Frontier Fiber Model Shows How Models Have Changed

In recent investor presentations, Frontier Communications has made three points about its prospects for revenue growth based on optical fiber deployments: the number of consumer broadband accounts; the number of businesses within 250 feet of existing fiber assets and the number of cell towers within one mile of Frontier fiber assets. 

Recent presentations also have shown fiber-to-home home broadband average revenue per user of about $63. 

source: Frontier Communications 

For those of you who have followed the business model for home broadband over the past few decades, that number might seem quite surprising. The late 1990s justification for FTTH was the ability to sell subscription TV as well as faster internet access. Keep in mind that “faster” at that point was 10 Mbps. 

About 2000 the “average” U.S. cable TV bill was estimated to be about $32 a month, according to CordCutting.com. It actually is hard to remember what home internet access actually cost between 1995 and 2000, in large part because most people were buying dial-up services in 1995, while broadband subscriptions did not reach parity with dial-up until about 2005. 

In August 2000, only 4.4 percent of U.S. households had a home broadband connection, by some estimates.  

But a dial-up cost in the $10 a month to $15 a month range is close enough for 1995. Consumer broadband with speeds in the less-than-1.5 Mbps region cost more than that, perhaps in the $30 a month range by 2005. 

The point is that a telco customer with a voice line generating $30 a month, plus internet plus video could have been worth about $100 a month in revenue. Ignoring for the moment the issue of market share in each of the services (compared with a competing cable TV company), the potential revenue was as much as $100 a month for an FTTH-passed consumer location.

Now Frontier says ARPU for an FTTH customer is about $63 a month. Assume that figure includes some amount of voice revenue and zero video revenue. The change in revenue expectation (not adjusted for inflation) per potential customer is roughly 40 percent lower than might have been the case in 1995. 

The biggest change is the assumption that future revenue will be driven principally by one service--home broadband--not three potential sources. 

That was impossible to foresee in 1995. Absent the potential upside of video, and being charitable about the future of fixed network voice, most executives would have argued that the upgrade to FTTH would never make financial sense. 

So lots of assumptions have changed. Among them, in Frontier’s case, is the expectation that business customer revenues from cell tower backhaul and business broadband and services will underpin the FTTH network business model. 

The mid-1990s expectation of higher revenues from video and internet was only partially validated. Linear video no longer figures into the model, though over-the-top streaming might, for some access providers. 

Revenue contribution from voice arguably has been far worse than initially expected. 

So consumer revenue is principally driven by home broadband. Overall payback models for FTTH now lean on business customer revenues and backhaul. 

It is part of the change in FTTH business models in the U.S. market.