Bob Rice Blogs: AT&T v. Verizon. Who's the Pawn?

Bob Rice has had many careers. He was an attorney with the U.S. Department of Justice, a partner at law firm Milbank Tweed Hadley & McCloy, C.E.O. of a tech startup, and now runs merchant bank Tangent Capital, which he founded in 2005.

Today, he's squeezing in some blogging. One day. One place: Portfolio.com.

Chess clubs have their kibitzers, and Wall Street has its analysts. Both groups specialize in short-term advice based on the obvious. And neither has much of an appetite for the kind of strategic thinking that generates value over time. In fact, the biggest difference is probably just that you don't lose money listening to the kibitzers.

Okay, maybe we shouldn't be so hard on our Wall Street friends. Mostly, they're just playing the same game that your standard-issue corporate executive does: making and evaluating decisions based solely on what some Excel spreadsheet shows. After all, who can argue with a decision that chooses a bigger number over a smaller one? Gather lots of data; create some formulas for projected profitability; insert sets of base-case, upside, and home-run assumptions; hit "enter;" and the answer is clear. Automatic management.

But, here's the problem: in the hyperdynamic world in which we now live, those financial analyses will not only likely be wrong; much more fundamentally, they won't account for the strategic situation that will exist by the time the decision is implemented.

The ongoing chess game between Verizon and AT&T illustrates the point. Back in 2003, Verizon made the decision to roll fiber past about half its customer base. It was, indeed, a breathtakingly expensive proposition: north of $20 billion. But the company thought it could achieve what grandmasters would call a "dream position"--a setup that would provide a dominant, long-term advantage. Not a calculation for checkmate, mind you, or even a clear calculation to a profit. But its executives did see a position that would provide a lasting strategic edge and, at 50 megabits per second, a luxurious flexibility to adapt to future customer bandwidth demands.

Over at AT&T, the paint-by-the-numbers executives blanched. After all, for a fraction of the cost, the existing copper wire could be juiced by new technology to pump maybe 3 megabits per second, plenty good enough for "high-speed" internet access. Moreover, why invest so heavily in landlines when cellular would be the future?

For AT&T, it was all about the numbers. And numbers are easy.
For Verizon, it was all about the strategy, and strategy is hard. So the analysts jeered. No matter how you do the math, a leading critic said, you'll wind up having invested $6 billion more than you'll make (and save, given the lower costs of maintaining a fiber system).

But, as is nearly always true in a world in which so much changes so fast, those purportedly damning numbers totally fail to account for the strategic position that will prevail once the fiber is laid. The system bandwidth demands of 2003 "broadband" now look like a thread, once YouTube, multiple channels of high-def TV, and VOIP are tossed in. Somehow, those darn Excel programmers forgot to include a function to cover this situation.

Not that the analysts miscalculated how Wall Street would react in the short term. Sure enough, AT&T stock outperformed Verizon's for a while after the rollout started. But the guys running the company simply cannot do it solely to maximize current shareholder happiness. (At General Motors, one of whose executives famously scoffed at Honda's "green" approach at a car show just a couple of years back: "There's no return on the environment.")

Instead, executives must prepare the company to compete in the vastly different world that is certain to exist a few years from now. Still, is the FIOS bandwidth over the top? Was it worth it? No way, and absolutely.

Remember that, in the 1980s, no one knew to what use home computers could be put; so I.B.M. didn't even bother trying to enter the market. In the '90s, nobody thought we'd ever need more than a dial-up connection to get on that internet thing. AOL was sure to dominate internet access permanently. With FIOS available to a critical mass of homes, new habits and applications will certainly be developed to fill the pipes and generate more revenues than currently predicted.

But even if that doesn't happen, so what? Fiber allows Verizon to make a killer "Triple Play" offer that copper wire will never be able to match. And that's where all the growth is. As the company captures more and more of the market, they'll be able to drive the new users to more and more of their new offerings (FIOS-based or not).

Think about Apple: It has turned a stupid MP3 player into a surging demand for its computers and, ultimately, the leading smartphone on the market. The tail can indeed wag the dog, regardless of what cell F32 says.

And, by the way, remember what that cell said: a $6 billion loss. Does anybody really want to argue that getting a decade in front of its competition wasn't worth a net investment equal to one-third of the annual cap-x budget?

What you should not think: that the Verizon guys were gurus who could precisely predict the future. Nobody can credibly say that they saw how networks would be forced to adopt to time-shifting by offering episodes on the Web, how video shorts would become an essential social axis, how rapidly VOIP would catch on, or how sports would enflame both demand for high-definition video and 24/7 Web access to every Olympic event.

No. Great moves are not based on clearly understanding exactly what's going to happen in the future. They're based on ensuring that you'll have the right strategic position and capabilities to adapt to it more rapidly than your opponents. They allow you to exploit an unforeseeable future once it does announce itself.

That's bad news for analysts and unimaginative executives: Great moves most certainly are not found, or disproven, by crunching numbers. Or even--dare we say it?--by the stock price after the next earnings call.