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Wall Street Journal, January 4, 2008 commentary


The Wall Street Journal  

January 4, 2008

COMMENT FROM breakingviews

Fiber-Optic Battle Lines

Bet on High-Speed Network
Pays Off for Verizon, AT
Still, Cable Looks Pricey
January 4, 2008; Page C14

Investors have taken their time to realize the phone companies' diet needed a lot more fiber. A plan by Verizon Communications to spend $18 billion over six years to install high-speed fiber-optic lines directly into customers' homes was initially regarded skeptically.


The phone companies furthest along in their rollouts are pummeling cable groups. Shares of Verizon and AT&T both rose more than 15% in 2007, while shares in Comcast and Charter Communications have fallen 35% and 62%, respectively. This trend isn't over.

Verizon and AT&T both offer the so-called triple play: phone, television and Internet service. While the big cable guys have about 10 million customers for their phone service, the phone companies are just getting started in video. AT&T has around 250,000 customers and Verizon about one million.

Installing fiber may be costly, but it enables the phone companies to leapfrog their cable rivals. While expensive to install, fiber is cheaper to operate because many repairs can be done off-site. Verizon claims a saving of around $900 a customer a year. More important, a fiber connection to the home offers a faster Internet service than the cable companies serve up.

Consumers are switching. And once they do, they don't tend to return. Verizon says less than 1.5% of its video customers leave each month. The early so-called subscriber-churn rate is about half that of many cable companies.

Cable companies could bump up their investment to compete. Cablevision and Comcast increased their capital-spending plans last quarter. However, the average cable company has a prodigious amount of debt. In the short term, it could be difficult for them to take on much more in order to build better networks. Despite all this, the average cable stock trades at a 30% premium to the big telephone companies, based on estimated 2008 earnings before interest, taxes, depreciation and amortization. This doesn't look right. Cable companies may be overvalued or phone companies undervalued -- either way they should converge over time. Playing that trend again in 2008 is likely to reward investors.


--Robert Cyran ***

 This column is written by breakingviews.com1, an online financial commentary site.
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