How Much Does Fiber to Customer Really Help Service Providers?

Though there are not too many developed nation markets where a new national fiber to the cabinet network will change the market, Italy might be the exception to the general rule.

In January 2012, the penetration rate of fixed broadband in Italy was 22.2 percent of the population, up by 0.5 percentage points year-over-year but 5.5 percentage points below the EU average of 27.7 percent.

Italy, in other words, might be said to represent an “under-penetrated” market, in terms of fixed network broadband.

Italy also lags behind in the penetration growth rate with a 0.5 percent increase, compared to the EU average of 1.2 percent annually.

Fastweb is the only provider in Italy to offer “fiber to the cabinet” fixed-line broadband, to around two million households in Italy’s urban areas.

Fastweb generally says its network supports 100 Mbps right now, with the ability to increase speeds to 300 Mbps to 400 Mbps over the next several years.

Fastweb plans to invest some EUR 130 million in fiber expansion by the end of 2013.

And Fastweb obviously thinks its fiber network will have resonance with Italian consumers. Italy has 8.2 percent of fixed lines providing speeds of 10 Mbps and above.

There are no subscriptions with speeds greater than 30 Mbps, according to an EU analysis of broadband in Italy  Around 90 percent of broadband lines in Italy are in the range of 2 Mbps and below 10Mbps,

Mobile broadband penetration of all kinds of devices (both handheld devices and computers) is 31.3 percent, up by 3.1 percent, year-on-year, but still 11.8 percent below the EU average penetration level.

At the same time, penetration of dedicated data services cards, modems and keys only is 10.2%, which is by 2.6 p.p. higher than the EU average.

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Most other places, optical fiber, though a key means, long term, for boosting access speeds, is a somewhat difficult financial proposition.

The problem is that, in many developed nation markets, optical access revenue basically only cannibalizes cable modem and digital subscriber line revenue, for the most part.

In such markets, broadband access is nearly a zero-sum game. Adding an optical subscriber generally means losing a cable modem, digital subscriber line, satellite broadband or fixed wireless subscriber. There could be market share shifts, but likely little growth in the overall broadband access market.

The other issue is average revenue per user. Globally, broadband average revenue per user has continued to decline across all broadband platforms, says Jake Saunders, ABI Research VP.

But Fastweb might be said to be operating in a favorable market, where adding an optical access subscriber does not necessarily mean taking a DSL subscriber out of service. Nor are cable operators much of a factor in the Italian broadband access market.

Globally, that might not be the biggest part of the story.

Global fixed broadband services generated $188 billion worth of service revenue in 2012, a seven percent increase from 2011, according to ABI Research.

Fixed broadband service revenue will grow to $251 billion by 2018, ABI Research also predicts.

If one assumes 2012 global fixed network revenue as about $1 trillion, then broadband would represent about 19 percent of total fixed network revenue.

Assume video entertainment revenues such as IPTV represent about eight percent of telco revenues, on a global basis. That implies that 70 percent of global telco revenue still is being earned from voice services.

And if you assume global fixed network growth in developed and developing regions will be flat to negative, there is a big revenue problem developing that everybody already recognizes, namely that replacing perhaps half of the voice revenue over perhaps a decade is the main challenge facing executives at many firms.

That might imply replacing about $350 billion. If ABI Research estimates prove accurate, broadband access will grow by about $63 billion between 2011 and 2018. For the sake of argument, assume fixed network broadband continues to grow at that same volume for the next five years, implying a decade-long increase of about $126 billion.

That roughly suggests the revenue shortfall fixed network operators will face is about $224 billion in current voice revenue that will be lost over 10 years.

Except in markets such as Italy, optical fiber services are not going to help most service providers too much, where it comes to replacing lost voice revenues.