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A Little Fiber in the Telco Diet.


Which is worse, being early, or being wrong?


Which is worse, being early, or being wrong? In the end, they're both the same.

Let's rewind the clock a bit: It's the late 90's and Global Crossing (GLBC), Qwest (Q), Level 3 (LVLT), Worldcom, and a myriad of other up-start communications companies are laying fiber around the globe. At this point, it was called "dark" fiber. This meant there was nothing to "light" it up. Nothing to fill the pipe. Imagine an oil company building a pipeline that spanned the globe with the hope of finding oil to fill it. You would have fired the CEO and lynched the board of directors for spending money on a lark. This is EXACTLY what happened and what forced many of these companies to fold or to shrink back to a shell of what they used to be. Essentially they were too early.

Fast forward to present day: The battle lines that once existed are disappearing between the companies that provide the pipes and the companies that fill it. Some were early, but late enough and/or made enough "strategic acquisitions" also known as "luck" to survive. AOL did it with Time Warner (TWX) and Qwest with US West. We know what happened with the others Worldcom, and Global Crossing. Many of us shudder at the sound of those names.

But as with all good ideas that came around too early, there is a dormant infrastructure that is rearing back to life with the convergence of companies and the delivery needs of content.

Last year a number of sites reported on Google's desire to acquire dark fiber. Realizing the bandwidth needs for their future and an opportunity in time when dark fiber can be acquired because of a surplus, it was rumored that Google (GOOG) would build their own global network. I would still believe that this is on the agenda. It's been in the small print for some time.

One of the key issues for adoption has been what's called "The Last Mile." This is the ability to connect the network from the street to the home. This has always been a core issue. Now Verizon (VZ) is making a strong push to change this. Today, I have an installer at my home installing Verizon's new FiOS. Now I struggled between switching to Cable modem, or sticking with DSL. I'm giving FiOS a try since it is so cheap compared to what I currently pay Verizon. They've down sold me in an effort to retain my business. Verizon is simply trying to stake their turf and make sure that they own the pipes.

In recent articles I've talked about cable companies versus the telcos. For the most part, I believe the cable companies will win the majority of consumer share. Verizon is a bit of an anomaly in my eyes. They are transforming at dare I say (Dare! Dare!) light speed. As a total communications company, they have the full spectrum and a solid network. If they can capture a large share of "last mile" installations, then they are going to be a significant player for the foreseeable future. Ironically this press release came out as I drafted this story.

From an investment standpoint, keep an eye on Level 3. They were one of the early players and have survived the down turn. Needham initiated coverage of them Tuesday and Weisel initiated and upgraded in February. They have a pretty robust fiber-optic backbone. Keep an eye on Verizon over the next couple of months as they continue this aggressive push for FiOS. The inherent risk is the hit they'll take as they invest in converting copper to fiber with their user base. And finally, keep and eye on Comcast (CMCSA) for movement.

Comcast, one of my favorites has the distribution and they've aspired to own the content. Comcast, rumored to purchase Disney (DIS) a while back moves to acquire the 40% of E! Networks, which is owned by Disney. Now here's the beginning of what I believe has the potential to become a feeding frenzy. Comcast is a pipe and they're looking to control the content that runs through it. Roberts looks at Warner Brothers and sees a model that he can surpass.

Keep an eye on Qwest. Most view this company as a rebranded US West. Considered by most to be the worst of the RBOCs (Regional Bell Operating Companies) a 60,000-employee organization was bought by an 8,000-person organization. Hmmmmmm, where have I seen this? AOL Time Warner? The story seems eerily familiar. The big difference is this - as you drive through the desert in the mid-west/north-west, you'll see these orange cables sticking out of the ground - dark fiber. With the bandwidth needs today and broadband penetration now hitting 64% of all Internet households according to Neilsen Net Ratings, it's potentially time for more fiber in the diet.

If you're interested in learning more about fiber-optics, look at this, this and this.

Position in TWX.
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