Could, Should Telcos Invest More in Fixed Networks for Consumer Services?

Among the “in the hall” discussions I had at the PTC’19 conference was one extended discussion about whether U.S. telcos simply did not want to invest in better fixed network access infrastructure, or whether they actually could not do so, for business model reasons.

“They could do so, but do not want to” was one pole. The assumption here is that heavier access network investment would generate sufficient financial return to justify the spending.

“They cannot justify the business case” was the other pole. The assumption here is that revenue upside--while it exists--is not great enough to offer a payback.

That there is a challenge many would accept. “Wireless substitution and cable competition have taken a toll on most wireline carriers’ customer base, leading to challenging economics and limited funds for fiber deployment.” researchers at Deloitte have said.

Some argue that fiber-to-the-home networks have allowed at least some fixed network telcos to hold market share against their cable TV operator rivals. Still, on a national level, “wireline telecom carriers account for about 37 percent of consumer broadband customers compared to 63 percent for cable,” Deloitte notes.

And cable has been gaining more than 100 percent of all net new accounts for at least a decade. In 2012, telecom companies enjoyed 44 percent broadband market share.

source: CableLabs

Nor does it seem likely that telco investments in fiber to the home can do much other than try and keep up with cable operators, who keep pushing faster speeds, with a gigabit being the standard headline offer, and 10-Gbps speeds being on the roadmap, already. Even when fixed network telcos do deploy new FTTH, it is to support gigabit speeds that only match cable.

The other problem is simply that profits to plow back into the fixed network business are thin, and getting thinner. Having lost leadership in the internet access market to cable TV operators, telcos also have lost half or more of their voice accounts, and now are seeing erosion of their linear video business as well.

There is, in other words, no revenue growth sufficient to drive big FTTH investments. There are limits to how much market share can be gained back from cable, and the investments will not slow voice and linear video erosion.

source: Deloitte

AT&T became the largest linear video supplier in the U.S. market not by upgrading its fixed networks but by acquiring DirecTV.

To be sure, the additional and continuously-expanding bandwidth requirements are an issue. One way or the other, higher bandwidth must be supplied or the fixed network business eventually collapses entirely.

But it increasingly seems likely that the solution is not ubiquitous optical fiber but use of mobile and wireless access. Mobile is the way to supply consumer voice. Linear video is declining, and AT&T uses satellite, at least for the moment.

Cable TV operators have the lead in internet access, and given their own need to rely more on internet access as video revenues contract, they are not likely to allow telcos to win back extensive share in the consumer internet access market.

Fixed network telcos need to find some way to keep extending bandwidth, to be sure. The problem is that it simply is difficult to make the business case, anymore, for ubiquitous FTTH. The revenue upside simply is too small, compared to the investment.

Still, “more bandwidth” will be required. Either that, or fixed network telcos must find ways to exit the consumer fixed network business. In essence, that is what CenturyLink has begun to do. Its revenues now are generated mostly by business customers. About 70 percent of CenturyLink revenue comes from that segment of the business. All nationwide consumer operations generate only 25 percent of total revenue.

Increasingly, the value of the fixed network is driven by mobile backhaul and enterprise services. Smaller business and consumer revenues are thin, and getting thinner.

So, in the end, it might not matter which side of the debate one believes. The statement that telcos could invest more in fixed networks, but choose not to, is correct.

Whether that is because the business model is not there, or because the business model is better if they do not invest, is somewhat secondary.