Paradigm Shift in Access Markets?
Though it is a bit early to draw definitive conclusions, researchers at the Yankee Group argue that some telcos “are making dangerous technology bets that will haunt them for years.” Specifically, Yankee Group analyst Benoit Felten believes a truly next-generation fixed access network in mature markets means fiber to the home, not fiber to the curb or cabinet.
“Our view is that for broadband to be a game-changer, fiber must be delivered as close as possible to the home to overcome the current limitations of the copper network,” Felten says, taking a global view of deployment.
Lots of executives will disagree with that assessment, at least for the moment, while not dismissing the notion that FTTH ultimately will be useful. Count all North American Tier One carriers with the exception of Verizon, plus all cable operators among those dissenters.
That said, one can imagine scenarios where FTTH does emerge near term as a key differentiator. Consider that cable marketing emphasizes digital subscriber line as an “old” technology incapable of providing the faster speeds cable now is introducing.
On the other hand, one can imagine a situation arising where Verizon can offer “no caps” service as a differentiator to cable-provided service with usage caps.
Still, there is no conclusive evidence in most markets of a sustainable advantage derived or lost because of a choice of network access platform. In France, there are in some major markets three separate FTTH networks. In the Netherlands, there are many communities with two FTTH networks in operation. In most North American major markets there are no FTTH providers, save Verizon.
Cable & Telephone Internet Providers Broadband Internet Provider Subscribers at End of 3Q 2008 Net Adds in 3Q 2008 Cable Companies Comcast 14,738,000 381,000 Time Warner 8,634,000 222,000 Cox 3,945,000 60,000 Charter 2,858,200 70,900 Cablevision 2,427,000 32,000 Mediacom 726,000 24,000 Insight 445,100 20,500 Cable ONE 368,614 7,345 RCN 301,000 6,000 Other Major Private Cable Companies 2,050,000 50,000 Total Top Cable 36,492,914 873,745 Telephone Companies AT&T 14,841,000 148,000 Verizon 8,459,000 129,000 Qwest 2,793,000 61,000 Embarq 1,388,000 24,000 Windstream 962,700 28,400 CenturyTel 628,000 21,000 Frontier 571,946 12,646 FairPoint 294,134 (278) Cincinnati Bell 231,100 2,100 Total Top Telephone Companies 30,168,880 425,868 Total Broadband 66,661,794 1,299,613 Sources: The Companies and Leichtman Research Group, Inc.
In some markets, perhaps South Korea, there has been relatively little service innovation despite the availability of high-bandwidth, low cost FTTH. On the other hand, one might argue there has been quite a bit of innovation in some markets using hybrid FTTC networks.
One can argue that FTTH is a strategic offensive or defensive move. One can argue it is a good thing. What one finds hard is a conclusive argument about why FTTH necessarily results in more innovation than a new FTTC network.
Many policy advocates argue, and logic suggests, that robust broadband is an enabler of economic growth. What isn’t yet proved is that any single platform choice is always better than any other alternative.
Regulatory and market uncertainties suggest we will not get a clear test of that proposition any time soon.
Some countries—especially in Scandinavia—already have significant FTTH deployments and are accelerating rollouts boosted in part by municipal and utility-driven projects, Felten notes. But the rest of Europe is still struggling with finding the right regulatory model to incentivize telcos to invest while avoiding the development of new broadband monopolies, he adds.
In North America, a single broadband provider, Verizon, represents the large majority of deployment. That isn’t to slight independent and rural telco FTTH deployments, but simply a reflection of the fact that AT&T and Verizon represent perhaps 70 percent of all landline customers in the U.S. market. No matter what others do, ATT and Verizon will tell the national story.
Also, as a practical matter, regulators face a tough choice. They can encourage FTTH deployments by existing market players at the risk of establishing new monopolies, or they can try to encourage competition, with the downside of discouraging investment by incumbents who rightly see limited returns.
Still, FTTH offers the potential to reshuffle the broadband space as new players involve themselves in the infrastructure business, Felten argues.
That inevitably creates more pressure on incumbents to rethink the value of FTTH access investments. The promises for operators are essentially threefold, says Felten.
Perhaps most crucial is potential for quickly creating new revenue streams. Entertainment video is sometimes cited as one immediate upside, but it remains unclear how much incremental video revenue can be earned from FTTH, compared to an FTTC alternative.
Nor are there any clearly practical new services or applications an FTTH network enables that cannot be provided using another network access platform.
Operational efficiency does help, primarily by reducing maintenance and operating costs. Most observers note that fiber access networks experience fewer faults than copper networks, allow use of smaller and more concentrated central offices, and significantly lower energy consumption, for example.
There also are some customer satisfaction advantages related to better application performance, related in part to the amount of delivered bandwidth in both directions as well as the ability to avoid usage caps or other forms of bandwidth rationing that less-capacious networks must employ.
But those advantages always are offset by the costs. In European markets, for example, FTTH costs €300 per dwelling for dense urban multi-dwelling units with preexisting infrastructure and more than €1,000 per dwelling in less dense areas and single-dwelling units.
These costs cannot simply be offset by new revenues in a three-year to five-year timeframe that access providers typically must provide to borrow money to make the investments, Felten notes.
Complicating matters are the regulatory implications posed by rival terrestrial and wireless networks. That obviously complicates the investment framework.
When investments are as substantial as those in fixed next-generation access, it makes sense that the players making these investments would think carefully before doing so, says Felten.
Competitive markets can nudge contestants to move even when they might prefer not to, however. The existence of rival local access networks are a primary motivator in that regard. In the U.S. market, it is cable networks that are the primary consideration. Elsewhere, it is the threat posed by third party municipal networks or even rival access networks built by competitive providers.
In fact, more than any other, this has been the driving factor for incumbents such as Orange in France or PT in Portugal to invest in FTTH. In other cases, the requirement to create a multi-channel video revenue stream helps push the decision.
In many, though not all countries, cable and satellite are the main distribution providers for TV services. It’s a lucrative market for some providers, and that can enhance the business case for FTTH. Verizon in the United States and Telefonica in Spain provide examples of that sort of thinking, Felten says.
In other cases, network efficiency is enhanced by use of optical transport. Central office locations, for example, traditionally have been based on copper loop length, not call capacity. Fiber allows more rational placement of switching and routing equipment based on actual demand, not the physical limitations imposed by the access media.
FTTH allows a much more efficient use of space and therefore gains in real estate costs and maintenance costs. That is the case for KPN in the Netherlands and Deutsche Telekom in Germany, Felten says.
In other cases, FTTH contributes to a business case by allowing dramatic improvement of operating costs. Verizon has said that the number of faults on its fiber central offices were one-fifth of the number of faults on its copper COs.
But new players are emerging as well, creating new competitive threats. In some cases, competitive operators have used FTTH to pull ahead of incumbents and offer more diversified new services to consumers. Lyse in Norway and Sonae in Portugal provide examples of that, says Felten.
In other cases, terrestrial contestants have used FTTH to capture customers from satellite and cable competitors who were vulnerable on service or other fronts. SFR in France and Fastweb in Italy provide examples of that sort of development.
Also, competitive providers sometimes decide to deploy their own FTTH networks to gain financial freedom from the incumbent’s network. Leased access can eat up to a third of the customer ARPU, so sometimes a competitive provider can trade the capital expense for on-going operating expense savings. Free in France is an example of that approach.
Municipal FTTH is a factor in some markets as well. Lafayette, La., in the United States, Nuenen in the Netherlands provide examples. Burlington, Vt., Amsterdam, in the Netherlands and Stockholm, Sweden provide examples.
The upshot, though, is that FTTH networks can be disruptive both to markets and telecom regulatory paradigms. The historical paradigm (with the notable exception of the United States) was once centered on a single access network owned and operated by the incumbent, with an obligation for said incumbent to resell access to the network to alternative operators.
But we are seeing new patterns. Some regulators favor infrastructure competition (multiple fibers owned by separate operators extending to every home) but recognize the advantage of incumbents owning telecom ducts. These regulators (Spain, Portugal and France) aim to enforce regulated access by alternative operators to the ducts, but not to the fiber itself.
Other regulators aim for models similar to the existing unbundling model, whereby an operator will physically interconnect to its competitor’s access fiber at the central office or even deeper in the access network. Such regulators (including OPTA in the Netherlands and Ofcom in the United Kingdom) usually enforce such access obligations on all competitors deploying fiber to the home and sometimes even to cable operators.
In other cases open access on the logical rather than physical layers (Ethernet or IP) has become a viable option. That approach allows competitors to use an incumbent’s existing fiber network at layer two or layer three, rather than requiring physical leasing of a connection.
No matter which approach is taken, uncertainty always retards investment. In countries where regulatory models have been stabilized (the United States, Japan, Spain), incumbents tend to invest more readily.
In countries where the regulatory model is still uncertain, incumbents tend to withhold significant investment unless their competitors have already committed to deploying a competitive infrastructure.
Also, new approaches that separate wholesale access from retail operations (structural or functional separation) also are getting some traction. Sweden, Singapore, the United Kingdom and New Zealand provide examples of this trend.
There also are differences in drop cable deployment. The drop cable is the actual connection between a user and the network passing by a location. Some operators have chosen to deploy drops on a 100-percent basis, essentially “wiring” every potential customer location in advance, which raises initial costs, since investment is made to every location, whether there is a paying customer there or not.
The trade-off is lower operating costs, as it doesn’t cost more to turn up service for a new customer. This is the model chosen by Reggefiber in the Netherlands and Free in France.
The alternative is a “success-based capital” model where drops are added only when a customer signs up for service. The trade-off there is less upfront capital investment, but more operational expense as customers are added. This is the model chosen by Verizon.
The stakes are high, says Felten. If he’s right, then incumbents are at risk when they choose an FTTC rather than an FTTH access network. One might make the converse argument: if operators of any sort spend big to install FTTH, and then demand fails to emerge, company bankruptcy is a possible outcome.
So far, in the U.S. market, most operators—cable and telco alike—have opted for the less-expensive FTTC approach, though most networks also have been designed to shift to FTTH if required.
According to the Leichtman Research Group, the twenty largest cable and telephone providers in the US, representing about 94 percent of the market, acquired approximately 1.3 million net additional high-speed Internet subscribers in the third quarter of 2008.
These top broadband providers now account for nearly 66.7 million subscribers. Cable companies have 36.5 million broadband subscribers, and telephone companies have about 30.2 million subscribers. By definition, all cable operators now use the FTTC topology.
Asia is the region where FTTH is most prevalent today. The leading country in the world in terms of FTTH penetration is South Korea, with more than 37 percent of fiber-to-basement or FTTH broadband connections. Incumbent Korean Telecom (KT) is the strongest player, but competitors Hanaro Telecom and LG Powercom have also established strong positions.
Mainly due to regulatory constraints, broadband services are mostly PC-centric, and FTTH/FTTB has not been associated in Korea by a boom in IPTV or IP telephony, or new applications, for that matter.
Japan boasted 12.2 million FTTH customers versus 12.7 million for DSL and the number of FTTH broadband customers has overtaken that of DSL broadband in late 2008. Incumbent NTT is by far the largest player with more than 70 percent market share. Far behind, with a little more than 5 percent market share each, one finds KDDI, Ucom and K-Opticom (Source: Nikkei).
In Hong Kong, Hong Kong Broadband Network and PCCW are the leading FTTH providers. In Taiwan, Chunghwa Telecom has about one million FTTH customers.
Singapore is creating an open-access nationwide FTTH network. Australia is on a path for FTTC. New Zealand’s plans are not yet final.
Fiber to the home in Europe started in the Nordic countries, particularly Sweden. Today, around 700,000 homes in Sweden are connected with FTTH/B connections and more than 300,000 subscribe to these services.
There also are more than 200 municipal- or public-utility-owned networks in Sweden. Norway is also quite advanced in FTTH deployment compared to the rest of Europe.
Telenor has been deploying fiber to the home in Norway in greenfield developments for a couple of years, but the main player is Lyse Tele. Lyse is a private energy company serving the Stavänger region. In 2001, Lyse started deploying FTTH to local communities with an approach focused on leveraging the local nature of its original energy business.
| Cable & Telephone Internet Providers | ||
| Broadband Internet Provider | Subscribers at End of 3Q 2008 | Net Adds in 3Q 2008 |
| Cable Companies | ||
| Comcast | 14,738,000 | 381,000 |
| Time Warner | 8,634,000 | 222,000 |
| Cox | 3,945,000 | 60,000 |
| Charter | 2,858,200 | 70,900 |
| Cablevision | 2,427,000 | 32,000 |
| Mediacom | 726,000 | 24,000 |
| Insight | 445,100 | 20,500 |
| Cable ONE | 368,614 | 7,345 |
| RCN | 301,000 | 6,000 |
| Other Major Private Cable Companies | 2,050,000 | 50,000 |
| Total Top Cable | 36,492,914 | 873,745 |
| Telephone Companies | ||
| AT&T | 14,841,000 | 148,000 |
| Verizon | 8,459,000 | 129,000 |
| Qwest | 2,793,000 | 61,000 |
| Embarq | 1,388,000 | 24,000 |
| Windstream | 962,700 | 28,400 |
| CenturyTel | 628,000 | 21,000 |
| Frontier | 571,946 | 12,646 |
| FairPoint | 294,134 | (278) |
| Cincinnati Bell | 231,100 | 2,100 |
| Total Top Telephone Companies | 30,168,880 | 425,868 |
| Total Broadband | 66,661,794 | 1,299,613 |
| Sources: The Companies and Leichtman Research Group, Inc. | ||
The Danish market is emerging, with limited service penetration as of yet. But utility companies, with DONG Energy leading the way, are massively deploying FTTx infrastructure, says Felten.
Finland’s market is nascent, though the government recently has approved a program to co-finance the rollout of fiber networks to nodes within 2 kilometers of every home in the country by 2015.
In Western Europe, the Netherlands currently leads the way with intense deployments from incumbent KPN. Also, large public-private partnerships, particularly in Amsterdam, have legitimized open access models in the country.
In Germany and the United Kingdom, incumbents have chosen to deploy VDSL first. Austria seems poised to follow the same route, with incumbent Telekom Austria envisaging VDSL and some cities planning to deploy their own FTTH networks.
In France, the first moves into FTTx were made by disruptive competitive ISP, Free. But there now exists fierce competition. France is the only country in Europe where three operators are competitively deploying fiber to the home, not to mention cable player Numéricable, which is aggressively deploying DOCSIS 3.0 technology.
In Spain, Telefonica announced a €1 billion investment in FTTH.
In Italy, Fastweb has been present in the FTTH market for some time with an estimated 280,000 customers. But the thrust of its development in the last few years has been in DSL, with no expansion of its fiber footprint.
Greece announced in August 2008 that it would invest €2.1 billion to develop an open access fiber-to-the-home network.
Belgium and Ireland are the only large Western European countries where no plans have been announced to deploy either FTTH or FTTC. In Eastern Europe, most countries only have fledgling deployments with the notable exception of Slovakia, where Orange is currently deploying, and Slovenia, where both incumbent Telekom Slovenije and competitor T-2 are aggressively rolling out and selling a triple play over fiber.
In the United States, Verizon has passed 11 million homes with FTTH and connected two million. However, outside of Verizon, no Tier One North American carrier has committed to FTTH.
In Canada, FTTH deployment has been limited almost exclusively to municipalities and some CLECs building in rural markets. Tier One providers such as TELUS, SaskTel and MTS have largely focused their efforts on using VDSL as a stepping-stone to FTTH at some point in the future.
In the near and medium term, one might argue that disruptive regulatory regimes are going to have more impact than choices of network platform. Structural separation might have more consequences than choosing an FTTC or FTTH platform.
Changing the incidence of funding for universal service, and changing the definition of universal service, likewise could have profoundly important implications.
One might note, for better or worse, that markets with robust open access requirements have lead to massive changes in market share, and in at least one or two instances, to robust, facilities-based optical access competition. What remains unsettled is the ultimate survival and prosperity of all the service provider contestants in those markets. IP
