Mayors Want FiOS, But "You Can't Always Get What You Want"

It is not surprising either that nine New York mayors, as well as their counterparts in Boston and Baltimore want FiOS. By the industry's own reckoning, fiber to the home is the ultimate, future-proof network. Nor would the mayors be alone in thinking better consumer outcomes could result if there were robust competition between an incumbent cable operator and Verizon, in each city.

But the economics of fiber-to-home networks have never been especially easy. Verizon itself justified the FiOS network choice to investors by arguing a combination of benefits, including operating cost savings, would provide the payback.

But Verizon seems to have found the operating cost savings were not as large as hoped, and the incremental new revenue not large enough, to continue with the program. You can be sure that if FiOS were throwing off huge amounts of new cash, you couldn't keep Verizon from building as fast as it could.

The problem is that an argument can be made that major investments in all new fixed network infrastructure are questionable, at a time when a variety of reasons make wireless networks a clearly-better financial investment. Even proponents say the business case varies from location to location. 


Observers are right to wonder about the impact on competition if Verizon continues to refrain from FiOS expansion. On the other hand, wireless does provide an important developing element of the competitive picture. Wireless might never be a full-fledged alternative to fixed network access. 


But neither is it clear that the fixed network business case will remain where it is today. At least in principle, some shift in end user demand could boost the FiOS business case far beyond where it exists now. 


The point is that promoting competition, a reasonable public policy concern, also has to take acoount of the fundamental economics of various approaches to providing broadband access. What we might prefer is one thing. The economics might dictate something else.
Wireless also has become a feasible alternative for broadband access in many areas, and for some use cases.

Nor is there much evidence that service providers are doing anything but increasing investment, globally. It also is true that industry revenue is growing, globally. The issue is where growth is occurring.

In the 10 years from 2005 to 2015, telecom service provider revenue has shown and will continue to show year-over-year growth every year except in 2009, Infonetics Research says.
With industry revenues expected to grow at a modest two percent a year, overall capital expenditure will thus remain stable (0.7 percent CAGR) for the foreseeable future, with growth coming from spending on equipment. But capex is shifting to mobile, globally.

Wireless access infrastructure, already accounting for 43 percent of total telecom infrastructure capex, will increase its overall share as spending continues to shift away from fixed infrastructure.

That has to raise questions about the long-term role, revenue and services suite to be offered by broadband fixed network operators. Not, it must be said, because demand will be lacking, but only because cable operators seem to be executing on their premise that they can deliver bandwidth more affordbly than fixed-line telcos.

Indirect evidence for that view comes from the A.D. Little analysis, which suggests that fiber to the home investment for very-high broadband will be “mainly” driven by non-telecom players.

In part, in some markets, that will be the case because 65 percent of all households with access to FTTH  networks in Europe are on networks deployed by fixed-line incumbents. In other words, in Europe, much fiber investment already has been made. Where it has not been made, there likely are payback issues that make FTTH highly questionable.

So utility companies and alternative operators are expected to split the value chain as well as the financial investments, by forming innovative partnerships to invest in more fiber access, A.D. Little believes.

If cable operators continue to nibble away at available demand for fixed broadband, telcos will face the challenge of a radical rethinking of their business models and offerings.

If one assumes that broadband will underpin and drive most future revenue for fixed line providers, and if one assumes it is the cable companies who can do so at lower cost, telcos will face a challenging investment case, especially given the arguably better financial prospects in mobility and wireless.

Strategically, one might argue that, though expensive, a full fiber to home upgrade might be necessary. In some cases a fiber to neighborhood approach might be “good enough” as a bridging strategy over the medium term.

Either that, or a telco has to dramatically lower its operating costs to compete as a provider of lower-bandwidth solutions, with cable claiming the premium segments. That will not be an appetizing prospect for most telco executives, especially those without wireless assets.

FTTH is better, no doubt. But the business case remains challenging, especially where cable operators are able to boost bandwidth at much lower costs.