Saturday, February 2, 2019

The Business Case for FTTH in the 5G Era

Could U.S. fixed network service providers--other than cable operators--make higher profits if they chose to dramatically increase investment in their access networks? Some might argue the answer is “yes,” while others will maintain the answer is largely “no.”

The essential argument is that telcos could deploy more fiber and thereby grow revenues, in addition to providing better customer experience. Naysayers might point to several reasons why that is likely untrue.

First, U.S. cable operators already lead in market share for internet access, have been adding more than 100 percent of net new additions for years--no matter what telcos have done--and already know how they will migrate the platform from gigabit to 10 gigabit capabilities, at costs far lower than the telcos can manage.

In that, that has been true in the entire internet access era: cable operator simply have been able to upgrade internet access speeds faster, and at much lower cost, than telcos have been able to do. Nor is there any particular reason to think that will change, in the fixed network arena.

That actually has been a key and ever-present issue in the competitive era.

Also, total fixed network revenues (telco and cable) are flattish to falling, as demand shifts to products that do not actually require use of the fixed network at all. Voice and linear video revenues are falling in both cable and telco segments of the fixed network business.

And there is every reason to believe that mobile substitution now is going to make itself felt in internet access and video as it has in voice.

Also, alternatives seem to keep popping up, ranging from overbuilders such as Google Fiber and other independent ISPs to coming use of low earth orbit satellite constellations and possibly other unorthodox platforms.

All of that means the potential return from a major investment in optical fiber access by a telco is getting harder, not easier. It will not help that mobile access now appears poised to erode yet more share from the fixed networks.

Verizon total wireline revenues, for example,  decreased 3.2 percent year over year in fourth-quarter 2018 and 3.0 percent for the full year, compared with 2017, to $7.4 billion and $29.8 billion, respectively.

AT&T fixed network revenues in the fourth quarter of 2018 likewise were down. That stagnating trend has been true for both firms, in the fixed network segment, for some years.
So to the argument that telcos could make more money if they invested more, once must look at Verizon, which already has heavily moved to fiber-to-home facilities. It has not helped much, apparently, though losses would have been greater had it not done so.
AT&T has a far-smaller optical access footprint, and might arguably benefit, in some of its markets, by upgrading to optical fiber. The issue is how much that would help. AT&T cannot expect much revenue lift from video, as it already is the largest U.S. linear video distributor. It is losing fixed network voice lines, as are all providers.
So AT&T would have to risk the value of the optical fiber upgrade, in the consumer segment, on internet access alone. Most who have looked at that model would agree it is likely not going to produce a positive financial result. The incremental gain in internet access share alone does not justify fiber to home investment on a ubiquitous scale.
Some of us believe the financial return from new optical deployments is not from fiber-to-home, but from from deep fiber to support 5G and business customers. That is the new twist as we move into the 5G era. At least in the U.S. market, the financial upside from FTTH increasingly gets worse as use of the fixed network by consumers declines, and as cable operators dominate what remains of revenue and market share in that market.

A new era is coming.

No comments:

Generative AI Will NOT have the Impact Many Expect

Generative artificial intelligence, to say nothing of machine learning or neural networks (and eventually general AI), might collectively re...