As fixed network revenue sources increasingly rely on internet access as the foundation service, with declining take rates for voice or entertainment video services owned by the telcos, the payback model for fiber-to-home upgrades gets more challenging, above and beyond price declines.
Without adjusting for currency differences and costs of living, internet access costs between $60 and $70 a month, some studies find.
Think about the payback implications. In the U.S. market, for example, the cost of passing a home location using FTTH might be in the $600 range. The additional cost to connect a customer might be in the $700 range.
At 50-percent take rates (high, by telco standards), that means half the assets are stranded. The network infrastructure cost for one paying customer is $1200 plus $700, or about $1900. The reason is that the payback for one customer means passing two locations.
Annual revenue for one FTTH home broadband location, at perhaps $600, means a rather-lengthy payback, as amortized overhead, debt service and principal repayment, inflation, operating costs and marketing and retention costs must also be included.
Even assuming a 20-percent profit margin, that still means 80 percent of revenue is consumed by operating costs, marketing, amortization of debt and other overhead, including personnel costs, retirement fund payments, dividend payments, taxes and so forth.
So, roughly speaking, assume that 80 percent of $600 in annual revenue is needed to cover mostly-fixed costs. That leaves about $120 annually in free cash flow. That implies a long payback cycle.
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