FTTH Economics Might Now Largely Depend on Monopoly Conditions
The economics of fiber to the home now seem to hinge very much on whether a monopoly deployment is possible, typically when one national network is built that is used by all, or most, retail competitors. Think of Australia’s National Broadband Network; Openreach in the United Kingdom, New Zealand’s network or Singapore’s model, or nations of the European Union.
In markets where facilities-based fixed network competition exists, entirely or in part (United States and Canada being examples of the former; the Netherlands, United Kingdom and France examples of the latter), market dynamics are quite different.
In principle, a monopoly fixed network provider could hope to have market share up to 90 percent (some satellite, some independent ISPs, some cable operators could take some share). In a competitive, facilities-based market, any single competitor might hope to get 40 percent to 50 percent market share. The lower figure might happen where there are significant third party suppliers, the latter figure happening when there are just two participants competing.
CenturyLink, for example, now earns 76 percent of revenue solely from business customers. The implication is that no matter what CenturyLink does, its consumer fixed networks drive, at best, 24 percent of results. That is a practical illustration of the “80/20 rules,” or Pareto Principle, which means 80 percent of results come from 20 percent of activities. For CenturyLink, one might say that 20 percent of the assets (those serving business customers) drive 80 percent of results.
Over recent decades, telcos have had to replace half of revenues every decade. The big shifts so far have been fixed network long distance to mobile; then mobile messaging replacing voice; then mobile data replacing mobile messaging. For many fixed network providers, internet access replaced voice, and now entertainment video is replacing internet access.
The point is that highly-competitive markets and diminution of all legacy revenue streams now mean the potential financial return from any network investment is limited. In essence, telcos and other competing service providers have been running in place, losing some revenue sources and replacing them with others.
For many access providers, the business problem is that new networks cost more, but support new revenues at a lesser level, in part because the amount of stranded assets (assets that do not generate revenue) grows in a competitive market, and in part because all legacy revenue sources are maturing.
That has huge implications. It means the economics of FTTH now are not driven principally by asset cost, but by the nature of the markets where the assets are deployed. Monopoly, or near-monopoly scenarios, are most favorable. Highly-competitive, facilities-based markets are where the payback is most tenuous.
In other words, even Verizon finds that up to 60 percent of its FTTH assets are stranded, and not generating revenue. That is not unusual, in any U.S. market.
So the new questions are whether FTTH actually makes sense, as a ubiquitous network, in any market where there is robust, facilities-based competition.