FTTP Bidders Slashing Prices?
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