The business case for fiber-to-the-home (FTTH) technology is quickly morphing into a fiber-to-the-dollar sign (FTT$) model as cable operators, overbuilders and telcos re-tool their FTTH business agendas to identify new revenue sources and justify the high cost of FTTH deployment.
No longer a technology confined to the laboratory, FTTH is being deployed, albeit sparingly, in a few select markets such as greenfield developments, small businesses, residential neighborhoods, or any revenue source that helps build the business case for FTT$. Yet for most service providers, particularly cable television, experts admit the current business models are far from compelling, at least in the short-term.
Despite falling prices for fiber related materials such as transceivers and optics, and plenty of raw fiber available, costs remain relatively high to deploy FTTH– from $1,800 to $2,100 per home–with an estimated return on investment (ROI) of three years to five years. With labor costs remaining stable and customer demand for new video, voice and data services still iffy, current business cases for FTTH and FTT$ are questionable.
"FTTH has been around, but it's always five years away. It's at least 20 percent more expensive than HFC builds, so it's close to being cost-prohibitive. But costs are falling, and the transition from HFC to FTTH is out there as a business model. The issue is how many chargeable services are out there to warrant FTTH costs, and it will take a 30 percent penetration rate to achieve a reasonable ROI," says Geoff Wilbur, analyst for KMI Research, a fiber research group.
FTTH has a ways to go before it reaches the magical 30 percent penetration number. By 2006, 2.65 million homes are expected to have FTTH service, and another 1.9 million will be served by fiber-to-the-curb systems. However, in 2005, the ramp up for FTTH should get serious, and significant growth is expected in 2006 as most RBOCs turn their attention to network rebuilds, reports a recent study by KMI: "Residential Broadband Access in the US: Fiber-to-the-Curb and Fiber-to-the-Home."
In the meantime, any FTT$ business model must include all three of the triple play services, or it won't work. "If you don't have the mix of video, voice and data, the numbers just don't work out. The revenues don't add up. For now, the revenue is FTT$ and the business model is new subdivisions. When there are millions of customers, that's when the business will grow," Wilbur concludes.
Indeed, but penetration growth and discounted pricing aren't happening fast enough for most service providers, especially cable MSOs who've invested billions of dollars in coaxial cable and HFC plant upgrades. The thought of rebuilding an entire network with FTTH technology is, well, gut-wrenching.
"FTTH makes sense in greenfields and certain other applications, and we're analyzing and staying on top of it as a business model. But we've completed 95 percent of our rebuild and won't go back, but we will move fiber closer to the home as needed. We want fiber closer to the home, but the economics of FTTH haven't proven out," says Hugh McCarley, vice president of engineering and technology for Cox Communications.
Figure 2: Annual FITL deployment in the United States, 2001-2006, most likely scenarios (thousands of homes).
For some, however, the time couldn't be better for FTTH. "We're making a market of the triple play services and have taken FTTH out of the lab into a broad-based market, and it's a good business case because it's designed from the ground up, so we can do it cost-effectively," says Jeff Fishburn, CTO for WINfirst, an overbuilder in Sacramento, Calif.
WINfirst's business model calls for a gradual buildout of FTTH applications in larger markets such as Dallas and Los Angeles. It will have completed 25 percent of its Sacramento build by year's-end, at a cost of $500 million, with an approximate ROI of four years. Its Los Angeles FTTH build will cost a staggering $1.5 billion.
"Our cost structure is right where we thought it would be, but revenues are a lot higher. The business case will be better believed after awhile, and it makes sense for us to pick up underserved small business markets. Every city eventually will be overbuilt. There are 100 million last miles to go," he adds.
WINfirst's FTT$ business model is precisely the one many analysts say is the most compelling–greenfield markets, ground-up construction, longer, more forgiving ROIs.
"There must be a greenfield, and all three services must be offered to make a business case for FTTH, and connections to the home must be leveraged whenever possible. Utilities and municipalities are doing it on a small scale, and the business model for the small business market could be compelling. But it's very early, experimental and not a substantial business case yet," according to Shin Umeda, principal analyst for the Dell'Oro Group.
Maybe not, but a significant number of industry experts–from analysts and cable operators to vendors–see a future for FTTH and FTT$, albeit in limited markets and over a long period of time.
One of those markets includes a new residential community near Houston, where 1,468 single-family homes will receive FTTH services and generate $40 million in gross revenue over a 25-year period, claims Eagle Broadband's subsidiary, ClearWorks Communication, as its builds out Stone Gate Canyon Lakes.
Those types of business cases are likely to drive FTTH in the near-term, experts say. "The big value proposition is that greenfields are as cheap to install fiber in as copper or coax, and the technology looks promising. But questions remain about deployment costs and penetration levels," notes Matthew Davis, director of broadband access technologies for The Yankee Group, a media research and analyst firm.
Those questions are on the minds of vendors as well. "It always comes down to viable business case costs versus revenues. You just can't build fiber networks as cheaply as HFC networks. We'll solve the electronics cost issue and are believers in FTTH technology, but splicing and labor costs remain, along with revenue issues. There's no business case for MSOs tearing out coax already in the ground. They can't justify a FTTH network today," insists Paul Connolly, vice president of marketing and network architecture for Scientific-Atlanta Inc.
Nevertheless, some are tinkering with FTT$ business models, which they suggest will work. "It gets down to optical electronics costs and offered services, and the sweet spot is the triple play. Without it, there's no business case. Overbuilders, municipalities, utilities and pure-play providers can make a good business case for FTT$, and there seems to be a high enough revenue stream of about $125 a month, which isn't trivial dollars," says Mark Klimek, senior director of marketing for Alcatel.
Figure 3: Annual FITL equipment market in the United States, 2001-2006, most likely scenarios (millions of dollars).
The rules for FTT$ costs are simple: 55 percent for electronics and 45 percent for infrastructure costs, explains Daryl Ponder, chairman and CEO of Optical Solutions Inc. "It's all about costs. Lasers are down from $400 to $100; splitters are down from $150 to $35. Now, fiber can cost $300 less per home than coax. With 1.7 million new residences, 82 percent single family homes and 75 percent of them in new communities, there's a market of more than $1 billion just serving new homes. For overbuilders, especially, FTTH is a very compelling business case."
Not so for cable operators, however. "There's not much interest. They already have a broadband pipe into homes. In greenfield situations, FTTH makes sense and should be considered when more services are offered and costs get close to HFC," says Chris Bonang, senior director of market development for Harmonic Inc.
Fiber to the small business market is another option for FTT$ technology. Concludes Fishburn: "The residential market dominates our business plan, and it's a short putt for us to do fiber-to-the-business. But there's much more competition in that market."
Competition aside, the new business model for FTT$ must have a number of components: lower costs; incremental revenues; triple play services; acceptable penetration rates; and for cable operators particularly, a strong belief system in FTT$ models. Yet most experts agree that the current FTT$ business cases aren't compelling enough to sway the cable industry and are likely to include select, niche markets in the foreseeable future.
"When there are new demands from new neighborhoods, then there's a business case for FTTH. Until then, why should a cable operator replace a business structure that works really well?," asks Wilbur.
Yet for overbuilders, utilities and others, the business case for FTTH can be appealing. Concludes Wilbur: "For smaller towns and people with longer ROIs, it makes sense, and there are enough rebuilds, overbuilders and new developments to make a case for FTTH, or FTT$."