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	Discussion Board Verizon Communications

By Chris Rugaber (TMF Chris)

Let's begin by settling where the name "Verizon" comes from -- and no, it's not the back cover of a Mad Magazine. As the company's website states, the name is a combination of "veritas," a Latin term "which means truth and connotes certainty and reliability," and "horizon," which "signifies forward thinking and limitless possibilities." Of course! Doesn't that make you want to invest in the company right there?

Perhaps not. But, don't let Rick's scare stories deter you. Verizon is not threatened nearly as much by competition and commoditization as Rick would have you believe.

In fact, one of the primary criticisms of the RBOCs is that they continue to act like a monopoly, and in one important way, they are: Verizon is basically the only telephone company with a direct link to millions of homes and businesses in its service areas. AT&T went to huge lengths to try to get its own direct connections over cable lines, and the company fell apart as a result. If a grand old blue chip like AT&T is willing to go to such great lengths to get what Verizon already has, then maybe Verizon is worth something.

Then we have the competitive local exchange carriers, or CLECs, the supposed beneficiaries of the deregulation Rick mentioned in passing. As has been well-documented on our site, these companies aren't exactly making the RBOCs shake in their boots. The CLECs are faced with the challenge of building their own networks at great expense, and yet are still relying on the RBOCs to provide the "last mile" connections to their business customers. Few are profitable, and many have taken on a lot of debt while building out those networks.

In addition, CLECs such as NorthPoint, Verizon's erstwhile DSL partner, had several Internet Service Provider (ISP) customers reselling its DSL service that weren't able to pay. Despite the souring of the deal, it doesn't particularly threaten Verizon.

Rick's bigger argument is that Verizon is offering low-margin commodity services or, as he puts it: "If all of Verizon's offerings have come down to the cheapest provider receiving the right to bill, then the winner of the lean-margin slicing tourney is, in fact, the loser." It's true that telecom carriers generally run the risk of engaging in never-ending price wars -- look at what happened to the long-distance carriers.

But, the RBOCs are in a different boat. To begin with, unlike AT&T, WorldCom, and Sprint, they aren't competing with each other to provide local service in each other's service areas.

More importantly, margins aren't necessarily the issue for a carrier like Verizon. Instead, the company's goal is to achieve increasing returns on its capital investments. In other words, while Verizon might spend billions and billions on network upgrades, spectrum licenses, and additional wireless coverage, it won't have to make these investments forever. As it bills more and more customers for local and long-distance phone, as well as DSL and wireless service, it should increase the billions in cash flow from operations it already receives, without having to sacrifice the same billions in capital expenditures (though the company will continue to spend a lot this year).

Verizon aims to have literally millions of customers paying recurring fees for a wide variety of services, using a huge, developed asset base (the wireline and wireless networks) -- that may require continuous maintenance and upgrading, but that will be largely complete (and nearly impossible for competitors to duplicate). As a result, the cash should continue to flow in, while less flows out for capital expenditures. This is the "sunk asset" business model that Fool analysts Bill Mann and Brian Graney wrote about last fall, in a highly recommended series.

Will Verizon pull it off? There are no guarantees, but the company is currently on track. There are certainly greater risks out there in the markets these days.

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