To make fiber-to-the-home (FTTH) successful, service providers need to rethink the business model and find a better balance between charging a premium for fiber service and offering a more expansive, but less expensive, service that attracts a much broader user base.

That's the argument of one analyst, Yankee Group Research Inc. 's Benoit Felten, following a study of the European market for the FTTH Council Europe .

Felten found that while premium prices may help telecom service providers recoup the cost of building out a fiber access network more quickly, they will also limit the service take-rate, and that in turn will limit future applications.

Some service providers, such as French operator Iliad (Euronext: ILD) (which trades under the brand Free), have built customer loyalty by continuing to add service features without ever raising prices, and by not charging customers who move from DSL-based to fiber-based services. (See Iliad Reports Q3.)

"With Free's bundled offering, the price never changes, and there are no [premium] services that add to the price," Felten says. "Customers have come to expect that every six months there is going to be something new, and that makes them incredibly loyal."

The basic Free FTTH service is 100Mbit/s downstream and 50Mbit/s upstream for €29.99 (US$40.21) a month, including IPTV, WiFi, Web on TV, 10 gigabits of online storage disc space, a LAN router, and a self-care management tool that enables users to prioritize traffic based on their needs, Felten says. The priority service lets gamers tailor their service for long ping times, while online TV viewers tailor theirs for low latency on video downloads.

US carriers, by contrast, have some of the highest FTTH service prices in the world and expect to charge more for every new feature, Felten points out.

The other approach is to keep the cost of services down, both for selling basic FTTH connectivity and for follow-on offerings. Take-rates would go up significantly, and service providers could then layer on services that build customer loyalty.

But Felten thinks even those new potential offerings need to be priced carefully.

"I believe that if there is anything that comes close to being a killer app for fiber-to-the-home, it's video communications. It is a disruptive service -- it's not something you will get over copper."

Fiber delivers the symmetrical bandwidth needed to enable good quality video chat, and a service that would enable casual video communications between family members or teleworkers, for example, would have widespread appeal.

"Most of the fiber services today are marketed to geeks," Felten says. "This will appeal to grandmas -- that's how you can get really high penetration. And if the telcos don't position themselves in this space, someone else will."

Cisco Systems Inc. (Nasdaq: CSCO) is experimenting with its TV-based video communications system and has announced pilots with Verizon Communications Inc. (NYSE: VZ) and Orange (NYSE: FTE). But a real service needs to be priced for the masses, Felten argues.

"I'm worried that telcos will want to apply a typical pricing plan, where consumers pay $15 a month and an additional $1 when they use the service... It will crash and burn."

There are many other services -- distance learning, home surveillance, and remote monitoring of elderly folk who want to stay in their homes -- that could thrive on fiber access networks if their market penetration were higher. Some of these could generate revenue, while others could improve the popularity of fiber networks and customer loyalty.

But Felten is convinced it all starts with a new view of what fiber-to-the-home services are and what they should be.

"You can look at services for revenue, or look at services as incentive to subscribe to the service," he says. "TV is very important in getting customers to subscribe, but it is not profitable for a telco -- for every single one, it's a loss leader. Broadband is very high margin for the telco, but is not enough for people to subscribe to FTTH. It is a complicated balance to find between service that will attract end users and services that assure the overall margin of the service is good."

— Carol Wilson, Chief Editor, Events, Light Reading