A Closer Look at PON Econ

It's been a month since word broke that U.S. RBOCs are soliciting bids for rollouts of new fiber access networks, many of them based on passive optical networking (PON) technology (see RBOCs Hungry for Fiber). Now that the RFPs (requests for proposal) are in the equipment vendors' hands, though, some question whether all the hoopla could be misleading.

Indeed, the economics of fiber-to-the-whatever are perplexing. Digging trenches and laying fiber is expensive no matter what type of services might be carried over the network.

So is this business for real? As it turns out, those expecting the PON RFP to result in widespread fiber-to-the-home could be in for disappointment.

A bit of background: On June 19, BellSouth Corp. (NYSE: BLS), SBC Communications Inc. (NYSE: SBC), and Verizon Communications Inc. (NYSE: VZ) issued a long-awaited RFP for "fiber to the premises." A Verizon spokesman says the request went out to "12 to 24" vendors under nondisclosure. The carriers expect to get answers back throughout the summer, and they hope to choose up to four vendors for each project before the end of this year. They plan to start deployments in 2004.

But that doesn't mean there'll be a PON on every porch. "I don't think RBOCs have any intention of deploying fiber to the home," asserts Tom Nolle, president of CIMI Corp., a telecom consultancy. He says carriers are investigating the role PONs could play in extending fiber hierarchically within networks -- using PONs to fan out links from a central office to multiple remote terminals, for example. Basically, the RBOCs also are looking for ways they might roll out fiber economically and quickly, as demand for services that require it picks up.

And that's the rub -- demand must match supply, and it may not do that for years yet. At the moment, the cost of laying fiber is roughly the same as that of laying copper in new buildouts. It still does not make sense to dig up streets and replace copper with fiber, Nolle points out. And it won't, until the cost of PONs drops and the cost of incoming revenues rises sufficiently to make the margins speak for themselves.

What is that point? And how long will it take to get there?

No one has an easy answer beyond "sometime in the future." But the PON part of the equation seems to be a bit easier to predict. Information from Optical Solutions Inc., by most accounts the residential PON market leader, shows the cost of elements included in PON deployments has fallen dramatically within the last eighteen months.

Pricing for splitters and couplers, for instance, has fallen by 55 percent; splicing costs are down 50 percent; cable by 30 percent; photonics by nearly 60 percent; and installation and labor by 25 percent, the vendor says.

Those are dramatic figures, but the dollar amounts aren't low enough yet, according to analyst Steve Levy of Lehman Brothers. PONs range from $1,200 to $1,800 per endpoint or customer, he notes. The RBOCs, he says, are hoping their RFP will help whittle that down to $700 or so an endpoint.

He emphasizes that cost reductions won't be the driver for widspread PON use. Revenues have to increase sufficiently to make the case for PON a no-brainer. And that can only happen if service sales go up significantly to make fiber a must-have for every home.

A recent study from research and consulting firm Technology Futures Inc., (funded, ironically, by a consortium of carriers that includes BellSouth, SBC, and Verizon) indicates that point may be a way off. While fiber has grown by leaps and bounds on the business side, it's still a relative rarity in residential distribution, where most folk are happy to have DSL at rates up to 1.5 Mbit/s -- which can be adequately covered by good-condition copper cable.

According to Ray L. Hodges, senior consultant at TFI, demand for 1.5-Mbit/s rates to homes will peak around 2005, at which time folk will start looking to 6 Mbit/s as a standard. It won't be until after 2010, when speeds of 24 Mbit/s are in demand, that fiber distribution to homes will become a necessity to overcome the distance limits of copper. Of course, by then RBOCs would ideally have PONs in place to meet peak demand. It may be around 2007 or 2008 when PON builds take place en masse in anticipation of that, TFI says.

For the math to work, RBOCs need to provide services that call for ever-larger bandwidth, and more speculation surrounds what those services will be. Video will probably be part of the picture; Levy says the RBOC RFP initially called for video capabilities. Bundled IP-based voice, data, and video services may also become more popular. Again, that will take time.

PON vendors seem undeterred, as ever. While most are keeping mum on the RBOC RFP, for fear of affecting any future dealings with the carriers, it's clear their activity level is up. This week alone has seen two announcements, and it's only Tuesday (see Alloptic Delivers FTTP in Wash. and Marconi Beefs Up Access Portfolio).

— Mary Jander, Senior Editor, Light Reading

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lightwait 12/5/2012 | 2:37:15 AM
re: A Closer Look at PON Econ "That is going wireless, especially with the kind of competition we see there, and as a result, for the first time in history access line growth has gone negative."

...I agree that wireless has an effect on access line growth, but perhaps not the largest effect. Consider over the last 10 years (we could argue the duration), how many households with dialup internet access ordered a second phone line so that people could actually call while someone was online. Now, as households switch to broadband via cable or DSL, the second line is no longer required to provide POTS (Plain old telephone service). People are cancelling their 2nd line, and this affects access line growth.
lightwait 12/5/2012 | 2:37:13 AM
re: A Closer Look at PON Econ Well, you are a compelling writer, I'll give you that. But I don't see SONET framing anywhere in the standards.

BPON (and APON) do use 622M & 155M. but not because they use a chipset common to SONET framing, but because they use the same laser (why develope a whole new laser, use what is available in quantity, at good price.)
However, that's not to saw that the framing for PON doesn't add overhead. ATM overhead is still there.

G983.1 shows that there are 56 downstream timeslots of 53bytes each. Two of the timeslots are for OAM (the two OAM cells are 18 cells apart)
and G.983.1 calculates the bandwidth available at
"The transfer capacity for the 155.52 Mbit/s interface is 149.97 Mbit/s" (54 of 56 cells on 155.52 Mbit/s).

It's a little different upstream, but again not SONET framing.
lightwait 12/5/2012 | 2:37:10 AM
re: A Closer Look at PON Econ "13Mbit/s of ADSL+ or 22 Mbit/s of VDSL is almost more than anybody needs."

and I remember when 9600bps dialup was fast. "Almost" isn't good enough in the long run.
HDTV, using MPEG2, is 19.2M. Anyone want to guess what will happen when kids start fighting over who gets to watch their favorite show on the only HDTV in the house?
Admittedly MPEG4 or WM9 will probably reduce that bandwidth hog somewhat, but then add internet gaming, the huge impact video sharing is having on the internet, hey, maybe even
think about Super-HDTV one day (these things don't
stand still).

DSL is pretty good today, but you have to get pretty close to the home with active components to support those speeds. Fiber based solutions offer an alternative with more bandwidth upside than copper.
Road Trip 12/4/2012 | 11:51:36 PM
re: A Closer Look at PON Econ Maybe Tom should actually try talking to the RBOCS.

palomar7 12/4/2012 | 11:51:35 PM
re: A Closer Look at PON Econ Where are the PON puffery pushers from Optical Solutions, Optical Mike and Accelerated Photon? They're usually gushing all over the PON propaganda when it's favorable. Why not now?

As many of us have said here in the past, PON is a CON.

A note to RoadTrip in post 1: Tom Nolle is generally pretty well in tune with what the RBOC's really intend to do, and is historically one of the strongest RBOC proponents in the trade press. His life's work revolves around them, you could say. Betting instead on the truth being contained in press releases from RBOC's own mouthpieces would not be a particularly wise move.

I'd go so far as to say that Nolle's views on this probably contain more inside information than anyone you could name who isn't a paid shill for the RBOCs. As the article indicates, even the paid shills from TFI aren't exactly ga-ga over the prospects.
rjmcmahon 12/4/2012 | 11:51:35 PM
re: A Closer Look at PON Econ The proof of the pudding is the eating -- Don Quixote. Part ii. Chap. xxiv

VZ has been talking fiber for many years. They seem to be doing nothing more than just blowing smoke up FCC Martin's ass. Martin may not have figured that out yet. The real question is, what can he do about it?

Munis are the way to go on this one. Find a community full of law offices, have the local officials condemn the local loop, and roll your own. It will be a huge tax savings and will increase the property values ;-)
DKP 12/4/2012 | 11:51:34 PM
re: A Closer Look at PON Econ Polomar,

There have been several PON announced deployment wins in the past 2 months. Now the RBOCs are making $B noise. Are these a CON? The fact is these are being deployed (see below). You remind me of someone decrying RPR because it was new and different and scary and something you don't do. As a multiservice switch vendor, I see PON as just another access tool.

reoptic 12/4/2012 | 11:51:34 PM
re: A Closer Look at PON Econ PON is great except the economics stink, the infrastructure isn't there, and you just cannot justify the business case. Comcast is whupping these guys with national deployment of a broadband backbone in place already. RBOCs are breathing their tailpipe and falling back.

Who is going to have easier time, Comcast adding voiceline on top of their broadband line, or RBOCs ripping out wires to put in PON. PON? Dream on.
palomar7 12/4/2012 | 11:51:33 PM
re: A Closer Look at PON Econ Why is the RBOC FTTP RFP under NDA? What possible business risk do they take if it were to be public? That the cable MSO's and the general public might laugh at it? That the FCC would see how suckered they were, before releasing their final document?

I can't even imagine how possessing that RFP would be a competitive advantage to anyone, considering the fact that the RBOCs are monopolies, and considering how no one else would deploy networks in the same way they will (i.e. maximize re-use of legacy equipment and OSS/BSS) since no one else has that baggage to contend with.
palomar7 12/4/2012 | 11:51:32 PM
re: A Closer Look at PON Econ DKP: RBOCs are making $B noise. Are these a CON?

YES. Just like the multi-billion dollar noise they made about fibering most of the US in the early 1990's. Apparently you are unaware of this?

DKP: You remind me of someone decrying RPR because it was new and different...

If you think PON is new and different I respectfully suggest you don't understand the business very well, nor do you understand the RBOCs very well.
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