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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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.
jepovic 12/5/2012 | 3:46:36 PM
re: FTTH Technology Fracas Continues "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"

I don't know about the US, but in Europe and Asia there are lots of small and medium-sized operators using FTTB and offering 10 Mbit symm for something like $50 and 100 Mbit for $100. They are relatively profitable.

Why should it be so expensive, in an apartment complex? You lease metro fiber from the CO to the building. The switch is cheap. The main cost is probably drilling and cabling Cat6 to each apartment. In a large complex, several switches might be needed. Still, compared to digging in suburbian areas it should be very cheap.

For the landlord, it should be a great selling point to offer cheap highspeed Internet.

Frankly, I don't understand why this model isn't used more in the US. I'm aware that the population density is lower, but there are plenty of very dense cities like Boston, NY, DC, SF etc.
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.
yarn 12/5/2012 | 3:46:39 PM
re: FTTH Technology Fracas Continues CatalystBP,

I think the type of broadband infrastructure you describe would make the download model for video obsolete. Why would you even wait 20 sec if you can have instant access/viewing in realtime, whenever you want? Also with progressive download you don't need to download everything before you can watch. Why require 20 sec if it takes 20 min to burn that same content on a DVD and 2 hours to consume it?
rjmcmahon 12/5/2012 | 3:46:44 PM
re: FTTH Technology Fracas Continues I live in one of the 10 largest metro areas in the country and I can't get any of this. I'd really like to hear from you or others, why this is and what if anything we can do to remove the apparent stalemate and get us into the 21st century. I'm certain it has very little to do with technology.

Well, everything I've seen to date indicates neither publicly owned nor privately owned (investor owned) models have worked for fiber access to date. Glasgow, KY was heralded as an example of how municipal networks could access cheaper capital and provide a quality network for their residents. In my opinion, they haven't done much besides acquiring an HFC network on the cheap since, i.e. their service may be a few dollars a month cheaper but it's basically equivalent to an MSO's HFC in a metro area.

On the investor owned side the industry has consolidated down to VZ and T in most markets. (MSOs are done investing in outside plants as they spent $100B in aggregate upgrading to HFC, so no fiber overbuilds coming from them in the near future.) VZ is deploying some PON with FiOS. T isn't doing much besides empty rhetoric about market competition and their billions in investment (in what?) since the demise of the Telco Act. FiOS is unproven (I'm a skeptic that it will generate an ROI) while T's approach of doing nothing milks the existing plant for as long as possible. I'd rather wait for Godot.

The thing that can act as a catalyst to investment is an ROI. Nobody in their right mind would sink large sums ultimately to lose it via bankruptcy or via firesales to scavengers. Yes, this deluded behavior happened during and after the 2000 bubble ,but that was in long haul and a little metro. Nothing in access.

Quality investors will also demand mitigation of risk and overbuilders will need cheap capital. The cheapest capital comes from government entities issuing things like bonds. Risk can be reduced by making the bonds general obligation, i.e. backed by taxes. I don't think this approach can succeed politically in most places. So revenue bonds, impact fees, etc. will be the preferred funding sources.

Also, bond holders will demand a monopoly. (Even RUS demands a monopoly before giving out a broadband loan.) The reality here is that a quality fiber access network is a natural monopoly which is a condition of economics and not government policy, so the monopoly already exists! We're just on the front end of it, i.e. the side where the costs are so high nobody can afford to enter. Government recognizing this and "acting" to enforce the monopoly might help "cure" distorted thinking, which is that competition from incumbents will make an ROI impossible. Government behaving in this manner is merely an appearance thing, i.e. nothing changes to the economic risks but only to the perceptions of risk. Now, the incumbents *will* waste everybody's resources and stall progress via lawsuits. It would be nice if government protected against that when granting limited exclusivity to an overbuilder.

Regardless, that still doesn't solve "who pays?" or more specifically, what cash flows back the debt creation. I think ultimately we'll end up with an ecommerce tax (assuming we progress.) If this is done right, let's say, based on the buyer's location instead of sellers and not allowing more than a small percentage to be diverted, that could entice capital to flow toward infrastructure investment. (Note: to get locals on board, a small percentage will need to go to them. This happened with cable overbuilds in the 70s and 80s.)

The other option is to try to use content revenue or advertising revenue streams to back the creation monetary instruments, e.g. via equities. (GOOG, MSFT approach.) I don't think either will build out access. It took forever to build out broadcast TV between the 1920s thru 1950s and that was a lot cheaper w/respect to infrastructure costs. Folks running around championing GOOG as an infrastructure provider are really deluded in my opinion.
CatalystBP 12/5/2012 | 3:46:45 PM
re: FTTH Technology Fracas Continues RJM,
Thank you for a very thorough and detailed response. I took your advice and researched some of the posts from Hemmingway and others. Ironically, it reflects the essence of the problem that started (or continued) this current debate... "the fracas continues", still, 6 years later. OK, I accept that P2P has a place in many applications; much of the advantages I described for PON could apply to P2P implementations (nothing magical about aggregation, policing and shaping) with the exception of subscriber termination. Used to, there was a value in increasing the number of connections per CO rack space, but maybe that's changed, so on to my point...

As Hemmingway, RJS and others have said, connection is necessary before the applications will come and the major cost of that lies in the outside plant, independent of the transport technology. As I've said, I have no religion here, so that being the case just pick one, or pick some combination of both, but get on with it.

As a subscriber, here's what I want:

LAN connectivity performance from my home to my office e.g. up/down load files (20MB) in 5 sec, full advantage of netmeeting and other interactive apps, video conferencing, etc. that would facilitate an effective virtual office, jitter free and on demand.

I want 3 gaming sessions, and 3 separate video channels running simultaneously, on demand.

I want to down load an HD movie in less than 20 seconds, a couple times a day.

Blended services- ok, let's start with real time video telephony.

Most of all, I only want to pay for the BW I use. Averaged out, its fairly low, but I'll pay for the peak capability to achieve the performance.

I live in one of the 10 largest metro areas in the country and I can't get any of this. I'd really like to hear from you or others, why this is and what if anything we can do to remove the apparent stalemate and get us into the 21st century. I'm certain it has very little to do with technology.


Jeff Boyardi 12/5/2012 | 3:46:57 PM
re: FTTH Technology Fracas Continues GPON over Coax??

Luke M 12/5/2012 | 3:46:58 PM
re: FTTH Technology Fracas Continues "An MSO strategy would be better served by initially deploying an overally GEPON solution to provide data services to residential/business users. This would complement current HFC networks. The GEPON network can then be enhanced to digital TV services at a later step."

That makes sense if the HFC network is decrepit and will be retired in the near future. Otherwise, I doubt that it would produce a positive return. So I believe that some sort of mid-life kicker will be needed for HFC networks.

A more likely approach than the "GPON over coax" idea is to simply add upstream bandwidth. For example, you could add bandwidth in the 1300-1800Mhz range and use it for a new upstream PHY with 1gb/s or better. That, plus a bunch of bonded DOCSIS downstream channels, would enable FTTP-class data service (minus the reliability) at 10% of the cost of installing fiber.
bollocks187 12/5/2012 | 3:46:59 PM
re: FTTH Technology Fracas Continues An MSO strategy would be better served by initially deploying an overally GEPON solution to provide data services to residential/business users. This would complement current HFC networks. The GEPON network can then be enhanced to digital TV services at a later step.

Therefore no need for GPON in this scenario.
rjs 12/5/2012 | 3:47:00 PM
re: FTTH Technology Fracas Continues SEVEN,
I wish I had an answer for compensating the shareholders. How did the power companies do it?
May be RJM or some other gurus out there have the answer to your key question.

I believe that a 10% assured margin for a company without baggage is a healthy margin. With free market there will be plenty of takers. There will be plenty of asian companies willing to take it on if the VZ and T lobbyist do not throw impediments in the way. Putting 10kV copper wires is quite more diffucult than putting in fibers. The electric cos are already doing it within the confines of strict regulations.

Your point about construction cost is well taken.
What I was trying to drive home was that the cost for fiber layout is a one time cost and it is the same whether it is E/G/PON or P2P ethernet, since the majority of the cost is in the labor and
rights of way. Also, once the fiber is laid, upgrade cycles are not required for the actual path which is in the form of conduits with slots for the cables.

With 1Gbps P2P ethernet transceivers any ugprades that are required are in the CO routing equipment and not in the bit terminating equipment.


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