Internet access is increasingly the only traditional communications service valued by the residential and small business customer. Fortunately, the business of providing broadband service – collecting a monthly fee to connect a subscriber’s home or business to the Internet over a local distribution network of copper, coax, and fiber lines – is healthy and strong. According to a 2017 report published by the International Telecommunications Union (ITU), global fixed-broadband subscriptions have increased by 9 percent annually in the last five years.
The same report shows that, contrary to the notion that mobile phone-inspired cord cutters will doom the business of broadband, the increasing use of cloud services and streaming video has driven up bandwidth consumption and made the need for fixed broadband access more important than ever before.
Unfortunately, while broadband subscriptions in the U.S. have grown in the past decade, the voice+video+data triple-play service bundle is in full retreat. Bundled pay-tv service, like traditional voice service before it, has been eroded by Over the Top (OTT) streaming media services, leaving broadband internet access as the dominant and critical component of the traditional residential service provider business case.
Compounding the profitability puzzle, even internet access revenue is not secure. Neilsen’s Law of Internet Bandwidth has been remarkably accurate in predicting a high-end user’s connection speed grows by 50 percent per year. In the next few years, we will pass the 1 Gbps threshold for premium user connectivity speed, putting pressure on service providers to once again upgrade their access networks.
This is a defining period that ultimately will reward those Communications Service Providers (CSPs) that are able to recognize consumer and industry trends 5 to 10 years out and build a network that addresses those demands. This network will need to provide near-limitless capacity with predictable performance, enabling the rapid deployment of new consumer and business services where quality of experience is paramount.
Investing in Uncertain Times
There is near universal agreement among CSPs that an all fiber access network is the most scalable, stable, and efficient to operate. As a result, most new access networks are constructed with fiber to the home. Across the residential, business, and mobile access networks, the race is on to deploy new fiber networks.
Still, some operators find it difficult to justify deploying fiber when compared to extending the life of the existing copper or coax access networks. Two main factors combine to cause CSPs to delay pursuing FTTP when deciding how and when to upgrade existing networks: 1) perceived cost to deploy a fiber network and, 2) the belief that copper or coax can meet future bandwidth requirements.
Both conditions have dramatically changed. New technology options have drastically reduced the cost of deploying fiber and major shifts in consumer behavior are driving the need for more speed at an ever-increasing pace. Indeed, the rate of top bandwidth rate growth often exceeds the pace that copper networks can be upgraded.
The frequently forgotten side effects of a decision to extend the life of copper networks and forego an investment in FTTP include:
- Current copper technology does not keep up with the consumer need for speed
- Higher operational costs during the entire life of the FTTN deployment
- Revenue and market share lost to competitors who have overbuilt with FTTP
- Marketing costs of regaining lost customers
These technology and market shifts are fundamentally impacting the business model for all CSPs and making FTTP a much more compelling option in most situations.
The improving case for FTTP
FTTP networks are virtually future-proof and require significantly lower operating expenses than networks with a copper or coax technology – two attributes that make the business case for FTTP easier to prove in. Traditionally, the payback period for FTTP networks has been around 5 years. CSPs are now finding that the breakeven time is much shorter as key factors considered in the business case have significantly changed.
The cost to deploy FTTP networks continues to decline
Innovative construction techniques continue to drive down the cost of placing the feeder and drop cables (e.g. micro-trenching). At the same time, FTTP technology is no longer new or exotic, reducing /the time and labor expense as construction crews leverage connectorized components and smart call-home technologies.
FTTP networks have a lower Operating Expense (OPEX)
An all-fiber network significantly lowers ongoing operating and maintenance costs, including reductions in electric power consumption as well as maintenance and support staff. Verizon has stated that the FiOS network experienced an 80% reduction in network trouble reports compared to copper subscribers, all while also reducing the customer churn rate to below 1.5% - an exceptional rate in the telecommunications industry. A reduction in maintenance of the network has allowed Verizon to streamline its wireline workforce. Other FTTP operators have successfully shifted their maintenance technicians to customer support and revenue generating roles, such as in-home technical support which generate monthly service revenues.
Higher take rates driven by higher subscriber satisfaction
The business case for FTTP is most strongly impacted by take rate – that is, the number of subscribers sharing the fixed costs of the fiber network.
A generally accurate guideline provides that a 30% take rate generates a positive payback in five years. The good news is that most FTTP networks achieve a take rate much higher than 30%. Widely reported over the past decade, FTTP networks provide consistently better customer experience than copper and coax networks in multiple categories:
- Service uptime
- Download speed
- Upload speed
- Consistency of speed
- Streaming quality
Thus, a higher subscriber satisfaction rate generates a higher take rate and higher likelihood to recommend the service to one’s neighbor. Higher subscriber satisfaction also correlates with higher ARPU, even in competitive markets, further strengthening the FTTP business case.
Higher Profitable Revenue
FTTP deployment experience clearly shows higher customer satisfaction, lower churn rates, more advanced services, and higher percentage of consumers taking multi-service packages anchored by high speed internet service – all resulting in higher profitable revenue. But that is just the start point for the future new revenue opportunities enabled by the high capacity, low latency, highly reliable FTTP broadband service. Notably, managed whole-home Wi-Fi services are quickly becoming a companion service to FTTP-based broadband service, providing additional revenue opportunities from the same fiber investment.
FTTP: more than connectivity
Much of the available financial analysis of FTTP deployment has come from Verizon’s deployment of FiOS, due to the availability of their financials as a publicly traded company. There are, however, many great FTTP success stories from hundreds of service providers in a variety of markets – especially in rural areas of the United States. Armed with solid business plans and a strong focus on addressing the needs of the local community, many rural providers have achieved a return on their investment in less than two years.
Only fiber can claim a life of 20+ years with virtually no limits on bandwidth potential or service flexibility. A CSP can build a fiber access network once and reap the benefits for a generation. The difference between winning 30% market share and 50%, or even 80% as Calix has seen, comes down to one thing: marketing execution. Wildly successful FTTP CSPs are entering the market with a full solution – fiber to the home and an exceptional subscriber experience. One without the other distinguishes the CSP in the market. Both together disrupts the market and puts the CSP on a firm financial footing.
Hear more from the service providers, analysts, educators – and even a few people from Calix – whose ideas are inspiring business, network, and operations transformation at Calix Perspectives.