Monday, November 8, 2021

Historic Shift of U.S. Internet Access Market Share is Coming

Though U.S. cable operators have steadily added to their installed base of internet access customers for two straight decades, at the expense of telcos, that might be on the cusp of significant change. 


Verizon, for example, seems to be taking share from Altice, despite that firm’s conversion from hybrid fiber coax to a fiber to home platform continues, and even as most of the footprint is offering gigabit levels of service. 


In some markets, independent FTTH providers also are gaining share. Tucows, which operates Ting Internet, has been getting market share.of about 31 percent where it chooses to build its symmetrical fiber-to-home networks. 


Coming next is an expansion of the addressable telco FTTH market, based on $65 billion in subsidies to be enabled by a new infrastructure bill passed by the U.S. Congress. 


The passage of an  infrastructure bill by the U.S. Congress means as much as $65 billion in support for broadband access across the United States. While the specific allocations are not yet available, that essentially means the business case for deploying fiber to the home--and other access platforms--is better by about that amount. 


The big implication is that the business case for deploying high-performance broadband networks will improve by a substantial margin, bringing millions of locations to the point where such networks are justified in terms of business case, where they had not been deemed feasible in the past. 


The obvious issue is where to prioritize the spending of money and for how many different types of platforms. As always, there will likely be an effort to award subsidy funds in a “platform neutral” manner, or largely so. 


George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 


Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.


Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 


But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 


Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 


The issue is the level of subsidy in various areas. 


“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”


Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural and even many urban or suburban areas. might affect cable operators and also could affect demand for all satellite and fixed-wireless operators. 


It just depends on the eligibility rules. 


Generally speaking, both AT&T and Verizon, where they offer fiber-to-home service, have been getting installed base a bit higher than 40 percent, in markets where they have been marketing for at least a few years. AT&T is hopeful it can, over time, boost share to about 50 percent of the market. 


Unless cable operators fail to respond, and that is highly unlikely, their installed base could  drop from about 70 percent to perhaps 50 percent if telcos adopt FTTH on a wide scale. That obviously leaves little room for third providers at scale, on a sustainable basis. 


To be sure, Ting Internet is “cherry picking” its markets, picking locations where it believes it has the best chance to gain share. 


Those typically are higher-income suburban areas where the main competitor, in terms of speed, is the cable operator, and where a telco remains wedded to copper access. Market share should be lower in areas where both the incumbent cable operator and telco offer gigabit speeds. 


In those markets, assuming pricing is relatively comparable, Ting’s advantage in part will rely on upstream bandwidth capabilities, at least where compared to the cable operator. 


It is harder to predict what might be the case in a decade, when telcos and cable operators alike might be offering access routinely in the gigabit to multi-gigabit ranges, possibly with upstream bandwidth high enough that return bandwidth is not an issue for nearly all customers, even if not fully symmetrical. 


To be sure, terms and conditions and general customer expectations about experience will matter. Internet service providers as a class do not score highly in the American Customer Satisfaction Index, for example. Whether specialist providers can do better, on a sustainable basis, is the issue.  


Brand name preferences and product bundling might also help the largest incumbents. According to ACSI, for example, in 2021 AT&T and Verizon both are ranked higher in customer satisfaction scores than any of the cable companies. 


That is surprising, especially for AT&T, which has not yet converted most of its plant to FTTH. The infrastructure bill is likely to accelerate AT&T deployments of FTTH, if it significantly changes the business case.


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