The New Digital Divide

Teresa Mastrangelo - Principal Analyst

Though I applaud Verizon for making fiber to the home a cornerstone of its future — the FiOS network has reduced operating costs significantly while giving consumers faster speeds, higher quality, and unique services and features — in reality, it poses a problem that highlights the potential for a new type of digital divide: fiber vs. copper.

Over the last 12 months, Verizon has introduced 50 Mb/s service as well as symmetrical 20 Mb/s service across its FiOS footprint, while the fastest DSL service has remained unchanged at 3Mb/s-768 kb/s. In addition, only FiOS subscribers can get FiOS TV, which far exceeds Verizon's own DirecTV offering, particularly when you add the multiroom digital video recorder and interactive media guides, as well as future services such as high-definition video-on-demand, advanced gaming, media sharing and home security.

And exactly what's happening on the copper side? Absolutely nothing. The 50% of Verizon's subscribers not on FiOS are basically left with a rapidly aging copper network. Unlike other telcos that are upgrading their copper plant with ADSL2+ and VDSL2 to offer speeds of 6 to 25 Mb/s and advanced services such as IPTV, Verizon is standing pat. This is reflected in a steady decline in net DSL additions since the end of 2005.

While a certain amount of decline is expected as current DSL subscribers switch to FiOS, the number of fiber to the home (FTTH) subscribers is not growing fast enough to overcome the drop in DSL subscribers, resulting in declining overall net additions. Although some will make comparisons with NTT in Japan, there are three distinct differences. First, NTT is making FTTH available to 100% of its network. Second, its overall net additions have remained steady, and even growing, despite the loss of DSL subscribers. And third, NTT's DSL speeds and pricing are comparable to its FTTH speeds and pricing.

Rising consumer frustration levels in non-FiOS markets will provide ripe opportunities for competitors to step in and profit. At present, virtually every cable operator can surpass Verizon DSL on speed and can offer a triple-play package at a comparable, if not lower price. If I were a cable operator, I would market aggressively to every non-FiOS market between now and 2010.

The big question is whether Verizon plans to invest in its copper plant. From an operating perspective, upgrading the network would be necessary to reduce cost while transitioning to an all-IP infrastructure with enhanced services across the entire network, not just FiOS. There is no evidence, however, that this will occur, even after 2010, once FiOS has passed the targeted 18 million homes. And while Verizon said it eventually will move toward offering full-blown IPTV, it appears this only will be available to FiOS subscribers. By the time they invest in the copper network, they may have already lost those customers to competitors.

I have no problem with Verizon trying to differentiate its services from the competition, but I do have problem when, within its own territory, the diversity of services is so great that I already feel like I'm being served by a different operator.

On the surface, Verizon's lack of interest in its copper plant appears intentional: a means of eliminating its less lucrative markets by neglecting them to the point where customers are all too happy to choose an alternative operator. But it's important to remember that these revenue-generating customers are subsidizing FiOS, and once they are gone, rates will increase.


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