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No Easy Answers on FTTH Investment

Graham Finnie
Heavy Lifting Analyst Notes
Graham Finnie, Consulting Analyst
2/18/2014
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This week, Heavy Reading will be presenting its European FTTH forecast at the FTTH Council Europe's annual conference in Stockholm – and the news this year is good.

After years of dampening down demand, we're pleased to report that prospects are looking much better across the region, and we're projecting nearly 50 million deployed lines by 2018. And whereas in previous years, it was the innovators -- utilities and competitive telcos in northern and eastern Europe -- who were leading the way, now many incumbent telcos in Western Europe are joining the fiber party, among them Telefónica SA (NYSE: TEF), Portugal Telecom SGPS SA (NYSE: PT), KPN Telecom NV (NYSE: KPN), Swisscom AG (NYSE: SCM) and Orange (NYSE: FTE). Between them, the EU's incumbent telcos added almost a million FTTH or FTTB lines in 2013, almost double the total back in 2011. For many of these incumbents, the cost-benefit balance has finally tipped in favor of fiber, and looking across Europe as a whole, the FTTH skeptics are now in a distinct minority.

So where does that leave the fiber laggards? As a Brit, I'm naturally pained to see the UK right at the foot of the FTTH league table. On any reasonable planning horizon, even if the UK (mainly BT Group plc (NYSE: BT; London: BTA)) suddenly got religious about FTTH, it would likely take more than ten years to catch up with leading nations like Sweden, where over a quarter of households are already connected to FTTH or FTTB.

Does it matter? That's a simple question that requires a very complicated answer -- far too complicated to fit in a short blog. It would need to take in a host of factors that include localized capex and opex projections and comparisons, projections of end-user demand, the local competitive and regulatory environment, the nature of the local housing stock and many other things besides.

For now, however, laggards such as BT, Deutsche Telekom AG (NYSE: DT), Telekom Austria AG (NYSE: TKA; Vienna: TKA), Belgacom SA (Euronext: BELG) (and others like KPN and Swisscom who are pursuing a hybrid FTTH/FTTC strategy) are placing a big theoretical bet that vectoring (and perhaps G.fast) will take them far enough up the bandwidth curve to meet all likely demand for at least the next five years, for a fraction of the (capex) cost of FTTH. For who, they say, really needs more than 50-100Mbit/s downstream and 5-10Mbit/s upstream?

In truth, no-one really knows the answer to that question. Although Nielsen's Law of Internet Bandwidth suggests that households will be enjoying near-1Gbit/s line speeds by the end of the decade -- far beyond vectoring -- skeptics are entitled to question whether this "law" will really pan out. Whereas ten years ago it was easy to predict that video would eventually be delivered via the Internet, driving bandwidth demand, it's not at all clear what services will be driving 1Gbit/s demand in 2020. Which is not to say, of course, that there won't be such services. Nor is it to say services themselves will be the deciding factor: There's evidence out there that some just want the highest speed available, while others now see fiber as a must-have residential investment, like double glazing.

And that, of course, is just the start of the debate. On the cost side, for example, do opex savings outweigh the high upfront cost of laying fiber, and how is that equation changing? Again, that requires analysis of a whole host of micro- and macro-issues, and the answer is not clear-cut, nor the same for every operator or region.

The truth is that while FTTH investment is often characterized as a high-risk investment, FTTH non-investment might turn out to be equally risky: it all depends on your assumptions and projections. In today's telecommunications investing environment, there are very few sure bets.

— Graham Finnie, Chief Analyst, Heavy Reading

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Duh!
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Duh!,
User Rank: Light Sabre
2/18/2014 | 12:16:28 PM
Sad irony
BT Labs invented PON back in the early '90s.  FSAN was organized by BT Labs.  BT was a key driver of BPON and GPON standardization.    For years, BT Labs has been preaching that a PON deployment with reach extension could dramatically cut the number of central offices in their network, and that the resulting opex savings would quickly pay for the CAPEX.  BT was a key partner in at least five PON-related EU demonstration projects.  BT Labs still has incredibly sharp PON researchers, and piles of PON patents. 

BT Openreach actually came close to pulling the trigger on FTTH in 2007-8.  It was a part of Matt Bross' 21CN vision.  There was a direction change in late 2008, just after the financial crisis, and just before Ben Verwaayen got pushed out and Bross got marginalized. 

Pretty sad that BT, having pioneered FTTH, is behind the rest of Europe in deploying it.
brookseven
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brookseven,
User Rank: Light Sabre
2/18/2014 | 10:30:04 AM
Re: Settling in
FTTH investment on a global basis is either from competition or government intervention.

Carriers are going to milk copper until they have to replace it from age.  They have been able to maintain pricing by giving away high bit rates at the access point, but there is no gain for them to proactively change things.  Unless there is competition or government intervention.

Three large deployments:

NTT - Competition (remember when Softbank was killing them in DSL?)

Verizon - Competition

KT - Government Intervention

The small carriers in the US are essentially government intervention as well.  

I have said in the past that we did a business case for FTTH as part of our work on FiOS.  Our #1 factor was line loss.  More than construction costs.  If a carrier perceives that it will lose lots of lines, then it can use FTTH to slow the line loss dramatically.  The business case for this is better than anything else.

seven

 
gfinnie
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gfinnie,
User Rank: Moderator
2/18/2014 | 10:10:27 AM
Re: Settling in
Absolutely. In an ideal world, incumbents would like to have relief from unbundling, limited competition and no net neutrality, alllowing them much more control over services and service pricing. But most have at best two of those three conditions. All the same, quite a few incumbents are charging down the FTTH route to allay competition from cable MSOs with "100Mbit/s" offers, and because of the long-term opex benefits of an all-fiber net. 
mendyk
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mendyk,
User Rank: Light Sabre
2/18/2014 | 10:01:25 AM
Settling in
Graham -- I wonder if the bigger issue regarding FTTH deployment is that operators have to come to grips with the idea that they will be building out a network over which they will have far from total revenue control. After years of hearing about (and believing) that they could have a dominant position in digital services, operators now see that this dominance is far from assured. Operators can't stop the transition to Gbit broadband, but they can slow it down if only because they see less in it for them.
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