Many Reasons Why U.S. Fixed Network Broadband Investment Lags

Many observers would say U.S. fixed network telcos have not invested fast enough in optical fiber access facilities. There are many reasons, including uncertain payback and payback that does not come fast enough.

Sheer geography is one reason. In Canada, fiber to the home covers 90 percent of the population by covering three percent of the land mass. In Australia, 90 percent of the population can be outfitted with fiber to home by covering four percent of the land mass.

In the United States, covering 90 percent of the population with fiber to home facilities requires covering 31 percent of the land mass.

In other words, in Canada, 14 percent of the people live in areas of density between five and 50 people per square kilometer. In Australia, 18 percent of people live in such rural areas.

In the United States, 37 percent of the population lives in rural areas with less than 50 people per square kilometer.

Put another way, less than two percent of Canadians and four percent of Australians live in such rural areas. In the United States, fully 48 percent of people live in such areas.

The point is that the business model for fixed network access, and fiber to the home, is vastly complicated in the U.S. market by low population density over much of the land mass.

As big as Canada and Australia are, in terms of land mass, few people live in low-density and rural areas.

That is one reason Google and Facebook might consider the U.S. a target market for new access systems based on balloon fleets or unmanned aerial vehicles, and why satellite access has been a significant platform across the rural United States.

source: Deloitte

But there are other issues as well.

Expected fixed network capital investment ranges between 14 percent and 18 percent of revenue, while operating expenses can range as high as 80 percent of revenue, according to Deloitte consultants.

Fiber deployment in access networks is only justified if a short payback period is guaranteed, a new footprint is being built, repairs from rebuilding after a storm or other event justifies replacement or in subsidized geographies where Universal Service funds can be used.

So one implication is that opex has to be reduced, so that more can be invested in capex, especially optical fiber access.

Excessive operating expenditures are caused, in substantial part, by legacy TDM network technology, while stranded TDM assets continue to increase (no revenue can be generated from the assets).

Generating sufficient cash flow to motivate fiber upgrades means building a business model based on simplicity and capital productivity, Deloitte argues. And that requires an expeditious retirement of the legacy infrastructure, and its replacement by an all-IP network.

Consider that mobile operators, not required to support legacy services, require approximately an eighth the care staff and receive half as many inbound calls per customer compared to wireline network operators.

French wireless and wireline provider Iliad, for example, operates an all-IP network with approximately three to four employees per 10,000 customers compared to 12 to 15 employees per 10,000 customers for U.S. fixed network service providers.

Important as they are, IP migration and regulatory reforms will not be enough to create the financial case for deep fiber deployment that is needed for broadband and densification, though.

New ways to monetize “last mile” access as an incentive for massive fiber deployment. Call that an example of why service providers must “move up the stack,” add more value and occupy new niches in the ecosystem.