Thursday, September 8, 2016

Lower FTTH Costs Improve the Business Model, But How Much?

It is not clear where customer revenue or network cost now are the biggest obstacles to wider deployment of high-bandwidth or “gigabit” networks in either the United States or United Kingdom.

A U.K. group representing competitive access providers claims fiber-to-home network costs now are substantially lower than in 2008, and faster fiber-to-premises investment would be made if some policy changes were made in the U.K. market.

On the other hand, Google Fiber seems to have encountered not so much a network cost issue as a “lack of customers” (revenue) issue with its own fiber to home efforts. And cost reductions might have hit a plateau.  

To be sure, both capital investment and revenue are key components of the business model. But Google Fiber seems to have concluded that even lower FTTH costs (equipment, make ready, construction) are not sufficient if take rates are too low, as the stranded assets problem is so significant at low adoption rates.

And Google Fiber is not the only major ISP (or would-be major ISP) looking at newer alternatives, especially fixed wireless. For some providers, including Verizon, the network facilities required to support a mobile business with lots of small cells and millimeter wave spectrum also change both the business model for fixed wireless and fiber-to-customer.

To be sure, key cost elements have declined in cost since 2008. Since then, fiber-to-home deployment costs are either “substantially” or “to some extent” lower, the U.K. Independent Network Cooperative Association says.

INCA argues that electronics costs are lower by 15 percent to 25 percent since 2008.

New construction methods, for example micro trenching in urban areas, deliver a cost saving of around 30 percent.

Fiber optic cables cost 15 percent to 20 percent less than in 2008, while backhaul and trunking network electronic costs are lower by as much as 50 percent.

Of those elements, it is the 30 percent cost reduction for tranching that likely is most significant, since construction, civil works engineering, obtaining permits and right-of-ways account for roughly 67 percent of total cost, while the equipment accounts for about 33 percent.

If network element costs are down 20 percent overall, those price reductions might shave the network gear portion of FTTP costs about seven percent.

If construction can be reduced 30 percent, and if construction itself represents 80 percent of outside plant cost, actual construction represents about 54 percent of total FTTP network cost.

Slicing that cost by up to 30 percent is the most-significant change in investment requirements.

The business case also hinges on revenue, however, and that likely is the biggest problem. As Google Fiber apparently has discovered after building and activating its own fiber to home networks, take rates--and revenue--are the crucial variable.

No matter how much construction, make ready and equipment costs have fallen, “lack of customers” is the really-big problem.

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