Naysayers don't worry Verizon CEO

His company's stock has sunk, its debt has been downgraded and its investment in a new fiber-optic network is regarded by some as a pipe dream, but Verizon Communications' chief executive is certain he is doing the right thing.

"This is almost religious ... religious with proper financial accounting," Ivan Seidenberg said with a laugh during a recent interview.

Seidenberg, 59, is by no means a messianic executive. Soft-spoken and self-effacing, he is faced with deep skepticism on Wall Street about Verizon's multibillion-dollar investment in a fiber-optic network to carry TV, high-speed Internet and old-fashioned phone service.

In his office in the soaring art-deco skyscraper built in the 1920s for New York Telephone, one of Verizon's predecessors, Seidenberg touted his strategy as the best way to reinvent a company whose roots stretch back to the opening of local telephone exchanges in the Northeast in the late 1870s.

"When it's all said and done, the growth opportunity here will be far greater than anybody is accepting at this point," he said, suggesting that Verizon's Fios fiber-optics project could someday allow people to consult their doctors by video link, to telecommute in numbers large enough to reduce global warming and to enjoy services not yet dreamed up.

The undertaking is expected to give consumers far greater bandwidth than Verizon's main competitors now offer.

But doubts about the project have helped drag the company's stock down by more than 10 percent over the past year and influenced Moody Investors Service's and Standard and Poor's recent decisions to downgrade Verizon's debt.

Analysts are particularly worried about the company's spending on Fios as Verizon's traditional local phone business shrinks amid competition from cable, wireless and Internet phone providers. Verizon lost nearly 3.5 million lines last year alone.

Company officials say the line losses are easily offset by growth from Verizon Wireless, high-speed Internet and long-distance service.

To Seidenberg, wireless is another example of an area where the company had the vision to make early investments over the objections of skeptics — and now it's driving the company's growth.

"Even 20 years ago, people never saw the full capability of wireless, but yet there were people in the industry, some of us ... who believed that this was going to change behavior, and you know what, [we] were right," he said.

This likely will be the year in which the Fios investment drags the most on Verizon's earnings per share, to the tune of 25 to 30 cents, Seidenberg said.

"You have to spend money to make money," he said. "It's fair to say that in '06 we are hitting about a level of dilution that would be about the maximum, and that from now on out, we'll start to get better."

Installation costs

Lawrence Babbio Jr., the vice chairman and president, said Verizon has made significant progress in cutting the cost of installing fiber, which it initially estimated at $1 billion for the first 1 million homes.

This fell by about 30 percent last year and likely will drop another 15 to 20 percent this year, Babbio said.

By year's end, "we will probably have cut the cost in half" from the start of 2005, he said, noting many investors do not grasp how much cheaper a fiber-optic network is to run than the old copper-based system, in place for decades.

Even as company officials are trying to reassure Wall Street, they are pushing Congress and state legislatures to make it easier for them to offer video by streamlining the laborious process of negotiating franchises one by one in thousands of localities.

If the company does not get some relief, Seidenberg said, it will have to reconsider whether to serve small franchises and might instead focus on big ones.

"This is the only threatening comment I'll make. ... Remember, there are some franchises that are big," he said. "So let's take the city of Philadelphia — it's big," he said. "Then you've got all these oodles of them in the state of New Jersey, or Virginia.

"So at some point, if we don't clean up this process, we just won't be in a position to do all the things that we think could be done," Seidenberg said. "If we don't see some change in behavior here, I think we are going to have to question how much we can do and how fast we do it."

Asked if that meant he would focus on big franchises rather than little ones, he replied, "It's something that we have to think about."

Seidenberg's stance on streamlining the video-franchising system is fiercely opposed by cable companies, which had to go to every locality in the country for approvals and want phone companies to have to do the same.

Cable executives say phone companies will "cherry-pick" by wiring only wealthy areas if they are not forced to serve entire communities, as local franchise deals routinely require.

"It's important to retain the local franchising process so that there is a level playing field in the video industry," said Thomas Rutledge, chief operating officer of Cablevision Systems, the sixth-largest U.S. cable TV operator.

"We encourage competition, but we think that competition requires that the players have similar obligations," Rutledge said.

"To allow someone to come through and just serve affluent suburban areas, not the rural communities, not the poor communities, gives the new provider a tremendous economic advantage," Rutledge said in an interview.

Before Congress

The House and Senate commerce committees are considering legislation that would make it easier for the phone companies to enter the video market.

Regulatory analysts see little chance of a bill passing this year, citing the short congressional calendar, the reluctance of lawmakers to enact legislation that would anger either industry in an election year, and the opposition of towns and cities reluctant to lose control over the local franchising process.

"Why kick 30,000 hornet's nests?" said Scott Cleland, chief executive of the research company Precursor Group.

Winning franchising relief is Verizon's top legislative priority this year, partly because it would allow the company to deploy the network and earn a profit from it faster, possibly allaying investor concerns.

"We recognize that we are making some bets," Seidenberg said.

"We don't consider them all that complicated because we have done this for a hundred years."