February 18, 2014
FTTH Remains a Tough Call for Telcos
By Gary Kim
Some things do not change easily in the communications business, one of those verities being the difficulty of justifying fiber to the home investment. In Europe, as elsewhere, FTTH investments are risky. Of course, non-investment is also risky.
Though the per-home investment hurdles have steadily dropped over the last two decades, one big problem is that up to 80 percent of cost is driven by digging trenches and other civil engineering processes, not the cost of cable or transceivers.
The other issue is growing competition in local access markets, especially cable TV companies, but also including overbuilders, satellite companies, fixed wireless and other independent ISPs. Almost nothing affects the access function business case more than competition.
In the monopoly era, an investment analysis could assume that more than 95 percent of homes would buy the lead service. In a competitive era, all those assumptions are incorrect.
In the U.S. market, for example, penetration for any single service--across the whole market--ranges from 95 percent for video to about 90 percent for broadband access to a bit over 50 percent for voice.
But in a competitive scenario, a provider might expect to have only a third of the video market share (when both cable TV and satellite providers are strong); only half of the voice market, itself representing adoption by only about half of homes; and half of the Internet access market.
For a telco or cable company, that might mean any next-generation network can hope to achieve, over the long term, about 25 percent of homes for voice; 45 percent of homes for high-speed access and 33 percent for video entertainment.
In other words, the risk of stranded investment (homes that buy no services at all) and under-utilized assets (homes where customers buy only one or two services) is quite high.
That makes for a tough business case. Of the three anchor services, only entertainment video and “faster than digital subscriber line” high-speed access represent revenue upside.
On the other hand, the strategic imperatives might dictate investment even when the strict return on investment considerations are difficult.
One might make the argument that unless the investment is made, the whole fixed network business becomes untenable. In other words, a telco might have to invest just to be able to take video market share away from cable providers, and to match cable offers in the high-speed access product line.
Also, many telcos have other places to invest capital, such as the growing mobile business, where the financial return and strategic advantages are clearer.
One might argue that telcos have no choice but to invest in fiber to the home, ultimately. But it has not been an easy call, and probably will not ever be a clear-cut advantage.
Edited by Cassandra Tucker
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