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On the Offensive

Baldwin Park is 4,500 kilometers and three time zones away from Verizon headquarters in New York. But creating a packet-switched network that traverses that distance is the goal of Paul Lacouture (pronounced LACK-uh-chur), the executive responsible for executing Verizon’s grand plan. Lacouture inhabits a 39th-floor office that once featured a view of the World Trade Center, and his desk is the size of a conference table. But engineers who work for Lacouture say they sense a kindred soul. “It seems like he’s turned a few nuts and bolts in his time. You don’t often see that in upper management,” says Pamela Jacoby.

Indeed, Lacouture started out as a network engineer 31 years ago, at the old New England Telephone (which became part of Nynex, which became part of Bell Atlantic, which merged with GTE in 2000 to become Verizon). And the ex-engineer shares the California team’s excitement about the shift to a packet network. “It’s something that you want to do” as an engineer, he says.

But it also makes business sense. Like all traditional phone companies, Verizon faces enormous competitive pressure. Cellular phones, cable telephony, and voice-over-Internet services like Vonage and Skype are steadily chipping away at its base of residential customers (see “Skype beyond the Hype,” TR June 2004). Even more alarming, from Verizon’s perspective, is a gradual drop-off in minutes used per line. Yet at the same time, Verizon’s broadband and data businesses are booming. When, in late 2003, the cost of installing packet-switching equipment finally dropped to levels comparable to those of traditional circuit-switching equipment, Lacouture realized that it was time to embrace a new future. “The information age is really just beginning,” he says. “We’ll be in a position to package wireless, voice, data, and video. It’s a tough transition, but we think we can grow there.” After years of simply trying to preserve the company’s market share against competitive forces, Lacouture says, “this was a chance for us to be on the offensive.”

Still, it is a difficult strategy. Customers won’t be able to take advantage of packet switching for services like full-motion video unless they have true broadband connections, and Verizon believes that means running fiber-optic cable to each home or business that wants it – a costly proposition. The central-office upgrades must continue, of course, and though much of Verizon’s backbone network already uses packet switches, it’s upgrading those, as well: the company is the first buyer of Lucent Technologies’ Lambda Xtreme switches, high-end optical switches each capable of handling 1.3 to 2.6 terabits of data per second. This enhancement, while not as costly as fiber to the customer, is also not cheap.

In fact, Verizon’s upgrades will cost enough that its siblings have opted for more limited plans. BellSouth, for example, believes that technologies like DSL and Ethernet can deliver data to homes at speeds sufficient for television; it’s laying fiber-optic cables to the curbside in many neighborhoods and switching to copper wires for the last 100 meters or so. SBC is doing the same in its existing service areas, reserving “fiber to the premises” for new housing projects. Lacouture, however, remains convinced that copper is a dead end. He believes these companies will eventually wind up doing the same infrastructure work Verizon is – and by then, he says, Verizon will have a huge head start.

But bets on media “convergence” have seriously damaged other companies, including Vivendi Universal and (ominously) AT&T. In the late 1990s and 2000, under then CEO Michael Armstrong, AT&T spent more than $100 billion buying McCaw Cellular and cable providers TCI and MediaOne in order to offer local-phone and TV service and position itself for a broadband future. AT&T overspent, and both the technology and consumer demand moved more slowly than expected, which left the company vulnerable when recession hit. AT&T sold off its broadband business, has steadily lost market share, and recently abandoned its pursuit of the consumer long-distance market.

AT&T actually had the right idea, argues veteran telecommunications consultant Frank Dzubeck, but realizing it would have required technologies that didn’t yet exist. “The implosion of the industry killed [Armstrong’s] vision,” he says. Verizon is a different animal: it’s a $67 billion behemoth with an established grip on local service, the third-biggest U.S. long-distance company, and in partnership with Vodafone, the biggest U.S. cellular company. Put it all together, Dzubeck says, and Verizon has everything it needs to kill itself – and then raise itself from the dead.

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