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Monday, August 14, 2006

Is Verizon Starting To Panic?

Stocks: (VZ)(CMCSA)(T)

Late news on Verizon's fiber optic buildout would indicate that the company is making a larger and larger bet on it to stave off competing technologies.

The New York Times has written that the Verizon is working feverishly to build out the fiber-to-the-home network in its home market of New York. Companies like Comcast and Vonage are now offering telephone service in the market, a real threat to Verizon's core business. Verizon will spend $20 billion to reach 16 billion homes by the end of the decade, according to the Times. The question is whether it will be too late. The cost is immense because in cities it may run $100 a foot to put down fiber.

Cable companies can already offer the "triple play" of VoIP, TV and broadband across their networks, giving them a multi-year head start on Verizon, AT&T and BellSouth. Why customers would change from cable companies to the telcos is a great mystery, yet Verizon persists.

As another cable copycat, Verizon is offering digital video recorders according to the Wall Street Journal. The systems allow people to record shows and run them on any TV in the household. Most cable companies have DVRs that only run recorded content on the one TV where the program was recorder. The DVRs will also allow consumers to view their PC-based photos and play music from portable media players using the TV as the playback device. It is hard to see why customers would want to view photos on their TVs when they can look at them on their computers. And companies like Apple already offer portable speaker packages for listening to music in the home. The move by Verizon may seem clever at first, but why consumers would use it in great number is another mystery.

Wall St. has yet to fully embrace Verizon's plans, largely because they are risky. With cable companies operating with most of these systems already in place, Verizon has to demonstrate how it can capture share with products that we appear to be "me too" offering.

Perhaps the fact that Verizon trades at 1.17 times sales and AT&T trades at 2.14 times sales is telling. AT&T's PE is 18. Verizon's is 14.4. By way of further comparison, Comcast's ratio of sales to market cap is 3.1.

Verizon's strategy may work, but there are a lot of skeptics.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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