Ivan G. Seidenberg Interview Excerpts
CEO, Verizon Communications Inc.

Tuesday, January 31, 2006 10:03 PM

Following are excerpts from a Washington Post interview with Verizon Communications Inc. chief executive Ivan G. Seidenberg. The interview, conducted by Post staff writer Arshad Mohammed, took place Jan. 30 in New York.

Q: When do you expect to see a positive return on the FiOS investment?

A: It's a big project and since we're building out market by market -- just to give you a rough sense and without getting into a detailed accounting presentation . . . -- that as you build these markets out over a period of four or five years you generally reach cash flow positive, then you reach EBITDA positive, and then you reach net income positive and you do this market by market. So it will take enough critical mass in enough communities for the whole project to turn positive, but you start out, in effect, community by community, exactly the way you did it with building out wireless and before that before the way the telcos built out their telco franchises and frankly the way cable has built out their franchises. There is no anniversary date, or one barbecue, that we are going to have on the date we all . . . this is all a market-by-market deal.

Q: But is there a date by which you would hope that it will cease to be dilutive to your earnings?

A: Well, sure. As we looked at the business plan is, you know, four to five years out, but again when you look at this you have to be careful what you are looking at because the minute the first few franchises turn positive, the investor looks at the whole process differently. And there is certainly going to be growth. There are many cable companies who have never turned a profit. So I think we have to be careful how we look at this. And I think in our case, once we get enough critical mass to demonstrate that the capital we are spending will generate the top line, and then we convert the top line into the bottom line, there will be a lot more, I think, 'comfort level' that many investors will have. In spite of all of the financial scrutiny this has been under, no one has challenged, in effect, the capability of what we're doing. So this is not, for example, I don't want to pick examples that pick on companies, but this is not like putting in satellite phones that people weren't sure were going to work. People know that fiber optics work. So this is really an issue of the financial payoff rather than the technical capability.

Q: Would you expect that over the four- to five-year period that you have projected out that by the end of that period it would have ceased to be dilutive?

A: I am not communicating this very well. I think there will be a lot of markets that will cease to be dilutive and then we will be starting new markets . . . So the issue is once you get enough critical mass -- so what we need to do is over the first, say, five years of the project is get enough critical mass to offset new markets. For example, we buy spectrum in wireless and we add a market and we build out, that market is dilutive, but when you look at the big ship, the big ship covers that up. So I think it's a question of when we get enough critical mass to do that. So getting back to the video franchising, the quicker we get through this process, the quicker we can get these markets penetrated, and the quicker we can show that there is successful execution of this strategy.

Q: In the (fourth quarter) conference call, the company noted that it (FiOS) had had a 4-cent dilutive effect on '04, about 15 cents on '05. . . . (Verizon chief financial officer Doreen Toben) said that she expected for '06 it would be an additional 10 or 15 cents. Did that mean, 10 or 15 cents beyond the 15 cents in '05?

A: Yes.

Q: In other words 25 to 30 cents.

A: Right. . . . By the way, which is a very small amount when you think about it. You know . . . every time we put a cell tower in, it's dilutive until you get customers up and running. So, the issue is . . . because of the heightened focus on this, I think we [tried] to help investors understand. So even when you hit a peak period of dilution, we're looking at 25 to 30 cents in total. Remember, since we already had [been] reporting about, say, 12 to 15 cents dilution in '05, and we are building another 3 million in '06, so there is more dilution. Now, by the time you get to '07, and you start to add more [lines] the ones you built in '04 and '05 will start to generate some revenues so they will start to offset some of that. So 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. So that's another way to think about it. But every thing you do, whatever you do in a capital intensive business . . . the first year or so, until you get customers up and running, you have to spend money to make money.

Q: Ten years, 15 years, 20 years -- what is the kind of time horizon that an investor needs to look at, or what is the horizon in your own mind, where you feel like you will have turned the corner?

A: Well, I am always interested in listening to investors who do 10-year discounted cash flows and then worry about [your] next quarter's earnings. So I am not sure what different investors do. I think we have an obligation to do both, which is do the right things that will create sustainable value over the long term, but at the same time manage your company so that you are providing a consistent return to shareholders in the short term. And so we recognize that we are making some bets. We don't consider them all that complicated because we have done this for a hundred years in terms of evolving technologies. But here's the proof in the pudding. When you look at the way we are going on this, the market has already spoken. So whether they buy these services from us or the satellite or the cable companies, customers love this stuff. They want more speed, more interactivity, more choice and it creates entry opportunities for hundreds and hundreds and hundreds of software developers to provide new services. So the issue for us is a management challenge, [it is] to deploy the technology and build the systems and get the results to make a profit. We know how to do that. It's what we do. And so whether we do it in one year or three years, we are going to do this. We are going to do it well. I think . . . most of the people creating the noise around us are our competitors, who have frankly tried to convince the investors that the investments aren't prudent. So why would anybody listen to the cable companies tell them what our costs are? I think a lot of investors, and some press, are getting spun by the cable companies by saying, well these guys can't afford to do this. We can do it. We know how to do it. We know how to get the costs down.

Q: Have you already begun to see that? I think the only time you have provided an estimate on how much it costs to pass a particular home was about two years when you said you expected to have to spend about $1 billion to pass a million homes . . . . Have you already begun to get those numbers down?

A: Yes.

Q: Presumably you are getting better at it.

A: Well, we are getting much better at it. As a matter of fact this year, we kept the capital program exactly the same and we added three more million homes. So its seems to me like we are getting twice as smart all of a sudden . . . as the customers buy these services, we will produce the metrics that make sense for ongoing reporting -- number of customers, number of video customers, revenues, churn, EBITDA, all that stuff. What I don't think we need to do is to provide point estimates on competitive information -- how we do it, how we roll it out, where the costs are . . . So I think that the little bit of a trough we are in right now is, it's fair that people are seeking more information, but they are seeking project information. And I think we have been very clear that as each of these markets gets deployed and we get results, we'll start reporting those results. And we already did that this quarter. We are reporting now combined DSL, and we'll start to report video when we are in a market for six months or so and we'll do all that . . . We'll do that. It just takes a little bit of time for all of the investors to get enough quarterly data to get more comfortable. And I would be the first to suggest that while we are very pleased with the early results, they represent early results, and I think that we frankly we are doing far better than I thought we would but we need more consistent performance to make sure that this is sustainable and we'll demonstrate that.

Q: Can you give me a sense of the new products that you expect to be able to deliver -- I am thinking beyond television, high-speed Internet access . . . and obviously voice?

A: I'd rather talk in terms of categories because it's always dangerous for one company to think it knows all of the things that will happen on the Internet or will happen over these networks but let's look at some capabilities. First of all, when you have 50 to 100 megabits, and you have symmetry of upstream and downstream speeds, now you are thinking in much different concepts. Just think of all of the high-definition programming that could be done. Just think of all of the essential services that one can offer, consultations with doctors, transmitting x-rays, I guess renewing your [driver's] license, who knows? . . . And then when you think of the ability to work at home and deal with -- since you gave me an open-ended question I can solve global warming with this too. . . . I don't want anybody to be limited in the way that they think about what these networks do. This is not about more movie downloads. This is about changing basic distribution of so many different things and letting creative people do this. I make a joke out of global warming, but you get more people working at home and you have less people in the car for fewer hours a day, I think if you do all the math ,somebody would conclude well that's less carbon dioxide. So I am not willing to concede that we aren't going to be part of participating in the solution to world issues here. Health care is another one. What can you do with these kinds of networks that people couldn't even dream of thinking about five years ago? . . . I would prefer, at least on this, to admit I don't know all the answers but I don't want anybody capping the capability of what we are doing simply because we haven't thought of all the things people will invent. This is an important point to me, because I think it's an untapped understanding of what we're about. Not to pick on the world but, even 20 years ago people never saw the full capability of wireless . . . but yet, there were people in the industry, some of us, guys like Craig McCaw, and others who believed that this was gong to change behavior and you know what, [we] were right . . . This is almost religious . . . religious with proper financial accounting.

Q: This is a question that you are not going to like but I want to make sure you have every opportunity to address it. To the extent that there . . . are people who look at FiOS and fear that it might be a pipe dream, what is your answer to that?

A: I think it's pretty clear. It's a fair question, by the way . . . It's a very funny expression, 'pipe dream.' Here's the issue. I think most investors have a fair concern over a couple of things. What they see is a hypercompetitive telecom space in the wireline space, right? And a lot of capital to go after a market that they think is shrinking. What I believe is that when it's all said and done, the growth opportunity here will be far greater than anybody is accepting at this point. If I believed the market was static, and all we were doing was shifting market share from one set of . . . suppliers to another, then I think it would be a fair case. But in almost every case that you put in new technology early on it's substitutable and then later on it becomes expansive. I would also point out, by the way, that these exact same arguments were the arguments that were made in the early days of wireless . . . If there's a place that I wish I could do more, quicker, while we are transforming a business that's being completely changed by technology, I wish that we had more sources of growth in other parts of our business. And so, when you think about it, our revenue growth, during this entire period, has led the entire industry in terms of any of the large cap companies. So what FiOS has done is it's caused an earnings dilution question in the short term . . . So what we need to do is plug that hole quicker than we have. But the succinct answer is the growth is there.

Q: What are you going to tell Congress you would like to see them do [on video franchising]? Give me the principles.

A: Several of the principles are this, which is, first of all, we want to take the issues off the table of franchise fees, providing the Peg channels, and all of the local rights of way issues. So, this is not to us an opportunity to unravel the comfort level that local municipalities should have around those questions. So the first set of principles are to make sure that there are no changes to the things that are important to municipalities concerning franchise fees, the Peg channels and rights of way issues. Now the things we would like would be a state-wide or a federal franchise so that you don't have this town-by-town, municipality by municipality [process]. We don't want to get in the cross hairs of different geographies and we don't want to have to negotiate with municipalities with the cable companies as the shadow negotiator behind the scenes. We want to streamline the process. We don't feel that, since we're already regulated under one set of principles under the public service commissions, we don't feel like we need to get a second franchise to have somebody else regulate our network at the same time that someone else is doing it. So I think those are the basic principles. But what this basically should do is take, I think, the risk away from the municipalities in thinking they are going to lose their fees and insert in the place of that a system that will eliminate all of the inconsistent behaviors, eliminate the unfair discrimination . . . and remove all the barriers to entry to get these products out there quickly. This is like motherhood and apple pie.

Q: Why is that? Why is it like motherhood and apple pie?

A: Because we are creating competition. You know for years, people would say, 'Why don't we create competition for the incumbent telcos?' . . . We are saying, 'Let's create competition for the cable companies' and people are throwing my financial statements at me as reasons why we shouldn't do this. It's ridiculous, totally absurd.

Q: Do you know how many hundreds, thousands [of franchise agreements] you would need to get to your target?

A: There are several thousand. I also need to make this point. So this is the only threatening comment I'll make. That over time, remember, there are some franchises that are big. So let's take the city of Philadelphia -- it's big. . . . So the issue is, that's counted as one. 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. So at this point I think doing it town by town . . . we are willing to do it to prove the feasibility of why this is all a good idea. But at some point, 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.

Q: Does that mean that you will concentrate on the big franchises rather than the little ones?

A: It means that -- we'll decide when we get there.

Q: But it's clearly something that you are thinking about.

A: It's something that we have to think about. You know the old expression. You never tell anybody what you are thinking, right? But it's fair to say we have to think about it.