The inching forward of fiber-to-the home (FTTH) deployment by a small but widening cross-section of multi-service providers is prompting a re-evaluation of business models which for years have tagged FTTH as too costly, too cumbersome and unnecessary.
With falling fiber and electronic equipment prices and the intense competition for video, voice and data customers, the blue sky vision of running fiber to single family homes, MDUs (Multiple Dwelling Units) and to the SOHO (Small Office/Home Office) market is slowly showing signs of becoming a viable business opportunity.
And why not? E-commerce is forecast to be a $3 trillion industry worldwide by year-end 2003, with 85 percent of the U.S. workforce expected to have access to the Web at work by 2004. DSL modem sales are consistently growing at a 50 percent rate versus 31 percent for cable modems, according to a recent Cahners In-Stat study, and competition is pressuring cable operators and other multi-service providers to extend their expanding bundled services directly into the home. The result could be that FTTH's day in the sun may be closer than once predicted.
Mix in the potential revenues derived from video, voice and data services, which experts say can average about $150 per month, and the ROI for FTTH looks even more appealing.
Yet most agree the full-scale deployment of FTTH is a long way off, and until video, voice and data revenues prove to be consistent winners and some level of scalability is reached, FTTH is expected to inch forward. It is, however, making strides.
Companies such as Western Integrated Networks in Denver, local telephone companies and others are putting FTTH strategies in place, and several trials are in progress. New housing developments, MDUs and small pockets of existing single-family homes are the early adopters for FTTH.
"We're targeting new developments and currently putting two FTTH networks in the ground. They're buying fiber all the way to the home so they can upgrade to FTTH as needed. It's in its infancy, but the shells and controls are in place," says John Gibbs, director of access systems marketing for Marconi Plc, a FTTH network provider.
Marconi's FTTH is a single fiber, passive optical network—which Gibbs says is the most efficient. "It has low maintenance, and once the fiber is in the ground, you simply need a box for future services."
Those future services, and the business models being developed to allow service providers a chance to deploy them, are helping drive growing interest in FTTH. "If you're getting into the telecommunications business and deliver multiple services, FTTH is the technology advantage. The question is: how do operators get to revenues? They must have the infrastructure and more services to capture customers, and their loyalty," says Joe Dooley, director of product marketing for Optical Solutions Inc., a provider of FTTH networks.
The promise of impressive revenue from FTTH is also serving as an incentive for some unlikely entrants to the communications business. A growing number of new housing developers, Dooley points out, are becoming CLECs once they've deployed FTTH in their developments. "They own the distribution infrastructure of the smart home and smart community. They can sell or lease bandwidth or own the whole thing. They have an appreciating asset," he says.
Optical Solutions is one of a few FTTH providers actually deploying a living, breathing and revenue gathering FTTH network. Federated Telephone Cooperative in tiny Chokio, Minn. is currently providing FTTH to nine communities, and by next year will expand its video, voice and data service to about 2,000 homes, apartments and businesses via Optical Solution's FTTH network.
"Our business plan is conservative, and says we'll be cash flow positive in under four years. Our average monthly bill is $78, not including access rates or long distance revenues. If you're going to deploy, deploy something that will last. That's why we chose FTTH," says Kevin Beyer, general manager of Federated Telephone Cooperative.
Federated, Beyer continues, runs its fiber to a demarcation point at each building. Once the customer asks for any or all of the three services, the HUDP (Home Universal Demarcation Point) on the side of the house is activated. Surprisingly, the cost of deploying FTTH, Beyer notes, isn't what he expected.
"The biggest costs are fiber, construction and splicing. They represent 59 percent of the total cost. The rest is in technology and electronics. Those costs are expected to go down next year, however," Beyer says.
The average cost per building for Federated to deploy FTTH, Beyer notes, is a pricey $3,400, which includes some ancillary construction costs. Beyer has no illusions about Federated's 10-year timeframe for true profitability, however. "We'll be profitable before the 10-year timeframe, but we've yet to see how many people will actually pay for all the services."
His anxiety over subscriber numbers may be short-lived. Ninety-eight percent of the community signed forms asking for FTTH. Economics are playing a role as well. Says Beyer: "We charge $18.50 for basic cable, and our competitor, Mediacom, charges $33.50 for a similar service. We also charge just $5 more for high-speed data on a separate line."
The acceptance of fiber as a cost-efficient and reliable method of adding potentially lucrative new services is helping to drive FTTH, and prompting more service providers to take a hard look at pushing fiber directly to the home. "Fiber is moving closer to the home, and some companies are saying, 'let's take it all the way home.' We've already been approached by several cable operators, telcos, competitive access providers and start-ups. There's a growing interest in the economics of fiber-to-the-home," says John Jutila, vice president of marketing for cable network products at Alcatel, a worldwide fiber products provider.
And economics count, especially with a fledgling and relatively untested business such as FTTH. Says Jutila: "There are 150 million access lines in the U.S. To replace those with fiber will average about $2,000 each. That's $30 billion to replace copper networks with FTTH, and another $100 billion to change equipment. But with $3 trillion in revenue available, the economics are looking better."
The timing of FTTH coming to market is being shortened as well, according to Patrick Harshman, vice president of marketing for broadband access networks at Harmonic Inc.
"Last year, we said (it would be) eight to 10 years for FTTH to become viable. Now, it's five years until FTTH is deployed frequently, but not ubiquitously. What will drive FTTH is when HFC runs out of steam," he says.
Stoking up enough steam for FTTH to reach its full potential will be a challenge, Harshman admits. "It's a front and center challenge to bring new innovations, cost reductions and optical technology to make FTTH more functional and scalable. We need to take lots of optical technology and make it usable in a hardened environment. The real trick is not to rush it. But eventually, all will be FTTH."
Many manufacturers and related equipment supply companies remain cautiously optimistic about FTTH's future, however. "We all know FTTH is the end product, and that it's a glide slope problem. But the runway is in sight. The real driver is usage per megabit, and it's creeping up. We're monitoring it very closely," says Don Sipes, vice president of advanced technical optical electronics for Scientific-Atlanta.
S-A recently hedged its FTTH bet with the acquisition of Bookham (UK), a supplier of low-cost transceivers. With nearly 60 percent of the electronics costs in a FTTH network attributed to transceivers, reducing their cost is crucial to the overall economic feasibility of FTTH. Says Sipes: "Prices are falling for fiber and splicing, but the high cost of electronics is pushing it out. We want to get those costs down."
The cost of FTTH versus coaxial cable plant is a concern to potential service providers as well, and the last 500 feet to a customer's home is the ultimate prize for multiple service providers. It essentially means a one-to-one relationship with a customer, and a path to full service offerings. There are speed bumps, however.
"We ran a coax drop versus fiber, and it costs 30 percent more to run fiber over the last 500 feet, so the services must be there," Sipes says.
For FTTH to prosper, the buildings must be there, too. "There are 35 to 40 million qualified living units above 50 apartments in the U.S., and 20 million of them are in the high-end market, with five million in high-end hotels, and 75 million single family homes, so access to those units is a crucial ingredient," says Ken Neighbors, vice president of worldwide marketing for OnePath Networks, a FTTH provider.
Another ingredient to FTTH is the added value it brings to a business, although it is a relatively hidden asset. "The business model for FTTH is like a stock market valuation process. As people deploy it, it becomes more bankable as a business. We've seen utilities and developers who know they can elevate their own businesses' worth with the addition of FTTH. Developers can put FTTH into new homes and own those services, so the value-added prospect is top of mind with them," Dooley notes.
Just how much value a fiber-to-the-home network will add to the worth of a cable system, utility, local telephone company, ISP or other multi-service provider isn't likely to be determined for several years. In the meantime, FTTH is expected to inch forward, development by development, and building by building.
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