FTTH Technology Fracas Continues

During 2007, the world's telecom carriers connected another 9 million homes to optical fiber; by 2010, if current trends continue, the number of homes connected to FTTH will pass 50 million. A massive transition to all-fiber access is now all but inevitable everywhere. Yet the road to FTTH is full of twists and turns that make it difficult and frustrating for vendors to negotiate – not least in determining what technologies will be used, where, and when.

For a start, despite the strenuous efforts of GPON cheerleaders such as Alcatel-Lucent (NYSE: ALU), there's no chance that GPON is going to dominate global FTTH deployment any time soon. In fact, as we reveal in Heavy Reading's new report, FTTH Worldwide Technology Update & Market Forecast, the deployed bases of the three main FTTH technologies – GPON, GEPON, and active or point-to-point (P2P) Ethernet – are likely to be more or less equal, by which time around 90 million homes will be connected to fiber.

Given the hyperbole that has swirled around GPON over the past two years, this might seem a surprising conclusion. But the fact is, there is no "global" FTTH market today, and there will be no global FTTH technology – at least, not in the foreseeable future.

Why so? First of all, no two national markets are the same – and even within a single city, one technology may not fit all needs. In Japan, by far the world's biggest FTTH market with more than 11 million connected homes, GEPON is universally used to connect single dwellings, while active Ethernet dominates in multi-dwelling units (MDUs), and there's little sign that a shift to GPON in either case is imminent.

Given the size of the Japanese market, that alone means that GPON cannot win the race in terms of sheer numbers any time soon. And although GPON looks certain to be the technology of choice for major incumbent telcos in both the U.S. and Europe, active Ethernet is actually more widely deployed in Europe today – and is likely to maintain that position right through 2012.

The truth is that although the International Telecommunication Union (ITU) Full Service Access Network (FSAN) group has worked very hard to establish GPON as the worldwide reference for FTTH, its strengths – high downstream speeds, carrier-class features, and low opex, among other things – haven't convinced everyone that it is the right technology everywhere, at least not yet. For now, GEPON gear is cheaper and more widely deployed – persuasive qualities in its Asian homeland.

Meanwhile, active Ethernet advocates point to their technology's simplicity, low-cost CPE, and suitability for use in so-called "open access" networks, such as those being built by municipalities and utilites worldwide. Advocates such as Cisco Systems Inc. (Nasdaq: CSCO) argue that incumbents that deploy GPON would in effect be making it more difficult for regulators to ensure that the new fiber networks can be used on equal terms by other service providers – an argument that certainly carries weight in regions such as Europe, where DSL unbundling has driven a vibrantly competitive market.

There is plenty of room for argument around the edges. For example, which way will China jump? China has already brought fiber into or very close to apartment blocks serving at least 15 million homes – far more than anywhere else. Almost all of it is simple Ethernet switching with very little PON deployed to date, but the big Chinese telcos are all preparing to move to PON. While GEPON currently has the upper hand, the longer the Chinese telcos delay, the more likely they may opt for GPON – potentially tipping the scales decisively in its favor.

Widespread deployment of GPON elsewhere would certainly help to make the case in China, since mass deployment will drive down the cost of equipment, and cost is the big issue there: Telcos are seeking a combined price for ONT and OLT of $200 per customer – less than half the typical current price.

However, widespread deployment of GPON probably isn't coming in 2008. While most GPON vendors are bullish about the medium term, it's been a long, slow haul, with many projects running late. Verizon Communications Inc. (NYSE: VZ) has slipped behind its original schedule for GPON; Orange (NYSE: FTE), the biggest European telco committed to GPON, is also behind schedule; and vendors themselves are mostly cautious about the coming 12 months, betting that scale deployment won't really begin before 2009.

It's a Catch-22 that can only be resolved by time – and based on current trends, within a few years, carriers and vendors will need to be thinking about the next generation of technology. In addition to higher-speed P2P Ethernet, WDM PON and 10G PON are both being prepared for launch around the 2012 time frame.

Yet for all the current frustrations, this is a market manifestly worth pursuing and investing in. The transition to FTTH is a once-in-a-generation infrastructure overhaul, and the winners over the next five years will be very well placed to reap continuing benefits for years to come. FTTH is a 20-year project that will entail hundreds of billions of dollars of telco spending, with the aim of achieving domination of wireline networks for decades to come. By any reckoning, that's a prize well worth pursuing – despite the twists and turns in the road ahead.

– Graham Finnie, Chief Analyst, Heavy Reading

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CatalystBP 12/5/2012 | 3:46:36 PM
re: FTTH Technology Fracas Continues Yarn,
Personal preference. I like to buy movies to build a library, otherwise I agree. It was just an example.

Again, excellent points, although the conclusions you draw are a bit grim. Maybe some sort of collaborative investment approach would work, albiet a departure from the conventional models. For example, some greenfield developers are putting in FTTH infrastructure to entice home buyers, but this doesn't solve established areas. Since the Euro is doing so well, maybe we could get BT or FT to build out the access then lease it back to VZ for a content play.

Seriously, how do independents do this? They must have a similar capex issue, scaled down. I know of a few small guys (5000 homes or less) that offer 10mb/s symmetrical with voice and video for $100/month. Most are RUS funded, so maybe that's the answer.

If your "content" suggestion would solve the ROI, then tax incentives, combined with shorter depreciation schedules should help with the build-out costs and technology churn. Add to that lower availability goals (.999) and auto-provisioning schemes to reduce operational costs and maybe we have a starting point.
rjmcmahon 12/5/2012 | 3:46:35 PM
re: FTTH Technology Fracas Continues CatalystBP,

I don't mean to be grim but rather I am trying to give a realistic assessment of the situation. Optimism wins at the end of the day and the folks that will get this done will be optimists. You seem to have this trait, learned or otherwise obtained, so good for you. (Note though that optimism and idealism aren't the same thing, i.e. the idealist refuses to readjust to the situation at hand and tends to lose out due to the lack of adaptability.)

Back to the discussion at hand.

I'm not optimistic that foreign investment will sink capital into US fiber access networks even with a declining dollar. I think they would buy up existing infrastructure first, (e.g. water infrastructure) and grab those cash flows.

I've seen pictures of Hong Kong broadband projects which look pretty good to me. They pass up on what we in the US would consider high density housing. It has to be a very dense building before they run a fiber to the premise. This argues for places like Manhattan first.

The obvious answer to these utility problems in a predominately suburban America is to create an entity like a municipal utility district and have the early adopters pay back the bonds obtained by these districts via their property taxes. This would be true for solar programs as well, i.e. it allows for low cost loans while amortizing repayment across the benefit life of the product (which is longer than the average length of home ownership.)

The challenge with this financing model in the face of technology improvements is that deferring investment is the rational approach. The solar panels coming in five years are worth waiting for in real dollars. This is arguably true for fiber termination equipment as well. If there were an ROI today, we'd see businesses springing up financing these types of projects. We don't.

Solar PV has battled this with politics instead of economics. That's why CA has a million roofs program, i.e. conning consumers into poor economic decisions. (It's ironic to see rabid libertarians like TJ Rodgers become beholden to government subsidies, even in the face of poor policy.) The political climate behind things solar is much more favorable than fiber access, making the bar even higher for us.

One day the mood will change and the optimists will pounce and deliver, giving to society a worthy legacy. To date, it hasn't happened though, at least not that I've seen.

PS. RUS funding is likely the reason the small projects can go forward. If the model scaled we'd see the MSOs suing the Federal government to stop these subsidized loans. The MSOs are very motivated to make sure that fiber access are not deployed. The have waited decades to get into the position they are in now and have no interest in losing it.
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