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Cable/Video

FTTP Bidders Slashing Prices?

Pricing has become the hot topic du jour following last week's public update on the fiber-to-the-premises (FTTP) request for proposal (RFP) from SBC Communications Inc. (NYSE: SBC), BellSouth Corp. (NYSE: BLS), and Verizon Communications Inc. (NYSE: VZ) (see Carriers Give FTTP Update). Though none of the vendors we contacted would speak about pricing on the record, rumors are afoot that some vendors priced systems below cost in order to remain in contention for a contract.

Privately, vendors say a well-worn practice called "forward pricing" has reared its head. Forward pricing involves pricing equipment cheaply today, based on anticipated volumes in the future.

"The ticket to the dance is that you have to be willing to drop your pants and savage your margins in the near term," says Kermit Ross, founder of Millennium Marketing and a veteran of vendor-carrier contract negotiations. [Ed. note: And past master of the mixed metaphor.]

What vendors are counting on at this point is that the carriers will eventually order their gear at volumes that will make the price cuts worthwhile. Secondly, the winning vendors might have first dibs on other network elements that need replacing, such as next-generation digital loop carriers.

But will carriers ever follow through and order as much gear as they promise at the bargaining table? Industry sources remain split on the issue.

Some say that the carriers' public statements have wed them to a huge FTTP rollout over time. Verizon vice chairman and president Larry Babbio has said that his company will reach 60 percent of its consumer revenue base with a fiber solution within five years.

But the other RBOCs involved in the big FTTP RFP haven't been so forthright about their deployment plans. "We can't make any deployment decisions until we've completed the RFP," says SBC spokesman Wes Warnock. "We're still heavily involved in the process."

That said, BellSouth and SBC will start first office application (FOA) trials during the second half of 2004, and only after that will they finally award an equipment contract. In greenfield applications, where the first FTTP rollouts will most likely occur, BellSouth expects to reach 135,000 new homes a year out of the 315,000 new homes in its territory, said Peter Hill, VP of technology planning and development at BellSouth, during a presentation at the United States Telecom Association (USTA) meeting last week.

Verizon is already said to have picked Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) for its first run of trials and deployments, according to analysts' reports (see Speculations Boost AFC). Not surprisingly, AFC's competitors quickly point out the likelihood that "aggressive pricing" factored heavily in the carrier's decision.

For AFC, having an installed base of digital loop carriers that can be upgraded to handle PON applications also helped keep its costs down. "Since carriers already deploy the [AFC] AccessMax, we know it works with current circuit switches (i.e., it supports standard interfaces TR08, GR57 and GR303, all of which are included in the FTTP RFP)," writes Merrill Lynch & Co. Inc. analyst Simon Leopold in an August 27 note to clients.

There is a historical precedent for forward pricing. In late 1996, Ameritech, BellSouth, Pacific Bell, and Southwestern Bell all signed multi-year contracts with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) to deploy its ADSL DSLAMs and related equipment. Industry lore has it that Alcatel won the deal largely because of its ability to price its gear based on anticipated volumes. "The RFP was designed to help the individual companies meet growing customer need for high-speed data network access by creating volume orders for equipment, thereby driving down ADSL costs and speeding deployment," the companies said in a joint press release.

The effect of the huge RFP win was obvious. Alcatel quickly became the market leader in ADSL DSLAMs, delivering more than 400 DSLAMs in North America during 1998, according to RHK Inc. By the end of 1999, RHK notes that Alcatel held 51 percent of the ADSL DSLAM market, with no other vendor commanding more than 16 percent share.

While today's FTTP race isn't exactly analogous to Alcatel's early conquest of the DSL equipment market, the similarities are strong enough to make a case for forward pricing. Vendors say they were each asked to provide a five-year forecast at three different volume levels, but none will divulge the levels.

There are only two constants in carrier contract negotiations, vendors say. The first is that the initial price a vendor gives in response to an RFP is never the final price. The second is that, whatever the circumstances, carriers won't let a vendor bid at a higher price than its initial RFP response.

"If you win this, it could mean a lot of business," says one vendor bidding for the RFP. "If you don't, it means you could be shut out for a very long time."

— Phil Harvey, Senior Editor, Light Reading

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gpiccirilli 12/5/2012 | 1:04:44 AM
re: FTTP Bidders Slashing Prices? Hello,

Do you know any vendors that do PON over MMF? I have MMF in the last mile and would be interested to see if there is a chance in using it to deliver high speed services. Thanks and regards.


Giovanni
dljvjbsl 12/4/2012 | 11:19:38 PM
re: FTTP Bidders Slashing Prices? I cannot see why companies are being criticized for pricing their product on the assumption that the market is going to be successful. If the market is successful then they will make money at the price. if the market is unsuccessful then they will go broke no matter what they price the product at.

Am I missing something here?

The Ottawa Citizen contained a 3 full page article on Scott Marshall and Ceyba. In it, Marshall was strongly criticized for building Ceyba to deliver a prodict in late 2002. Some of the founders and the others said that Marshall should have scaled back the company even more dramtically than he did so that the company could last through 2003.

I was puzzled by this. If the ULH market had existed as the founders hoped, Ceyba would have had a product to deliver to it. Since the ULH market did not appear then the Ceyba bankruptcy was inevitable and it would not matter that the company could have extended its death process a little bit longer.

Amrshall built a company on a strategy that had a chance of winning. The foundes and the Ottawa Citizen adivcated a strategy that could only fail.

The same analysis pertains to this issue of pricing. One must assume that one can win. Strategies that are based on the assumption of failure can only fail.
optodunce 12/4/2012 | 11:19:38 PM
re: FTTP Bidders Slashing Prices? Phil,

Your article header is FTTP Bidders Slashing Prices? Yet no where in your article do you reference what the baseline price is! YOu do reference that no one will go on record, but so that we can recognize the relative impact of your article can you at least give some estimated references in line with what the cost breakdown is regarding FTTP.

Quite often LR pens commentary on subjects that are loose and incomplete and do not give even the educated reader frame of reference.

I think it would be quite simple with relatively little work to breakdown the estimated costs per drop (i.e. FTTP equipment costs of $2,200 per drop for a fully populated rack of 1000 subscribers, installation costs of about $ 1,100 and cable costs....)

Thanks
optodunce 12/4/2012 | 11:19:37 PM
re: FTTP Bidders Slashing Prices? DA...this is business 101...in gross terms of course risk relative to the market portential and it is the bold who have disruptive technologies in a questionable market that often get ahead...but the consept of lost leading or front ending often finds failure for the company that ventures out...quite often it is the second and third players that pick up the pieces and learn from the inevitable mistakes of the adventurer that wins in the long run.

You cannot see why they are being criticized...well just look back at worldcom, global crossing, and others that had Op ex expenditures and cap ex that would take 20 lifetimes to pay back...
photonsu 12/4/2012 | 11:19:37 PM
re: FTTP Bidders Slashing Prices? What I find interesting is how the BOCs dictate the solution, and then complain about the price. Such is the lifecycle of PON. Gets down-right boring after a while.
One of these days maybe, just maybe they will state the problem and let all technologies compete as a solution. Until then .... yawn!!
photoelectric 12/4/2012 | 11:19:36 PM
re: FTTP Bidders Slashing Prices? Re: "Do you think companies that give up margins early on in hopes of making it up on volume are acting wisely? Let me know what you think and why."

Clearly, one has to jumpstart this business and price for volume. Without making this investment, why bother trying to play in this market? The problem for start-ups is their ability to subsidize the early years.

I would guess Alcatel is the clear early leader.
DCITDave 12/4/2012 | 11:19:36 PM
re: FTTP Bidders Slashing Prices? It's a bit tough to generalize like that in this case. There have never been deployments of FTTP gear in the volume that this RFP is calling for, so whatever something cost before this RFP is more or less irrelevant.

We are working to get some idea of what prices are. We're trying to find out what's been bid and at what volume, but it's not easy. This is closely guarded stuff.

Even without hard numbers, it is worth opening a discussion of forward pricing and what its impact might be on the companies involved.

Do you think companies that give up margins early on in hopes of making it up on volume are acting wisely? Let me know what you think and why.

-- phil
strands555 12/4/2012 | 11:19:35 PM
re: FTTP Bidders Slashing Prices? re: " cannot see why companies are being criticized for pricing their product on the assumption that the market is going to be successful. If the market is successful then they will make money at the price. Am I missing something here? "

It's not necessarily true they will make money (as in profits, not just revenue). Generally the early market's high margins are where you recover R&D expense. If you can pay those off before the margin erosion, then the late market at razor-thin margins and decent mkt share is an OK proposition for some (but not all) companies.

If the later market becomes hyper-competitive (like DOCSIS cable modems did), then even if you are an early market leader (like 3com was) the business returns just don't materialize. When 3com dropped out they were still #2 in market share.

It's not necessarily healthy for the overall market segment when one company "skips over" the high-margin period of R&D recovery to try and get an "edge." Often, everyone else will have to follow suit, and no one recovers R&D costs, or it is pushed out so far into the future that it's no longer a viable business to be in. So they do get an edge all right...they dive right onto the edge of the razor and bleed to death.
HiTekRedNeck 12/4/2012 | 11:19:35 PM
re: FTTP Bidders Slashing Prices? The price is sub $300 per home for ONT, OLT.

Predictions were it would start at $1,200, and RFP would drive price points to $500-$700. Yikes.
Curious George 12/4/2012 | 11:19:32 PM
re: FTTP Bidders Slashing Prices? Pricing is $350 for ONT and $50 for associated OLT. RBOC's have stated that this pricing "will work". Volumes were listed at three levels in the RFP, all rather high and intended to stimulate cut throat pricing. Most likely '04 will remain in the trial mode with deployments in the 10's of thousands, '05 a factor of 10 above that and significant volume >1M not until '06. With regard to market segments, the Greenfield builds will be dominated by fiber terminations at the home. Given roughly 1.4M new homes/yr, a number of at least 1M/yr is reasonable, beyond that we must include overbuilds, a much tougher financial hurdle. Also "take rates" for triple play service (voice, video, and data) will be significantly lower for overbuilds making the business case even more challenging. Total cost per home passed is roughly $1500 even at the 100K/yr run rate. Of this, roughly 40% is associated with construction labor that does not significantly benefit from increased volume. While any cost reduction is attractive, there is then a large portion that component suppliers can't really impact - except for designs that are inherently simpler to install. Other cost elements of the ONT like battery backup, SLIC and voice codec chips, power/protection circuitry, etc. are already rather cost reduced. The triplexer and processor block (some sort of CPU, PON MAC, flash memory, etc.) is about all we can significantly impact. Triplexers need to hit prices on the order of $60 in volume to be attractive.

Strategically, forward pricing is inevitable given the extremely competitive nature of today's PON market. The key issue is one of timing. ONT suppliers must work very hard between now and '06 to dramatically cost reduce and achieve a reasonable business model when volume deployments finally occur. It would actually be a major business problem if volume hit much sooner than '05 as the technology development and progress in the standards bodies would not have sufficient time to come to fruition. On the other hand, sub component suppliers cannot cost reduce until sufficient volume is available - this is the crux of the Catch 22 we are in. Government intervention could play a significant role in breaking the deadlock if we can make bringing bandwidth to the home a national issue that impacts economic recovery (e business, etc.) and education. Last year we ranked 4th in broadband delivery to the end user, this year we are 6th and falling further behind.
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