Fiber to Home No Longer is the Key Metric: Gigabit Access Is the Issue, and Pessimism is Completely Unwarranted

Vern Fotheringham, V-Satcast executive chairman, asked an interesting question at the Pacific Telecommunications Council’s 2016 annual conference: “what percentage of U.S. homes now are connected to by fiber?” Eventually answering his own question, he said “five percent.”

As with all such figures, context is required. The Fiber to the Home Council estimated in 2015 that 26 million U.S. homes were passed by fiber-to-home connections and could buy service. If there are 134 million U.S. homes, then perhaps 19 percent of U.S. homes are passed by fiber to the home networks and are able to buy service.

As always, though, the issue is not where we are, but where we are going, and there the FTTH statistics do not tell the story. FTTH is one method of providing very high speed Internet access. But it is not the only way.

Cable TV networks able to provide gigabit service would, for many, be a functional substitute for FTTH access.

Also, the issue is the impact of new fiber providers such as Google Fiber, as well as stepped-up gigabit programs by AT&T. The way some of us would frame the issue is the percentage of homes able to buy gigabit service, not the number using a specific access technology.

That paints a different picture. With the commercialization of Data Over Cable Service Interface Specification (DOCSIS 3.1) platforms, cable operators can upgrade Internet access speeds up to 10 gigabits per second by means of a software change to modems and routers.

The DOCSIS 3.1 platform supports speeds up to 10 Gbps, depending on how much bandwidth a cable operator wishes to devote for that purpose.

Comcast, for example, already has announced it will upgrade its entire consumer high speed access base (both customers and passings) to gigabit speeds using DOCSIS 3.1. Comcast originally believed it might do so in 2015 or 2016. It now has said that could happen, nationwide, by 2018.

Make no mistake: that will change the picture dramatically. Comcast has shown it can increase high speed access speeds at Moore's Law rates. Comcast passes 54 million U.S. homes. So once the gigabit upgrade is completed, Comcast alone will represent gigabit coverage of 40 percent of U.S. homes.

Cox's consumer gigabit service will be available in all of its markets by the end of 2016. Cox passes 9.2 million U.S. homes. That adds another seven percent.

So Comcast and Cox alone will pass 47 percent of U.S. homes, with unduplicated gigabit coverage.

Assume Charter’s acquisition of Time Warner is approved by regulators. Time Warner passes 30 million homes. That is 22 percent of homes. So Comcast, Time Warner and Cox eventually will provide gigabit access to an unduplicated 69 percent of U.S. homes.

Telcos are moving as well.

Separately, CenturyLink is deploying gigabit access as well, though those locations will overlap with some of the Comcast and other cable operator homes.

AT&T is expanding its GigaPower service to parts of 38 more cities. It's now in 56 metro markets.

AT&T's GigaPower service now reaches one million addresses, with plans to double that in 2016 and ultimately reach 14 million homes and businesses, Goldman Sachs said in a research report.

MoffettNathanson, for its part, says AT&T has committed to expanding its fiber-optic service to 5 million "customer locations" by the end of 2017, 8.3 million by year-end 2018 and 12.5 million through July 24, 2019, as part of conditions tied to the approval of its DirecTV acquisition. Based on regulatory definitions, MoffettNathanson contends the 14 million "locations" will translate to 9.9 million "cable equivalent" homes and businesses, or 7.3 percent of U.S. households.

Google Fiber is on a path to serve Chicago and Los Angeles, as well as the 4.3 million or so homes it already could potentially reach with its already-announced deployments of gigabit service.

The point is that the present and coming competitive market business model for high speed access will change dramatically over the next several years. Where we are does not matter. Where we are going matters.

Fiber to the home availability is not the metric you want to watch. Watch for gigabit access to become the dominant and normal advertised speed across most locations cable can reach. And keep in mind, cable reaches 98 percent of all U.S. homes.

Soon, cable alone will potentially reach 70 percent of U.S. homes, with Google Fiber and telcos offering a second provider option across some of that cable footprint.

Fiber to the home passings do not tell the real story.

AT&T, Comcast and Verizon Collectively Generate about $212 Per Home Passed, Annually

It is not easy to run a big fixed network business these days. As Verizon CEO Hans Vestberg said on Verizon’s fourth quarter earnings call, Verizon faces a “secular decline in wireline business that is continuing.” 

Secular means a trend that is not seasonal, not cyclical, not short term in nature. For multi-product companies such as AT&T, Verizon and Comcast, it can be argued that "everything other than the core business is doing a lot worse than the core business, both at Comcast and at AT&T and at Verizon.

One supposes the “core business” for AT&T and Verizon is mobility, while the core business for Comcast is fixed network broadband. The conclusion analyst Craig Moffett of MoffettNathanson reaches is that AT&T, for example, will have to be broken up. 

The suggestion to focus on the “core business” often produces financial returns when conglomerates are broken up. 

What might not be so clear is how breaking up triple play assets, or separating mobile from fixed assets necessarily helps the surviving connectivity assets to generate greater revenue and profits. 

Is it logical to assume that the AT&T and Verizon businesses would all do better if the fixed network assets, mobile assets and media assets were separated? Would Comcast’s financial returns be better if the content assets were separated from the fixed network, or the video entertainment business separated from the network connectivity business?

Given the “secular decline” of the fixed network business, could a fixed services only approach (internet access, voice and perhaps video entertainment) actually work, at the scale the separated Comcast, AT&T or Verizon assets would represent?

The issue is not whether a small firm, with a light cost structure, might be able to sustain itself in some markets selling internet access alone, or internet plus voice. The issue is whether an independent AT&T fixed network or an independent Verizon fixed network business could sustain itself. 

The answers arguably are tougher than they were twenty years ago, when a telco and a cable company faced each other with a suite of services including internet access, voice and entertainment video. Basically, they traded market, at best. Telcos ceded voice share, but cable lost some video share, and both competed for internet access accounts. 

At a high level, the strategy was that both firms would trade share, but by selling three services on one network, instead of one service on each network, the numbers would still be workable.

But the math gets harder when every one of those three services faces sustained declining demand and falling prices. 

That being the case, it is hard to see how a sustainable business can be built on connectivity services alone, especially for either AT&T or Verizon. Perhaps Comcast could survive with a strong position in internet access and smaller contributions from voice and possibly video entertainment. 

In the fourth quarter of 2019, Comcast Cable generated $14.8 billion in revenue.  Total revenue that quarter was $28.4 billion. 

Verizon’s fixed network business, on the other hand, generated about $7 billion, out of total revenue of nearly $35 billion. 

AT&T had fourth quarter 2019 total revenue of nearly $47 billion. AT&T’s fixed network, plus satellite TV, generated about $18 billion in revenue.  AT&T’s “fixed network plus satellite” operations generate 38 percent of revenue. Perhaps $8 billion or so of that revenue comes from the satellite operations. So the fixed network business might generate $10 billion in revenue. 

Comcast Cable passes 58 million consumer and business locations. Comcast has 26.4 million residential high-speed internet customers, 20.3 million residential video customers and 9.9 million voice accounts, generating average cash flow (EBITDA) of $63 per unit. 

At a high level, the problem is that Verizon’s entire fixed network operation generates about 20 percent of total revenue. AT&T’s fixed network generates perhaps 21 percent of revenue. Comcast, which has a small mobile operation, generates close to $15 billion from the fixed network. 

And that, it seems to me, illustrates the problem. Comcast, AT&T and Verizon all put together generate about $32 billion in fixed network revenue, and revenue is likely to remain flat to negative. 

Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. 

CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

Looking only at Comcast, AT&T and Verizon, $32 billion in annual fixed network revenue is generated by networks passing about 146 million U.S. homes. That works out to about $212 per home passed, per year. 

How that is sustainable is a clear challenge.

Why Some Service Providers are More Positive on Fixed Wireless Than Others

Connectivity provider strategy choices virtually always are a combination of necessity and opportunity; constraints and advantages. Consider the view T=Mobile, Verizon and AT&T have about upside from 5G fixed wireless. T-Mobile is arguably the most bullish; Verizon is hopeful but AT&T is a skeptic. 

Sometimes choices are dictated by political choices. In any effort to win approval of its merger with Sprint, T-Mobile promised to supply fixed wireless home broadband service to 10 million homes by 2024. AT&T likewise uses fixed wireless (generally using its 4G platform) as part of a commitment to rural broadband--and receipt of government support funds--it made in 2015.

Neither of those moves is necessarily driven by a strict profit-and-loss or revenue growth motivation. For T-Mobile, the fixed wireless commitment was essentially a bargaining chip to win government merger approval; for AT&T a way to honor a commitment made to get rural broadband funding. 

In other cases, though, market positioning dictates relative financial opportunity and therefore different strategies. T-Mobile, for example, has zero share of the roughly $115 billion annual revenues fixed network broadband access market. 

AT&T has about 14.6 percent of the U.S. installed base of broadband customers. Verizon has less than seven percent of the installed base. 

Compare that to Comcast, which has nearly 29 percent of the installed base, and Charter, which has 27 percent of the installed base. 

AT&T in the third quarter of 2020 had about 11 percent share of the new customers, while Verizon got seven percent of the new accounts. 

In large part, those  fixed network broadband figures are based on relative opportunity, as well as customer preferences. 

Comcast has (can actually sell service to ) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 18.6 to 20 million. To be generous, use the 20 million figure. 

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

T-Mobile has not historically been in the fixed network home broadband business and has passed zero homes. 

So what percentage of total homes does each provider pass? According to the U.S. Census Bureau there are about 137.9 million U.S. housing units.

Roughly 8.8 percent of units are not occupied, typically. Vacant year round units represented 8.8 percent of total housing units, while 2.6 percent were vacant for seasonal use. 

Add it all up and 88.6 percent of the housing units in the United States in the first quarter of 2020 were occupied and 11.4 percent were vacant, according to the U.S. Census Bureau. 

Still, the addressable market therefore is about 138 million locations. Comcast passes perhaps 41 percent of U.S. homes; Charter passes perhaps 36 percent; AT&T passes possibly 45 percent of home locations while Verizon passes perhaps 14 percent, best case, and many of those locations are high-rise buildings where fixed wireless might not be the best access medium. 

So one way to look at 5G fixed wireless is the ability to take market share away from other providers. T-Mobile can win the most, in the sense that it can grow from zero share to some share. 

Charter and Comcast have market share that is outsized in comparison to their homes passed totals, getting roughly 70 percent of the potential market as customers. 

Verizon’s opportunity is dictated by geography. It has the smallest geographic footprint of any of the other tier-one suppliers. That means the use of its nationwide 5G network to supply home broadband gives it reach to most of the country it cannot presently serve. 

Aside from T-Mobile--which has zero fixed network share or network--Verizon has the greatest potential account upside from providing services outside its fixed network footprint. 

AT&T, on the other hand, already covers the greatest percentage of U.S. homes, and therefore has the most to lose from competitors, followed by Comcast and Charter. Verizon and AT&T earn relatively little from their fixed network customers and therefore are most interested in their mobile customer bases, which provide virtually all the incremental revenue growth for each firm. 

Still, the ability to use the 5G mobile network to attack the home broadband market is interesting to T-Mobile and Verizon for reasons related to geography. 

T-Mobile is solely a wireless provider, has no retail fixed network and therefore stands to gain by taking share in the former fixed network broadband business. Verizon has the most-limited geographic footprint of any of the other providers, and therefore has the most to gain from out-of-market share gains in the fixed wireless space. 

Comcast and Charter remain focused--even for mobility services--on customers in their own regions and areas of service. Operations out of existing markets continue to hold little--if any--appeal. 

Some cable companies who operate in rural areas have said they will use fixed wireless rather than hybrid fiber coax or fiber to the home as an access technology in lower-density areas they might be able to reach using wireless. 

The point is that tier-one service provider interest in 5G fixed wireless depends on their assessment of relative financial upside; in some cases regulatory postures; to a great extent existing and possible market share in home broadband and relative expectations about revenue contributions from fixed network services generally.

Business Context Shapes Access Network Strategy

As often happens in any industry, service providers have different opinions about fixed wireless access versus fiber-to-premises versus hybrid fiber coax versus satellite platforms for access services. 

As always, different firms have different views on strategy because of their business circumstances. Perhaps in principle, all former telcos would say fiber-to-premises is the ideal long-term solution where the economics exist. But the economics are daunting in many cases, leading to a “yes, but” strategy that uses other platforms as the economics dictate. 

Verizon has a relatively small “in region” footprint of U.S. homes and businesses--perhaps no more than about 20 percent--and cannot afford to “fiberize” another 80 percent of U.S. homes. So fixed wireless, which piggybacks on the 5G network, makes sense. 

T-Mobile, with close to zero fixed network coverage of U.S. homes and businesses, benefits even more from 5G fixed wireless. 

AT&T, on the other hand, has the biggest footprint of U.S. homes and businesses, so out-of-region coverage magnitudes are correspondingly reduced. 

Comcast and Charter have “homes passed” totals close to AT&T’s footprint and already have HFC networks they believe will be marketplace competitive for quite some time, as multi-gigabit speeds are coming next on the HFC platform. 

Of a total of 140 million U.S.  homes, AT&T’s landline network passes 62 million. Comcast has (can actually sell service to) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 27 million. Lumen Technologies never reports its homes passed figures, but likely has 20-million or so consumer locations. 

Assuming no further significant consolidation, AT&T only “needs” to fiberize within its footprint to reach 44 percent of U.S. homes (and virtually all the homes regulators are likely to allow it to pass). 

Assuming Verizon has no appetite to significantly expand its fixed network footprint, that leaves about 81 percent of U.S. homes that could be passed by the 5G network, and would be impossible to significantly serve using FTTH. 

Comcast already has HFC offering gigabit speeds reaching about 41 percent of U.S. homes. Charter already passes about 29 percent of U.S. homes. Again, regulators are unlikely to allow either firm to get significantly bigger, in terms of homes passed. 

Lumen has a largely-rural territory that includes perhaps 14 percent of U.S. homes, but Lumen has no mobile network assets it can use to offer fixed wireless on a facilities basis. 

The point is that each firm’s view of strategy is shaped by its existing legacy assets. Cable operators, though not denying FTTH makes sense in the future for a growing percentage of customers, also believe HFC is a viable platform, without major reliance on FWA or FTTH to serve mass market customers. 

Verizon and T-Mobile have good reasons for using FWA that piggybacks on their nationwide 5G networks. 

AT&T believes FTTH is the best solution, but also has the largest in-region fixed network footprint of any major ISP, and therefore has the most to lose if copper access facilities are not upgraded to fiber access.

There is no universal answer for “which access platform” makes most sense. Each major ISP has key business model constraints and opportunities that shape the access network choices.

High Speed Access was the Relevant Market for Antitrust Officials Looking at Comcast Bid to Buy Time Warner Cable

I may have an overly-simplistic way of looking at the odds of big mergers in the access business, but there is a simple rule of thumb: antitrust opposition arises in the access business whenever any single provider is poised to exceed serving more than 30 percent of U.S. households.

It’s a simple rule of thumb, but it tends to work. In that regard, the Comcast purchase of Time Warner Cable, had it succeeded, would have given Comcast access to 84 million U.S homes, representing about 70 percent of the entire population, in a market where AT&T, the biggest provider in terms of homes reached, might potentially reach 50 million homes.

If total U.S. homes are about 123 million, and occupied units are about 116 million, then Comcast would have had access to 72 percent of U.S. homes. AT&T, by way of contrast, has access to 43 percent of U.S. homes.

“Access” is different than “active account at that location,” though. Since there are two to four major suppliers of any single service in every market, the market share held by any single provider is a fraction of total addressable homes.

AT&T knows it will not be allowed to increase its fixed network footprint. Comcast positioned its acquisition bid as being primarily about video accounts, where market share would have been held at about 30 percent.

Others had said the relevant “market” was high speed access, not video. Had the deal been approved, Comcast would have had about 57 percent share of the high speed market, and an overwhelming share of accounts in the fastest speed categories, and the widest footprint of gigabit and 2 Gbps service availability.

Unknown "Homes Passed" Data Hampers Revenue Growth Estimates

Some important types of statistics and data are not collected because governments do not force firms or industries to collect it. For example, many governments think it is important to track data on where home broadband exists, where it does not, how fast it operates, who buys and who does not. 

Private firms often have important incentives to track and measure their own revenues, sales, profit margins and growth rates. Financial markets and accounting rules often require measurement of this sort. 

AT&T, for example, reports revenues for mobility, fixed network business revenues and consumer fixed network revenues from internet access, voice and other sources. But those are traditional financial metrics, not operating indices such as penetration or take rates, churn rates and new account gains. 

source: AT&T 

Nobody seemingly believes the same effort should be made to measure the number of home broadband provider locations or dwellings reached by various networks. Better mapping, yes. Metrics on locations passed? No. 

And yet “locations passed” is a basic and essential input to accurately determine take rates (percent of potential customers who actually buy). That input matters quite a lot to observers when evaluating the growth prospects of competitors, even if that figure does not matter much for policymakers, who mainly care about the total degree of home broadband take rates, on an aggregate basis. 

The U.S. Census Bureau, for example, reported some 140.5 million housing units housing units as part of the 2020 census. The estimate for 2021 units is 142.2 million units. Assume 1.5 million additional units added each year, for a 2022 total of about 143.6 million dwelling units. 

Assume vacancy rates of about six percent. That implies about 8.6 million unoccupied units that would not be assumed to be candidates for active home broadband subscriptions. The U.S. Census Bureau, though, estimates there are about 11 million unoccupied units when looking at full-time occupied status. That figure presumably includes vacation homes.

Deducting the unoccupied dwellings gives us a potential home broadband buyer base of about 132.6 million locations. 

More difficult is the degree to which access networks operated by any single contestant actually pass those locations, as firms generally do not report such numbers in quarterly financial or annual reports (they do not have to do so). 

And that is where estimations must be made. AT&T’s 2022 10-K report cites 14.2 million customer locations connected. Assume AT&T has about 20 percent take rates for its home broadband services where it operates. That implies a housing unit coverage of about 71 million dwellings. 

Assume AT&T has a higher take rate of about 39 percent where it operates fixed networks. That implies housing coverage of about 36 million dwellings. 

The estimate of 71 million home passings strikes me as too high, but the estimate of 36 million seems too low. In the past I have used the figure of 62 million homes passed for AT&T. 

Assume Verizon has about 10 million home broadband accounts, with a take rate of 40 percent (a bit high, probably, if we include copper access). That implies housing coverage of some 25.3 million dwellings. 

Leichtman Research Group has estimates of home broadband accounts that vary from company reports. LRG estimates that AT&T has some 15.4 million internet access accounts. The variance might come from business accounts not enumerated. 

Verizon’s consumer accounts might be overstated, as LRG estimates Verizon has about 7.5 million home broadband accounts, not 10 million. Using the LRG account figures, we might estimate Verizon home coverage of about 18.8 million homes, on the high side. 

ISPs

Subscribers at end of 2022

Net Adds in 2022

Cable Companies
Comcast	32,151,000	250,000
Charter	30,433,000	344,000
Cox*	5,560,000	30,000
Altice	4,282,900	(103,300)
Mediacom*	1,468,000	5,000
Cable One**	1,060,400	14,400
Breezeline**	693,781	(22,997)

Total Top Cable

75,649,081

517,103

Wireline Phone Companies
AT&T	15,386,000	(118,000)
Verizon	7,484,000	119,000
Lumen^	3,037,000	(253,000)
Frontier	2,839,000	40,000
Windstream*	1,175,000	10,300
TDS	510,000	19,700
Consolidated**	367,458	724

Total Top Wireline Phone

30,798,458

(181,276)

Fixed Wireless Services
T-Mobile	2,646,000	2,000,000
Verizon	1,452,000	1,171,000

Total Top Fixed Wireless

4,098,000

3,171,000

Total Top Broadband

110,545,539

3,506,827

source: Leichtman Research Group 

Assume Comcast has 31.2 million accounts, with take rates for home broadband of about 52 percent. That implies something on the order of 60 million households. 

Assume Charter Communications has a take rate of about 45.5 percent where it operates fixed networks. Assume Charter has approximately 30.8 million home broadband accounts. That implies a homes-passed figure of about 67.7 million homes. 

If there are 132.6 million U.S. occupied home locations, then Comcast and Charter can reach about 127.7 million of those locations, or about 96 percent of total, as Comcast and Charter essentially have unduplicated networks, not competing in the same geographies. 

That strikes me as unlikely, on the high side. An older rule of thumb is that Comcast and Charter reach about a third of total U.S. locations, each, for a possible reach of up to 66 percent of total U.S. home locations. 

Using different methodologies, I have in the past estimated that Comcast has (can actually sell service to ) about 57 million homes passed, while the Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 18.6 to 20 million. To be generous, use the 20 million figure. 

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

Ignoring the variance in potential customer locations passed, AT&T would seem to have the greatest opportunity in the home broadband space, if it can build optical access connections faster, as has the biggest home footprint and low home broadband market share. 

On the other hand, AT&T revenue is driven by mobility, not the consumer fixed network. So then the question has to be posed as "how much to invest in the consumer fixed network?" compared to other oportunities. A rational person might argue that answer is "not so much."

Capital availability--and financial returns--are always the issue. Even if it dramatically escalated fiber-to-home capital investment, it is not clear AT&T would gain as much new revenue, compared to investing in mobility or business services, for example.

The point of the wider exercise is that we are forced to guess about how many homes each of the major fixed network contestants actually can reach. That, in turn, affects our ability to estimate adoption rates and potential growth opportunities. 

The key point is that the estimates are imprecise. Pinning down the “homes passed” figure, essential as the denominator in any calculation of take rates, requires estimations with variable degrees of uncertainty, especially for the larger networks.