For more than a century, the phone companies in America have drawn their power and wealth from their venerable networks of switches and the copper lines that lead to nearly every home in the country. But now the biggest of the Bells, Verizon Communications Inc, is coming to grips with the limitations of the traditional phone network—and it’s making ambitious plans to replace it. "Having watched this industry for 35 years," says Bruce Gordon, president of Verizon’s retail division, "I don’t believe it’s a network that will take us into the next decade."

So Verizon is pulling out its wallet to retool. Faced with growing competition from cable-TV companies and others, it’s committing itself to the most dramatic network upgrade in its history. As BusinessWeek Online reported on March 18, the plan is to hitch every customer in its local-phone region to a blazing fast connection. This means speeds of 5 to 10 megabits per second, up to 20 times faster than today’s typical broadband connections through digital subscriber lines or cable modems. That’s fast enough to provide voice, video, and digital-TV signals on a single connection to the customer.

The company won’t say how much the project will cost or how long it will take, but it’s sure to cost billions of dollars, and could take 10 or more years to roll out. "These copper loops will be replaced by fiber-optic technology. We’ll begin initial rollout in 2004, if technical trials... and regulations go well," said vice-chairman Lawrence T Babbio in a March 19 conference call.

Verizon’s gambit may well be the best news out of the telecom sector since the industry went into a recession nearly three years ago. During the boom, the industry fell prey to over-ambitious business plans and ill-conceived mergers, cobbled together with financial engineering. Such practices led to the bankruptcy of industry giants like WorldCom Inc and Global Crossing. Instead of wasting investors’ money paying a huge premium to buy another company, Verizon is proposing to invest slowly and steadily in the improvement of its network.

The benefits could be enormous. Verizon, which has a 2003 capital budget of up to $13.5 billion, one of the largest of any company in the US, could help stabilize the struggling telecom-equipment sector. The spending would trickle through the tech food chain and into the economy. More importantly, it could provide a platform for the innovation of new products and services, from digital entertainment to cheap video calls.

Pulling this off, though, will be quite a challenge for a company that failed at several high-tech ventures in the ’90s. Verizon’s merger with John Malone’s cable empire, the former Tele-Communications Inc, fell through. Its attempt to enter the interactive-TV business fizzled, too. And while Verizon has stumbled, cable-TV companies have raced out to an early lead in broadband.

Still, Verizon’s offering, when it arrives, should make today’s broadband look positively pokey. The company stands to benefit from plummeting prices of high-speed technology, which are off as much as 75% since the ’90s. High-speed wireless technologies also have become better and cheaper. These are systems that dispatch fast streams of data to antennas miles away. To reach every customer, Gordon says, Verizon is betting on a combination of fiber and wireless—but is keeping quiet on the details.

Plenty of challenges lie ahead. Verizon paid down $10 billion of debt last year but still ended 2002 with a heavy $54 billion of IOUs. Stress on the balance sheet, combined with the need to pay a dividend, limits the company’s financial flexibility. CEO Ivan G Seidenberg, a former union cable splicer, will be under pressure to seek painful concessions from organized labor to lower costs for the broadband project ahead. He’ll have to move fast, too. Verizon already faces enormous competition from wireless companies and resellers, such as AT&T and WorldCom, which eat away at the company’s core business. These resellers have captured about 8% of the market as of 2002. That share is expected to double by 2004, estimates communications analyst John Hodulik of UBS Warburg.

By Steve Rosenbush in New York in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc