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Figuring FiOS

Phil Harvey
9/27/2006

Will it really cost Verizon Communications Inc. (NYSE: VZ) more than $9,000 to bring fiber to your home?

Yes, it could. And bear with me, please: I'm about to attempt some FiOS math.

The company today said it plans to pass 18 million premises with its fiber network by the end of 2010. It also says it expects to invest $18 billion in net capital from 2004 through 2010 in deploying that fiber-fed network. (See Verizon to Pump $18B Into FiOS by 2010.)

I’m on my second bourbon and coffee, but it seems like Verizon has just copped to spending about $1,000 a home, on average, to pass 18 million homes, over a six-year stretch. Earlier, Verizon said it cost around $900 to pass a home, so let's go with that.

Verizon also says it will cost only about $650 to connect a "passed" home to its network by 2010.

So what does it cost to hook up a neighborhood? These aren't absolute figures, mind you, but let's assume that Verizon passes each home in a 400-home neighborhood, then nabs 10 percent of the homes (40 homes) as customers.

Take $900 and multiply it by 400 homes. That's $360,000.

Now let's hook up those 40 homes. That's 40 multiplied by $650. That's $26,000 added back to the cost to pass the homes, which was $360,000.

So now we have a figure of $386,000 spent in just one neighborhood. But what has Verizon spent per customer? Take $386,000 and divide it by the 40 homes and you get $9,650.

Millennium Marketing principal Kermit Ross worked out some very similar figures for me on a notebook after a session at Optical Expo 2006 last week. I recall his numbers/assumptions were also in the ballpark of $9,000 per subscriber.

Okay, now I'm on my third bourbon and coffee. But I think the larger point here is that even with all the cost savings Verizon has managed to achieve, this stuff is still really expensive.

"Obviously, in the early stages of a network, the cost to connect each home is astronomical and there's really nothing you can do about that," says Graham Finnie, an analyst at Heavy Reading.

So slice it anyway you like -- fiber to the home is damned expensive. And the payback takes years, maybe decades. But without a next-generation access network, carriers simply won't have a business.

— Phil Harvey, News Editor, Light Reading

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Michael Harris
Michael Harris
12/5/2012 | 3:39:31 AM
re: Figuring FiOS
Nothing like back o' the napkin math. $9K per connected sub? Ouch! What's funny is that Comcast and Time Warner paid under $3,300 per sub for Adelphia. With a market cap around $76B, Comcast itself isn't valued much higher. Were it not for those pesky antitrust rules, it would be smarter for Verizon to buy Comcast rather than overbuild them. ;)
davrich
davrich
12/5/2012 | 3:39:30 AM
re: Figuring FiOS
I think you're assuming the $150/month ARPU is pure profit, which it isn't.
DCITDave
DCITDave
12/5/2012 | 3:39:30 AM
re: Figuring FiOS
I guess the real key is customer sign up and ARPU, isn't it?

If they get $150/month from the 40 homes I made up above, that pays for itself in less than 5.5 years.


ph
Michael Harris
Michael Harris
12/5/2012 | 3:39:27 AM
re: Figuring FiOS
I think you're assuming the $150/month ARPU is pure profit, which it isn't.

Yep. With that ARPU, profit might be more like $50/month. In that case, the pay back for $9K per sub would take 15 years. Pretty ugly.

In fairness to Verizon, what they've said all along is the financial case for FiOS is driven in large part from opex savings they expect to see from running a passive optical network, as opposed to their legacy copper plant. So really, this is as much about cost savings and existing customer retention as new ARPU.

DCITDave
DCITDave
12/5/2012 | 3:39:24 AM
re: Figuring FiOS
re: "the financial case for FiOS is driven in large part from opex savings"

Which means layoffs, according to some in the outside plant business.

Good points on ARPU, though. Pretty silly of me to assume that 100 percent was going right back to pay for the network.

ph
stephencooke
stephencooke
12/5/2012 | 3:39:24 AM
re: Figuring FiOS
The other really nasty is that the opex reductions are not what they appear either. Unless Verizon gets lets say >85% (at that level perhaps the rest would be forced onto the fiber architecture) take rate on Fios in your neighbourhood they can't turn off the copper.

In their presentation they also figured that they would achieve 35-40% take rate by 2010. It took cable over 15 years with just rabbit ears as competition to reach 30%. Given the competitive nature of the areas that they are upgrading this should be good to watch. I guess it would be even better if you were in that area.

The most interesting thing though was that their originally installed CPE apparently won't support FMC or MoCA. This means that for Verizon wireless to bring in the 4-play option that the CPE has to be upgraded (or another external WiFi box supplied which would theoretically be taken by the customer when they move. The ONT stays with the house.). To offer the 4-play package it might make sense to replace the ONT which would be more capital cost.

Opex costs would be even lower if the xPON technology used was ubiquitous throughout the rollout. Fios started with BPON and is now GPON and may move to WDMPON before 2010.

I also found it interesting that Doreen dodged the question about 18M households past by 2010 and the thresholds for increasing or decreasing that number. She said that they would re-examine things in 2007 or so.

This is an enormous undertaking with many senior executives' jobs on the line for it. This will be an education for us all.

Steve.
kbg_lem
kbg_lem
12/5/2012 | 3:39:23 AM
re: Figuring FiOS
Anybody knows what it really means to pass a home?

My take is:
1-All the Fiber is installed in a neighborhood.
2-All the Fiber is tested and Connected to an OLT.
3-All the OLT are placed in the Central Office to support a neighborhood.
4-Every OLT port is able to support up to 32 Customers that subscribe.

So: in a neighborhood with 1024 houses, 32 OLT ports are lighted.

When a Customer Subscribes:
Day 1 - Fiber is dropped from the pole to outside of the house.
Day 2 - A verizon Guy comes to the house to do the installation.

Any feedback on this understanding?

Signature: A Happy FiOS customer !!!
optiplayer
optiplayer
12/5/2012 | 3:39:23 AM
re: Figuring FiOS
Stephen,

Adding to your point about opex savings, I suspect that a significant portion of the current improvement they are seeing comes simply from the fact that the plant is new. If they had gone out and replaced the old copper with new copper they likely would have seen tremendous improvement in opex as well. Let the FTTH stuff cycle through some snow, sleet, ice and wind storms for a couple of years then get back to us Verizon.

In fairness to Verizon the 35-40% projection is for broadband. The video share projection is 20-25% which seems reasonable.

All that said, I don't care how much it cost Verizon I demand FTTH even if the government has to step in an subsidize it and it must be a dumb pipe!! (just doing my MaterialGirl impersonation)
rjmcmahon
rjmcmahon
12/5/2012 | 3:39:22 AM
re: Figuring FiOS
Here's the issues I took away from a cursory review of the charts and halfway listening to the call on Yahoo.

o Homes passed and connected costs decrease over time but VZ wouldn't separate labor vs materials. It's possible that labor/productivity won't meet those projections and costs will stay flat or increase. Also materials such as fiber were oversupplied during the bubble and that should be correcting.

o Costs didn't include sales/marketting expenses. Anybody following Vonage knows that "me too" services, which FiOS TV is, are very expensive in this area.

o Costs didn't include set top boxes. Customers will demand them to be included. TIVO showed us there is little consumer demand for customer owned STB equipment, even if it's novel.

o As Stephen and others have mentioned, the opex savings assumptions of the fiber plant may be overly optimistic. Personally, I'll probably never give up my line one copper, used for voice, with -48V DC, which is connected to a wall phone. If many people are like me it suggests VZ may have two OSPs instead of one to maintain, hence the savings may not be there.

o Their bundling demand projections were inverted and skewed. They used FiOS TV subscribers as the basis for their "bundling demand" charts saying that TV subscribers also buy other services. Most people interested in FiOS will be buying it for internet access, not FiOS TV. The upsale "or bundle" numbers should start with internet access as the basis and see how many buy other services.

o Their churn rate was exceedingly low, barely accounted for people moving. If there is ever really facilities based video competition with the MSOs one would expect this number to increase significantly. (What's the churn rate for cellular voice? Probably more in line with that)

o VZ would only make 2010 projections and explicity said that wouldn't make any projections for 2007. This makes them less accountable. In general, they seemed to be reticent with respect to revealing the details of their financial models used to prove an ROI.

PS. One way I use to determine a low end cash stream expectation on an investment is to use an annuity estimate from somebody like fidelity. (These tend to be poor investment choices) Give fidelity $90K and they'll guarantee you $1226 per month for 7 years. Hence, VZ needs to *earn* more than $122.6 per month on the low side to justify a $9K investment.
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:39:21 AM
re: Figuring FiOS

One thing you are all assuming is not true.

If Verizon gets a significant take rate in your neighborhood, you will get your copper line cut and your phone line run over FiOS. None of that changes your -48V phone.

You guys have no idea how inefficient the copper network is to run from an Opex standpoint. If you did you would laugh at yourself. You are not even in the right zone to where the problems are. Let me give you a hint - it is spelled u n i o n.

seven
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