Altice FTTH Bill Could Hit Almost $9.6B in US

Cable group Altice could be facing a bill of nearly $9.6 billion to connect the premises in its footprint to a fiber-to-the-home (FTTH) network, according to calculations based on data from broadband equipment vendor Adtran.

Altice, which owns the Optimum and Suddenlink Communications cable businesses in the US, this week announced plans to build a FTTH network that can provide 10Gbit/s services to almost all of the homes in its US footprint by the end of 2022. (See Altice Plans FTTH for Entire US Footprint and Altice Favors Fiber Over D3.1 for Its US Upgrade.)

On the basis of homes passed at the end of September, that plan would mean ensuring fiber networks reach almost 7.985 million homes in the next few years -- 5.075 million served by Optimum and 2.91 million in the Suddenlink footprint.

Like other cable companies, Altice relies largely on DOCSIS technology, which runs over hybrid fiber coax (HFC) networks, to provide Internet connectivity for its customers. But the FTTH scheme suggests it doubts the business case for a large-scale deployment of DOCSIS, the next iteration of which is the DOCSIS 3.1 standard.

Optimistically, Altice reckons that by reinvesting "efficiency savings" it will be able to build this FTTH network without any "material change in its overall capital budget."

It is hardly surprising that Altice is keen to play down any concern that investment needs could soar on the FTTH plan. The company toils under a mountain of debt that currently equals about 5.7 times its annual EBITDA. Most big European operators report net-debt-to-EBITDA ratios of between 2 and 3.

Even so, while Altice has developed a reputation as a pretty ruthless cost cutter, its budget expectations seem overly optimistic, judging by cost data that Light Reading has been able to obtain from Adtran Inc. (Nasdaq: ADTN).

The equipment vendor, which specializes in the broadband sector, puts the average current cost of connecting a home to fiber at between $800 and $1,200. This would require Altice to cough up between $6.4 billion and $9.6 billion to cover all of the homes it currently passes with HFC.

The actual figure could, of course, be somewhat lower because of investments that have already been made: It is important to note that Adtran was not commenting specifically on the Altice plans.

On the other hand, Altice has said it will make use of "proprietary technologies" developed by Altice Labs, its own in-house R&D unit, which would seem to rule out next-generation FTTH standards such as XGS-PON and NG-PON2: Using in-house developed technology could alter the capital and operating costs.

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To put these figures in context, Altice spent a total of €197.8 million ($210.2 million) on capital expenditure in the US during the July-to-September quarter -- about 9.8% of what its US subsidiaries made in sales.

Annualized, and ignoring any seasonal variation, that comes out at €791.2 million ($840.9 million). Assuming Altice's FTTH investment takes place over a six-year period (from early 2017 until late 2022), the bottom end of Adtran's range would require the operator to spend $1.07 billion annually on broadband rollout.

Even if Altice were to connect only existing customers, rather than homes passed, it could face a bill of between $3.6 billion and $5.5 billion -- or between $600 million and $917 million a year. Optimum had 3.107 million HFC customers on its books at the end of September, while Suddenlink catered to 1.454 million.

Finding savings may not be that easy. While Altice does not break out details of costs, Suddenlink could already be considered the most profitable business that Altice owns, reporting an EBITDA margin of 46.4% in the July-to-September quarter. Optimum, conversely, was the least profitable, with an EBITDA margin of 35.8%. And so-called "synergies" between the two US businesses could offer scope for additional savings.

What's clear is that FTTH will cost a lot more than an upgrade to DOCSIS 3.1 that would include some fiber rollout. Adtran reckons the cost of this kind of deployment currently ranges from about $400 to $500 per home. That would require Altice to fork out between $3.2 billion and $4 billion to upgrade all homes passed.

There are ways of lowering the FTTH bill, however. According to Adtran, several operators are now looking at technologies that could reduce fiber-trenching costs, leaving service providers with an FTTH bill of between $600 and $1,000 per home passed.

Another approach, it says, is to roll out DOCSIS 3.1 today and plan for a fiber upgrade in the next seven to ten years, on the assumption that very high-speed technologies are not urgently required.

The problem here, says the vendor, is that an operator would end up spending more than if it took the fiber plunge today. In the long run, Altice's decision may look like a shrewd one.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

brooks7 12/1/2016 | 6:28:38 PM
Re: "Civil works" is ~70% of an ftth network That is only true if the building owners let you work in their MDUs and MTUs.  Not always the case.


teak0 12/1/2016 | 2:42:51 PM
"Civil works" is ~70% of an ftth network Hello It's important to remember "civil works" including cabling, splicing and testing can be ~70% of the initial cost of an ftth network. A common "mistake" is to treat single family homes "as equal"to MTUs and MDUs. The Rate of return of an ftth project can improve dramatically (assuming provider has a handle on programming costs) if MDUs and MTUs are wired first with plug and play solutions before single family homes
Duh! 12/1/2016 | 1:32:49 PM
Re: Wild SWAG Large operators make decisions like this based on detailed financial models. Presumably, somebody at Altice modeled CAPEX per home passed based on overbuilding existing plant. The models presumably also took OPEX savings into account. Passive plant is dramatically cheaper to maintain than active plant, and requires much less electric energy.

Other operators' cost models necessarily vary, as do financial criteria for go/no go and other strategic objectives. I wouldn't presume to second guess any operator's upgrade vs. replace with FTTH decisions without first seeing the numbers and reasoning behind them.
iainmorris 12/1/2016 | 12:38:41 PM
Re: Wild SWAG Good points. However, the article does note that Adtran was talking about FTTH deployment costs generally, and not in specific reference to Altice or another incumbent, and also that Altice's costs could be somewhat lower because of investments already made.

That said, there is clearly a huge bill to foot, even for incumbents, or there would obviously be far more willingness to invest. European incumbents like BT and DT constantly fret over the investment requirements for FTTH, and have held off on big commitments because of them. As you point out, the use of a proprietary tech could also drive up costs for Altice. 
Duh! 12/1/2016 | 12:02:12 PM
Wild SWAG I have no idea what's behind Adtran's numbers. I strongly suspect that they assume greenfield or an overbuild by a non-incumbent.

Incumbents have a significant CAPEX advantage in overbuilding their own outside plant. For aerial plant, they can overlash existing strand with minimal make-ready hassles. For underground plant, they can use their existing duct without having to negotiate with with the duct owner. Their costs come closest to parity for direct-buried cable -- but even there, they have established rights-of-way. Those things avoid most of Altice's biggest cost drivers for FTTH overbuild.

As far as Altice's "proprietary technologies": it's doubtful that they can reduce CAPEX by rolling their own PON standard. XGS-PON and 10G EPON enjoy economies of scale that another flavor of PON can't touch. More likely, they're referring to proprietary OSP technologies. There is plenty of room for innovation in that space, for relatively low non-recurring engineering and tooling costs.
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