In its newly published report, FTTH Worldwide Market & Technology Forecast, 2006-2011, Heavy Reading predicts that 85 million households will be connected by 2011, and over the following decade the transition from copper to fiber access networks will proceed with the same inevitability as the historical transition from canals to railroads.
This is a global revolution with momentous consequences for both the telco and the vendor community. Like any really large-scale transition – the last brought us cellular mobile services and digital wireline networks – it entails big opportunities and big challenges.
Unfortunately, however, there are no simple formulas for winning, for one simple reason: There is no truly global FTTH market. Instead, there is a series of regional and national markets, each with its own unique characteristics, players, and requirements. Flexibility in addressing those markets will be the key to success.
Take the current stage of development: Of the 11 million connected homes at the end of 2006, two thirds will be in Japan, which is racing far ahead of every other country. In fact, by the end of 2006, 16 percent of Japanese households will be connected to fiber. Compare that to the situation in Europe, where fewer than one house in 200 will have fiber at the end of this year. The U.S. is moving more quickly than Europe, but, with only 1 percent of homes connected in 2006, it still lags far behind Japan.
Looking ahead, Asia in general and Japan in particular will continue to dominate the FTTH opportunity as far out as we can see; in fact, given the rapid economic progress in the region, it is likely to be much the largest regional FTTH opportunity right through the next two decades. That dominance is partly a reflection of Asia’s sheer size and economic vitality. But the speed of the transition from copper to fiber – with Taiwan, Korea, Malaysia, and, most of all, China soon following where Japan has led – is also crucial.
The main fiber network construction patterns also vary widely among different regions. In Japan, no-holds-barred competition among half a dozen providers, including NTT Communications Corp. (NYSE: NTT), KDDI Corp. , Tepco, Usen, and Yahoo BB, has driven the market. In the U.S., the market was initially highly fragmented, with dozens of small independent telcos, CLECs, utilities, and municipalities building in mostly small communities. More recently, a single incumbent, Verizon Communications Inc. (NYSE: VZ), is beginning to dominate rollout. In Europe, meanwhile, buildout was initially led by a small number of broadband CLECs, but may soon see local authorities and municipal utilities begin to dominate.
Finally, the technologies in use differ widely. In the U.S., no one technology dominated initial buildout, but the influence of the major ILECs in the years to come means that GPON (gigabit passive optical network) will be the main technology used there. The main technology in Japan’s buildout is GEPON (Gig Ethernet PON), and this is also likely to be the preferred technology in many other Asian territories. In Europe, the nascent nature of the market makes prediction risky, but the rise of utilities and municipalities could result in a much bigger role for active Ethernet.
How do we explain the differences, both regional and national – and could they even out over time? There are in fact a whole range of factors at work here, too complex to cover in a single column, but covered in depth in our report. Among the most important:
- Cost per connection, a figure that varies enormously: In optimal conditions, marginal cost per home is as low as $300; in worst-case conditions, it is more like $7,000. The reasons for the differences lie primarily in local construction costs, housing density and type, ability to use aerial fiber, and availability of existing ducting, among other things.
- Competitive pressure, highly important both in Japan and in the U.S., where it was a key factor in stimulating incumbents to move ahead with FTTH, and elsewhere has led CLECs to jump-start the market with packages that include higher-speed broadband than DSL and various video services.
- Regulatory and political action, especially at the local level, where incumbents, often in alliance with utilities, are key players in some markets. Regulators can also have a huge influence on whether the providers operate “closed” networks (like Verizon’s FiOS) or “open” networks like those emerging in the Netherlands.
- Strong local appetite for high bandwidth services, which has been very important in Japan and Korea, for instance.
In a globalized economy, these striking differences may not persist in the longer run: Consumer and political pressure will ensure that countries that currently trail behind will in the end catch up, and buyer pressure may ultimately lead to a single standardized approach to FTTH like that which has been achieved to a significant degree in the DSL market. Yet the differences in both the technologies used for FTTH and the builders of those networks will persist at least through the next five years. That means we can expect to see a market distinguished by considerable fragmentation – on both the service provider and the vendor side. Those who still seek to be truly global actors in FTTH will need think very local indeed.
— Graham Finnie, Senior Analyst, Heavy Reading