FTTH: 'How much does it cost?' vs. 'How much is it worth?'

Sept. 1, 2000

Bringing fiber all the way to the home has become an economically viable alternative for high-bandwidth service provision.

Joe Dooley
Optical Solutions Inc.

There is a gold rush going on, and it is happening right where you live. Literally. The convergence of technological innovation, consumer demand, and deregulation in the telecommunications industry has created enormous opportunities for telecommunications service providers. Carriers can now compete for more customers by providing multiple services-specifically voice, video, and high-speed Internet access-directly to those subscribers.

Capturing the opportunity requires a solid plan, including a sound marketing strategy, access to capital, and a communications infrastructure that can provide a technological advantage. Most importantly, capturing the opportunity requires a strong vision and a willingness to invest today to achieve business success and security in the future.

Once a service provider makes the decision to offer comprehensive voice, entertainment video, and high-speed Internet access to its customers, the carrier must wrestle with the question, "What is the best infrastructure with which to do it?" In the area of residential access infrastructure, the options are clouded by multiple technological alternatives and by lingering perceptions from past experience.

Fiber-to-the-home (FTTH) is arguably the optimal comprehensive solution, and everyone agrees that driving fiber deeper into the residential access network is good (the deeper the better). However, many service providers still cling to the notion that FTTH is too expensive compared to the alternatives. This somewhat paradoxical perception suffers from three major flaws. The first is that the technical alternatives-e.g., digital subscriber line (xDSL) and hybrid fiber/coax (HFC)-simply do not support current and emerging services in the same comprehensive manner that fiber does. The second is that service providers are failing to figure "residual value" in their cost-based business analyses. And the third goes right to the heart of the matter-that those who still believe FTTH is too expensive on a per-subscriber basis are either ill-informed or operating from dated information.

The primary technical alternatives to FTTH are HFC systems with cable modem technology and xDSL technology over twisted-pair copper.

Cable-TV systems provide excellent downstream (from the headend to the subscriber) broadband capability, with the reach being extended by HFC technology. However, the initial deployments were one-way only. The cable-TV industry is in the process of upgrading its infrastructure to support two-way communications, most specifically to provide a return path for the new cable modem technologies. Nonetheless, the upstream bandwidth is limited to approximately 40 MHz (about one-twentieth of the downstream), and it must be shared by multiple subscribers. It also is subject to environmental RF noise ingress at both the subscriber residence and in the outside plant.

This upstream bandwidth limitation will become even more exasperating as new voice services start to compete for the same bandwidth. Most importantly, the coax plant is close to its maximum theoretical capacity (due to inherent high-frequency attenuation, or rolloff characteristics).

Switching to a digital cable-TV distribution system, which is more efficient in its use of bandwidth (but which has a whole set of different issues, including finding affordable programming in that format), could free up some of the bandwidth for more data and voice. However, converting downstream bandwidth to upstream bandwidth would require another round of costly plant upgrades.

Meanwhile, the telephone industry is responding to consumer demand for high-speed Internet access with the deployment of xDSL technology, most significantly asymmetric DSL (ADSL) for residential subscriber access. For those who can get it, it is a great solution. Unfortunately, not many can get it.

Subscribers who wish to sign up for the service must first have their loops "qualified," which can be a tricky endeavor. Unbeknownst to the subscriber, there are a lot of infrastructure obstacles in a service provider's network that can nullify xDSL signals. For example, the loop must be within a given distance (measured by cable route) of the central office for a certain level of service, it cannot contain load coils (used to extend POTS) or bridge taps, nor can it be served by current digital loop carriers (DLCs). This last restriction is the most ironic for two reasons: Many DLC nodes are fiber fed, and many of the newer (arguably more attractive from a marketing perspective) housing developments are served by DLC nodes, a relatively new technology in the telephone industry.

Major independent local-exchange carriers (ILECs) are taking a proactive approach to resolving the DLC restriction with the deployment of next-generation DLCs that are DSL-enabled. At the recent GR-303 Integrated Access Symposium in San Francisco, a representative from SBA discussed "Project Pronto," which is aimed at upgrading the carrier's DLC network elements within the next two years for DSL support. This effort is no small task, with a project cost of $5 billion to $6 billion and with the result that up to 77 million access lines would have the potential for DSL support.

The catch is that the subscriber loop will still need to qualify for DSL support due to distance or other physical plant limitations. In addition, there are potential limitations on how many high-speed data services can be supported in any given twisted-pair cable or sheath. While the DSL signaling is particularly sensitive to crosstalk from T1 circuits, ADSL deployments may be self-limiting to the percentage of customers that can be served, especially at a given level of service.

From a marketing perspective, these limitations are not huge barriers (at least currently) to the deployment of high-speed Internet connections because there is not universal demand (yet) for the high-speed access. The real glitch is envisioning the deployment of digital cable-TV services over ADSL. That's a can of worms for marketers because service cannot be guaranteed to reach all of the potential customers in a geographic market.

The technical issues surrounding xDSL and HFC technologies do not make the selection of those technologies for broadband residential access inherently "bad." For many ILECs and cable-TV service providers, it's a good business decision to expand the capacity of their current infrastructures and offer more services to their existing customer base. However, if they are making a large investment in an infrastructure that does not seamlessly blend with their vision of the future, that's a different story.

For those with a vision of offering all of the services subscribers want today and the services they will want tomorrow, an FTTH infrastructure is really a business necessity. It is the only infrastructure that has the bandwidth and flexibility to address the large, growing, and ever-changing bandwidth demands of residential subscribers.

Obviously, FTTH cannot be deployed "at any cost." Businesses must build their infrastructures upon sound business principles. Among service providers, business models are often traditional-e.g., based on initial investment, operating costs, and service revenues-and are evaluated on the basis of an x-year payback. This business model is sound, but in applying it to the local access market, the mathematical analysis has a major flaw. That flaw is the accounting for residual value.

Not accounting for residual value means a service provider is neglecting two major components that relate to the vision of the enterprise and its future prosperity in the residential access market. The first is the opportunity cost of missed customers and the second is future revenue streams from new services.

The traditional net-present-value/discounted business model is useful when comparing alternative business options, in that it "normalizes" the timing differences in cash flows for revenues and costs. However, using the business models to compare HFC, xDSL, and FTTH implementations will generally fail to take into consideration that the number of customers and services that can be delivered using each of the three technologies is different. More importantly, an x-year payback model will not account for potential subscribers that are "missed" and who will never provide future cash flows because they have selected alternative vendors to meet their ongoing communications needs.

For example, if you choose to implement ADSL with the idea of delivering entertainment video via digital cable-TV or high-speed Internet, and a potential customer requests service but has to be denied because the customer's loop didn't "qualify," that individual is likely to find an alternative, such as direct satellite. Not only would the traditional business model fail to show the missing potential revenue as an opportunity cost in the x-year payback, but it would also mask the fact that you have likely lost the customer permanently. One of the strongest motivations for a service provider to offer multiple services is that the more services that a subscriber receives, the stronger the loyalty to the provider. The reverse is also true-losing potential cable-TV customers today, makes it also more likely to lose them as an Internet subscriber and voice subscriber, as well.

The concept of capturing the customer base is fundamental to the second component of residual value (future revenue streams from new services.) The standard business model only shows when the discounted revenue stream is equal to the discounted expense stream. What is usually missed is how much the business is worth at the end of the time period being evaluated. From a classic business accounting perspective, the residual value is equal to the non-depreciated asset value. From a business valuation perspective, the residual value is a function of the number of customers served and the number of services that can be delivered in the future.

Arguably, the standard business models for the HFC and DSL technologies are fair because the future services that the subscribers will demand will not be able to be delivered with those technologies, at least not without some costly plant upgrades. In fact, the only future plant "upgrade" that will deliver the future high-bandwidth applications is FTTH.

Using the captured customer/future services/residual value business comparison model, fiber networks will actually appreciate in market value, not depreciate.

So far, this discussion has been aimed at presenting FTTH from a holistic business perspective. But that's not an attempt to skirt the issue of cost. The hard numbers behind an FTTH deployment are nothing to shy away from. Today, the cost of deploying FTTH has plummeted dramatically from the early trials of almost a decade ago.

The basic cost of fiber on a per-subscriber basis in passive-optical-network architectures available today is actually on parity with copper. For installations where new plant is required-e.g., in greenfield, competitive overbuild, or replacement projects-the cost differences shrink even further when the total construction is taken into account. Moreover, the costs of passive optical components and electronics will continue to decrease as a result of competition and volume in the overall fiber industry.

The bottom line is that in comparing the cost of fiber to the value it brings, there is no question that FTTH is the right decision for today. It has the bandwidth to provide today's and tomorrow's services, it protects and enhances future revenue streams and preserves customer loyalty, and it costs virtually the same to deploy today on a per-subscriber basis than less robust, alternative technologies. For carriers and their customers, it's a no-brainer: Those that get FTTH first win.

Joe Dooley is director of product management at Optical Solutions Inc. (Minneapolis). For more information, call (888) 674-3884 or visit the company's Website at www.opticalsolutions.com.

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