of innovation, regulation and competition have shifted into place, and the great change is finally upon us.

Incumbents around the world are coming to face the fact that wireless substitution, cable telephony and voice over IP are undermining their core local businesses. The recent decision by the Justice Department to not contest the appeals court decision that struck down a big part of UNE-P set the stage, providing strong indications that an incumbent that rolls out fiber will truly own and control such a network. Finally, the costs of rolling out the network have come down steadily.

The cost of deployment eventually could be as low as $1000 per home passed, which would make payback (in some optimistic scenarios) less than five years. Regardless, incumbents have little choice but to build out FTTP and get into video, cable and extremely high-speed Internet services.

Despite the onslaught of viable competition (UNE-P was never viable), the incumbents have a runway here. Most have built wireless businesses that are nicely profitable, generating lots of cash. More important, they still generate billions of dollars of free cash flow from their core local businesses. And while that is dwindling, it's not about to disappear. They have years' worth of free cash flow from those depreciated and hugely profitable networks left.

The huge debt loads that many took on during the heyday of easy money in the 1990s will be a problem. But the incumbents realize the only way to ensure they can roll over that debt is to keep their models from collapsing around them. Sitting still while the new competition attacks isn't going to get the job done.

So Verizon has taken the first step, committing nearly a billion dollars in spending to FTTP this year and passing more than a million homes. It's just the tip of the iceberg. BellSouth will also get aggressive, especially if they can get the FCC et al to give them full ownership and control of fiber-to-the-curb networks in addition to FTTP networks. SBC looks to be moving more slowly (though that can change in a heartbeat) — and Qwest, of course, with its wrecked balance sheet is another beast altogether.

The rest of the world is moving, too. AFC, which won the Verizon contract, has received requests from many foreign telcos. Then there are the municipalities, the utilities and the greenfields.

Did I mention that this is just the tip of the iceberg for FTTP?

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At the time of this writing, the author was long AFCI.

DOSSIER CODY WILLARD

Occupation: Hedge fund manager and author of “Telecom Connection Newsletter”

Location: Capital of the World (NYC)

Favorite destination: My hometown of Ruidoso, N.M.

Device inventory: Palm Treo, Apple iPod, Dell Precision, Clarks Shoes

Summer reading: “Linked: How Everything is Connected to Everything Else and What it Means” by Albert-Laszlo Barabasi

Personal maxim: Overcome and get it done

What's next: Free market revolution (see column at left)