Verizon bets big on network infrastructure

From Verizon CIO Shaygan Kheradpir's 38th floor apartment on the Upper East Side of Manhattan with panoramic views of the East River, I saw first-hand the fruits of the company's $23 billion gamble to build a new fiber network directly to customers' doorsteps and a glimpse into where the strategy will lead next.

Kheradpir had invited a handful of journalists to his swank pad to show off the latest enhancements to Verizon's Fios TV service. The new features, which include everything from new widgets for getting weather and local traffic to a specially designed ESPN fantasy football application to remote control of DVRs, are rolling out across Verizon's Fios footprint right now with New York, Verizon's largest market, expected to get the enhancements starting October 9th.

While its cable competitors look for ways to curb their customers' usage of their networks by either slowing down certain applications or metering usage, Verizon plans to spend about $23 billion through 2010 to take fiber directly into people's homes to actually increase the amount of bandwidth people consume. The company also recently spent $9 billion on 700Mhz spectrum in the Federal Communications Commission's auction, which it plans to use to build a new fourth-generation wireless broadband network, again with the hope that people will choose bandwidth-intensive applications.

Verizon's commitment to betting big on bandwidth could cement its dominance in the communications market for years to come. But these bets don't come cheap. And as network operators find themselves in tighter competition with Internet giants such as Google, they could end up simply becoming dumb pipe providers, competing on speeds and feeds rather than services.

There's no doubt that service providers are caught between a rock and a hard place. Not only must they compete with each other, but they also have to think differently and innovatively to compete against new Internet competitors, who are using the service providers' high-speed infrastructures to deliver competing voice and video services.

While other service providers, like AT&T and the cable companies, have tried to deliver new services and enhancements by incrementally upgrading their infrastructure, Verizon has gambled all its chips by spending billions of dollars on fiber infrastructure that it believes will future-proof its network.

Verizon's Kheradpir admitted that Verizon's fast fiber pipes will likely be used to deliver new applications and services that Verizon may never be able to monetize. But the super fast infrastructure also provides Verizon with a blank canvas that its own developers can use to create new services.

"The network that Verizon has created with Fios is a dream for software developers," he said. "It's what we all dreamed of when we were in school. It's basically an unlimited pipe that can be used to develop whatever you want."

The main thing the ultra-fast fiber network enables is the ability to deliver rich content, namely high-definition video. According to J.D. Power and Associates, the number of households that report viewing high-def programs has nearly doubled since 2007, reaching 55 percent this year.

Kheradpir also believes that HD doesn't stop with TV. People will increasingly want high-definition Web video and high-definition digital music. That's why Verizon is promising at least 100 HD channels as part of its Fios service in places like New York City. But high-definition content eats up bandwidth, making it difficult for many of Verizon's competitors to keep up with demand. Verizon's competitors are also introducing enhanced offerings. Time Warner Cable, which competes with Verizon in New York City and the surrounding area, is also pushing for 100 HD channels by the end of the year.

Still, Kheradpir believes Verizon is better positioned with its all-fiber network to stay ahead of the HD curve.

Building the network at home
As home networks increasingly look more like corporate local area networks, Kheradpir also sees an opportunity for service providers to manage their networks. He calls this the "consumerization" of IT. The difference between networks in the home and in the office is that instead of shuttling corporate data back and forth, people are sharing digital pictures and music, watching high-definition video and using VoIP services to stay connected to family and friends. And this basic difference means that service providers have to think differently about serving these customers.

"IT in the corporate environment is all about improving efficiency," Kheradpir said. "But in the home, it's about improving quality of life."

And that is where Kheradpir believes Verizon can add value. Not only can it provide the basic infrastructure, but it can build the applications that ride over this infrastructure to improve users' experiences. This means allowing people to access their digital content from wherever they are on whatever device they want, he explained. And because few people have IT managers living with them, it also means hiding the complexity and management of the technology in the network far from the end user.

Verizon has worked this concept into its latest Fios TV upgrade. Its new set-top boxes will automatically discover all connected devices whether they're wired or wireless, and it will allow people to view photos or video or listen to music from any device on the network. This means that you can share pictures from a PC hard drive on a computer. Eventually it could also allow people to listen to the digital music that's stored at home on their PC while on their cell phones.

"The consumer doesn't want to think about where they store their content," Kheradpir said. "Our view is that people should leave their pictures and music where it is. And we will extend the network to get it for them."

The latest version of Fios TV will also include remote DVR control. Initially, this feature will allow users to control their DVR from an Internet-connected PC. But the company also demonstrated how it can be done via a cell phone. Using a mobile Web site on phones such as the LG Voyager and the enV, subscribers will be able to set recording schedules, search for recorded shows, and enable parental controls.

In addition to needing someone to manage their home "IT" needs, Kheradpir believes that consumers want more personalized content. Again, a high-speed network can help facilitate this. For example, Verizon has added widgets to its latest Fios upgrade that allow third-party developers to create applications for personalized local weather, traffic, and horoscopes. One Verizon engineer even created a Facebook application so that people can access status updates on their TV screens.

Verizon has also included a "What's Hot" application that anonymously keeps track of what people are viewing to show people the most popular TV shows in their areas. Kheradpir said that Verizon is able to offer more personalized services because of the bi-directional nature of its network. Not only can Verizon broadcast content to its subscribers, but it can collect information and allow for individual interaction to provide consumers with a more personalized experience.

Seeing returns
So far, Verizon's gamble appears to be paying off. In areas where it sells Fios TV, Verizon has been able to steal customers from cable and satellite providers. And as of the end of June this year, Verizon had increased its Fios TV penetration rate to 19.7 percent from 13.3 percent in 2007. In total, the company has 1.4 million Fios TV subscribers.

Verizon is also getting high marks from customers. In a recent J.D. Power and Associates survey, Verizon Fios TV ranked higher than cable or satellite in terms of customer satisfaction. Specifically, customers said Fios TV's picture clarity and programming exceeded their expectations. AT&T, which provides its U-Verse service, also got high marks for its IPTV offering.

Verizon's goal is to attract 4 million customers by 2010, giving it a market penetration of about 25 percent. And it hopes to attract about 7 million Fios Internet customers, for a penetration rate of 35 to 40 percent.

But Fios is just the beginning. Verizon is also in the early stages of planning its fourth-generation wireless network that will be used to deliver the connected experience to wireless devices. While Kheradpir admits it is still in the early days on the wireless front, he sees it as an important piece of the strategy.

"Wireless is a key lever," he said. "From the time we wake up until we go to bed we generally have a wireless device within reach. So it makes sense to extend this strategy to those devices as well."

Indeed, everyone in the communications sector sees wireless as the next major frontier. Verizon's cable competitors Comcast and Time Warner Cable have invested in the new Clearwire joint venture, which will combine Sprint Nextel's WiMax assets with Clearwire's to build a next generation wireless network. Google has also made various wireless investments. Verizon has clearly staked much of its future on a high-capacity wired infrastructure. But it remains to be seen how aggressively the company will bet on its next-generation wireless network.