Could AT&T FTTH Footprint Reach 44 Percent by End of 2019?

What does it mean that AT&T will have 14 million fiber to the home passings by about the end of 2019? In a broad sense, FTTH means a chance for AT&T to retake market share from cable TV operators, which have about 65 percent of the installed base of total U.S. consumer internet access connections.

“Whenever we go into a neighborhood and turn up fiber, 25 percent (take rate) comes fast and 50 percent is eminently achievable,” said Randall Stephenson, AT&T CEO. “And we actually think we can hopefully get beyond 50 percent as we continue to get this build completed.”

AT&T’s fixed network could represent--on the high side--perhaps 62 million consumer locations passed. That figure has to be interpreted. It could mean physical locations passed. It could mean dwelling units reached.

My own understanding is that this figure refers to dwelling units, not buildings. Here’s the difference: the U.S. housing stock is divided between detached houses and multiple dwelling units and other types of housing.

In 2000, detached housing represented about 60 percent of all U.S. housing units, according to the U.S. Census Bureau. In 2017, detached homes represented nearly 62 percent of housing.

So if AT&T’s fixed network is the same as the national average, AT&T’s network might pass 37.2 million single family homes. The rest of the housing units are apartments, condominiums, other forms of attached housing, mobile homes, boats and trailers.

So assume there are 24.6 million attached dwelling units in AT&T’s fixed network footprint. One has to estimate “locations” to be served from the dwelling unit counts. We will exclude boats, trailers or mobile homes as feasible FTTH locations. Assume that “locations” (buildings) represent about 28 percent of dwellings (by definition, an MDU is one location with multiple dwellings).

In that case, there might be some 6.9 million MDU locations in the AT&T fixed network service territory. That blends MDUs of all sizes into a composite average of 3.5 units per building. So make the universe of residential locations 31.5 million.

AT&T says it will have 14 million FTTH locations in service by the end of 2019. Assuming 100 percent of those locations are single-family homes, AT&T FTTH locations would be about 44 percent, with most of the rest served by fiber to the neighborhood. It is unclear how many all-copper lines remain in service, but it is possible there are as few as a million.

Still, AT&T’s interest in high-capacity access that costs less than FTTH remains. For even if it were able to boost its market share (installed base) of consumer internet access to as much as 50 percent, half the assets would still be stranded, producing no revenue.

For AT&T no less than Comcast, lower-cost infrastructure provides two benefits: fewer stranded assets and a lower-cost base, which provides more room to either lower retail prices or boost profit margins.

Keep in mind that 25 percent take rates also imply 75 percent stranded assets. Fixed wireless built on the 5G mobile network has clear potential advantages, including lower incremental cost to supply the equivalent of fixed access and lower total capex, with lower stranded asset risk.

Can ISPs Keep Increasing Internet Access Speed at Moore's Law Rates?

Perhaps improbably, at least some internet service providers--Comcast in particular--have been doubling the top speeds on their networks at rates consistent with Moore’s Law . “Comcast has increased speeds 17 times in 17 years and has doubled the capacity of its broadband network every 18 to 24 months,” Comcast says.

Comcast says gigabit speeds now are available to nearly all of the company’s 58 million homes and businesses passed in 39 states and the District of Columbia.

Of course, not every platform, or every ISP, has been able or willing to boost average speeds that much. The general rule is that a hybrid fiber coax network mostly can boost speeds by swapping out customer premises equipment, where a telco has to replace copper access networks with optical fiber. The former simply costs less than the latter.

source: youreeeka.com

That explains why cable TV operators tend to supply a disproportionate share of the fastest connections in the United States and United Kingdom, for example.

source: FCC

If  want to know why mobile service providers see upside in 5G , the ability to upgrade speeds to gigabit ranges without having to rip up copper access networks explains much of the interest.

Some have argued that fixed and mobile 5G is an existential threat to cable operators for that reason. Some us might argue that danger likely is overblown, but other existential problems arguably exist, among them declining revenue growth rates, profit pressures, lower average revenue per account and shrinking of revenue for virtually every legacy revenue stream.

Mobile substitution for fixed network voice services is one problem. But mobile messaging and voice revenues now are declining in most countries, while internet access prices also are dropping in most countries.

Sometimes, in some markets, actual price declines are disguised. That can happen when posted retail rates are not the prices most consumers pay; when customers actually buy more-costly packages over time; as prices per gigabyte fall or when prices are not indexed for inflation or compared to household income levels. In most developed countries, internet access costs less than one percent of household income, for example.

It also is common for ISPs to increase speeds on given tiers without price increases. That is an effective price cut, even if the nominal or posted retail price remains unchanged.

source: FCC

source: PCmag.com

Today, 75 percent of Xfinity Internet customers choose plans with speeds of 100 Mbps or more, double the speed those customers took just three years ago, Comcast says.

One can see the shift in consumer demand to faster-speed tiers in data from 2011 to 2015. Over that four-year period, speeds more than doubled, for some telcos, and increased by 300 percent to 400 percent for many cable operators.

source: FCC

Altice to Become Frist Major U.S. Cable TV Operator to Abandon HFC in Favor of FTTH

In a major break with other leading U.S cable TV providers across the United States, Altice USA, the fourth largest U.S. cable TV company, announced plans to switch to a new fiber-to-the-home

Network, appears ready to use proprietary technologies it has developed on its own, and also appears to believe that “energy cost savings” will be substantial enough to allow construction of the FTTH network “within the existing capital budget.”

Any one of those actions--abandoning the hybrid fiber coax platform; using its own proprietary platform; or building a brand new network without boosting its capital budget--would be unusual steps. Taking all three is mind-boggling.

Of the three decisions, it is the clear break with HFC that stands out most starkly. The cable TV industry has insisted for decades that HFC is an extensible platform capable of supporting all future requirements. And the industry has argued for many decades that its platform was, in fact, superior to FTTH, in terms of its business model. In other words, HFC would allow cable to deliver all services, and better services, without the capital expense of starting over with FTTH.

Altice is breaking decisively with HFC, and will be the first major cable TV operator to abandon HFC in favor of FTTH. The strategic implications are enormous. If Altice winds up being correct,

then perhaps HFC does not have the “legs” touted by its backers, even if 10 Gbps is on the cable industry industry HFC roadmap.

If Altice is correct--and DOCSIS and HFC really cannot support future bandwidth requirements--then there is at least a possibility that other cable TV operators will face unexpectedly-high capital investment requirements they are not now modeling, as they would have to build wholly-new networks, not simply upgrade edge and headend gear, as now is the case.

That would have implications for profit margins (lower), capital budgets (higher) and equity prices (probably lower).

Altice has plenty of experience with FTTH networks. Altice France is on track to reach 22 million fiber homes by the end of 2022, and Altice Portugal will reach the milestone of 5.3 million fiber homes passed by the end of 2020.

The five-year deployment schedule will begin in 2017, and the company expects to reach all of its Optimum footprint and most of its Suddenlink footprint during that timeframe, within five years.

Perhaps just as surprising, Altice expects to do so without a material change in its overall capital budget.

Some will be skeptical about one or more of the Altice claims. Some might argue Altice is right, long term, but maybe wrong near term. Comcast, for example, uses HFC for all consumer locations, but spot deploys an overlay fiber-to-home network for customers (business or consumer) who want to buy a symmetrical 2 Gbps internet access service.

In large part, that is a practical choice. Comcast does not immediately have a way to supply symmetrical 2-Gbps service over its HFC network, though it can supply asymmetrical 1-Gbps service over HFC.

The point--it will be argued--is that even if, at some point in the future, FTTH is necessary for consumer customers (no other major cable TV company has said this), HFC will continue to supply everything necessary for the foreseeable future.

The big danger of moving to FTTH, say HFC proponents, is over-investment that does not generate a reasonable financial return, for the intermediate future.

Nor are cable TV executives the only believers in many other ways of supplying bandwidth and internet access to consumer customers. AT&T, for example, seems to be a big believer in fixed wireless, and Verizon thinks fixed wireless will be the first commercial application for 5G networks in the United States.

Google and Facebook likewise are developing multiple new platforms using wireless access (balloons, unmanned aerial vehicles, fixed wireless, Wi-Fi, shared spectrum, possibly others).

For no other reason than that Altice now will become the first major U.S. cable TV firm to abandon HFC, and therefore calling into question the cable industry insistence that HFC essentially is future proof, the move to FTTH is noteworthy.

Some skeptics undoutedly will question the ability to build the new network without increasing capital budgets; the assumptions about operating cost savings; or the danger of using proprietary platforms.

Still, it is a history-making move.

AT&T to Compete with Verizon, CenturyLink Local Access Networks

AT&T now says it is deploying fixed wireless using millimeter wave frequencies to apartment complexes in Minneapolis, outside its traditional 21-state wireline service area.

In case you miss the implications, this is the first time AT&T is going to compete head-to-head with CenturyLink in the consumer local access business, in CenturyLink’s footprint, aiming to supply 100 Mbps access service to each unit in a building. AT&T says it already plans to boost speeds to 500 Mbps to each living unit.

Up to this point, AT&T's consumer operations in the fixed network area have been confined to the 21-state region where AT&T has had operations growing out of the old Regional Bell Operating Company territories.

The move is akin to Comcast announcing it is going to serve customers in a Charter Communications franchise area.

While AT&T competes directly with Verizon in the mobile business, and with both Verizon and CenturyLink in the enterprise accounts business, AT&T has not overbuilt another telco in the consumer business.

There are many reasons for that situation. For one thing, AT&T wants to avoid running afoul of informal antitrust guidelines that tend to be triggered whenever a fixed network provider serves 30 percent of available U.S. homes.

By competing out of region as a CLEC, AT&T avoids increasing the number of U.S. homes passed by its incumbent provider fixed networks.

“If successful, this will give us the ability to offer a combination of Internet, DirecTV and wireless services to apartment complexes and multifamily communities in additional metro areas.” said Ed Balcerzak, AT&T SVP.

Additional areas under consideration where AT&T might do the same include Boston, New Jersey, New York City, Philadelphia and and Washington D.C., all in the Verizon Communications footprint.

AT&T says it also is looking at Denver  Phoenix and Seattle, in the CenturyLink region.

All those efforts would have AT&T operating as  a competitive local exchange carrier competing with Verizon and CenturyLink for the first time.

What is Happening in the U.S. VoIP Market?

It’s hard to tell precisely what is happening in the U.S. residential VoIP market. According to the most recent Federal Communications Commission data, there were 32 million VoIP subscriptions in service at the end of 2010, representing a growth rate overall of about 22 percent. FCC data

The 149 million wireline retail local telephone service connections in December 2010 included 40 percent  residential switched access lines, 38 percent business switched access lines, 18 percent residential VoIP subscriptions, and three percent business VoIP subscriptions.

The FCC data suggests that 81 percent of VoIP services bought in bundles, representing in turn about 84 percent of all VoIP subscriptions, were supplied using cable modems, meaning that cable operators sell about 81 percent of VoIP connections in bundles, which in turn represent at least 84 percent of all VoIP subscriptions sold in the U.S. market.

But third quarter 2011 data at the company might suggest either that the adoption rate has slowed fairly dramatically in 2011, or that suppliers other than cable operators or telcos have suddenly begun adding more subscribers than ever before. That seems highly unlikely, based on what has been happening in the U.S. VoIP market so far.

Though telcos and independent VoIP providers have represented some VoIP market share up to this point, the FCC data show it is the cable operators who have been responsible for most of the sales and customer volume.

Company results from wireline voice service providers through the third quarter 2011 might suggest that demand is moderating, since most new VoIP subscriptions are sold by cable operators, and cable sales of VoIP clearly are slowing.

Legacy voice services offered by phone companies have continued to decline during 2011, while "digital voice" line growth from cable operators has slowed. What's happening in fixed line VoIP?

AT&T lost 10.5 percent of its wireline voice connections compared to the third quarter of 2010., Verizon lost 7.6 percent  of its total wired voice lines, and CenturyLink reported losses that would total about 6.8 percent annually on a pro forma basis for the 12-month period ending September 2011.

Offsetting  those loses are incremental new telco VoIP connections. AT&T's U-verse Voice connections increased by 119,000 sequentially while 648,000 subscribers over 12 months. HD Voice makes steady progress in mobile networks

But the volume of activity in consumer VoIP has been driven by cable operators, and it now seems as though sluggish economic conditions or wireless substitution might be issues for cable VoIP services.

But there could be other factors at work. Perhaps few, if any observers think telco voice share will dwindle away to “nothing.” For any number of reasons, including product bundles and customer preferences, the likely ultimate outcome is some reasonably stable market share structure. That means cable will reach some “natural” limit in voice, as telcos might reach some “natural” limit in video share.

It could be that cable operators are reaching the “natural” limits of demand for cable voice products. Comcast, the largest domestic cable operator, now has 9.2  million VoIP lines in service representing a 17.6 percent penetration rate of homes passed at the end of the third quarter 2011, up  from a 16.1 percent penetration rate in the third quarter of 2010.

Time Warner Cablehas 4.6 million voice customers, but added only 5,000 new VoIP lines in the third quarter of  2011.

That dramatic slowing suggests cable has reached a natural limit, but also that strong growth of wireless services now is simply as big a problem for cable operators as it has been for fixed-line telcos.

Wireless substitution continues to slowly grow virtually every year, according to the CDC, which estimated in 2010 that 29.7 of homes had only wireless telephones during the last half of 2010.

NextLight Grabs 60-Percent Market Share Competing Against Lumen and Comcast

NextLight, the electrical utility owned internet service provider in Longmont, Colo. says it has gotten 60 percent take rates for its fiber-to-home service, with similar take rates among business customers, after gaining about 54 percent take rates after five years of operation. 

Should many other competitive ISPs achieve such success, incumbent telco and cable operator ISPs could face serious challenges. 

It has been conventional wisdom in U.S. fixed network markets that two competitors are a sustainable market structure, typically featuring one cable operator and the legacy telco, with market shares ranging between a 70-30 pattern (where the telco only has copper access)  to something closer to 60-40 as a rule (where the telco is upgrading to fiber access). 

Telcos hope for market shares approaching 50-50 as FTTH becomes the dominant access platform over time. 

The new issue is additional providers, ranging from municipal or utility-owned ISPs to independent ISPs, including independent ISP operations that cover only parts of a metro area. In a sense, that is the mass market or consumer version of the competitive local exchange carrier strategy adopted decades ago, where suppliers target business customers in major office parks or downtown core areas. 

The American Association of Public Broadband cites 750 municipal internet service provider networks in operation in the United States, mostly serving smaller communities. Not all have full retail operations, though. 

Chattanooga Electric Power claims 175,000 customers in the Chattanooga, Tennessee area. The next-largest 10 such ISPs have fewer customers, often because they are smaller population centers. 

• City of Salem Electric Department (Oregon): 50,000

• City of Longmont Power & Communications (Colorado): 40,000

• Plum Creek Electric Cooperative (North Dakota): 35,000

• Jackson Energy Authority (Tennessee): 25,000

• City of Holyoke Municipal Light Department (Massachusetts): 20,000

• City of Boulder Municipal Electric Utility (Colorado): 18,000

• City of Dubuque Utilities (Iowa): 17,000

• City of Lawrence Public Utilities (Kansas): 15,000

• City of Lexington Utilities (Kentucky): 15,000

 

And other networks are launching in larger population centers. As with any set of contestants in any other industry, not all suppliers will succeed and not all will likely survive. Managerial skill still seems to matter, as do the other prosaic concerns such as managing debt burdens and picking the right areas to serve. 

Many for-profit ISPs now believe they have better opportunities in rural areas, for example, where a new fiber network can be “first” to serve the market. Up to this point few have attempted to compete in a major big city market. ISPs targeting operations in mid-size cities have generally only chosen to serve portions of their cities. 

The obvious broader issues are the roles and strategies traditional retail service providers can envision as their markets are reshaped by competition, new investors and virtualized or other roles beyond the traditional vertically-integrated model. 

The question naturally arises: how many of these new competitors will succeed, and what are the implications for sustainable market shares over time?

In a market with two significant suppliers, each serving the whole market, an ISP might require  market share of at least 30 percent to be sustainable. That has often been the pattern where a cable operator competes against a telco with copper-only access, where the available telco speeds are quite limited in comparison to a cable operator hybrid fiber coax network. In such cases, there is an order or magnitude or two orders of magnitude difference in top speeds. 

In a market with three significant suppliers, an ISP typically needs to have a market share of at least 20 percent to be sustainable, if competition across the full geography is envisioned. Such ISPs also tend to require more efficient operations. 

In a market with four significant suppliers, where we can assume as many as two of the four compete only in a portion of the metro market, an ISP typically needs to have a market share of at least 10 percent (of the full area potential market) to be sustainable, though ISPs serving only a portion of a metro area also probably need take rates higher than 10 percent in the areas they do choose to serve. 

If an independent ISP cannot get 20 percent to 30 percent take rates in its chosen geographical areas of coverage, it probably is not doing well. 

The best suppliers can take so much share from the incumbents (telco and cable) that severe damage to the incumbent business model is possible, turning those competitive areas into loss-making operations. 

A fixed network operator with sufficiently offsetting performance might survive actual losses in a few geographies. In fact, traditional monopoly fixed network suppliers expected permanent losses in rural areas, breakeven or slightly better performance in suburbs and most of the profits from operations in city cores. 

NextLight seemingly has avoided issues of cross-subsidization of internet access service by the electrical utility ratepayers, separating its financial operations from those of Longmont Power Company.

NextLight has its own board of directors, management team, and accounting system.

NextLight seemingly provides service “at cost,” plus a small margin to cover its operating expenses. The objective is to break even, rather than “making a profit.”

NextLight's network is physically separate from LPC's network, though critics might argue NextLight uses power company rights of way and other benefits of having a sponsor with an on-going business, which could translate to financial advantages. 

Others might argue there is some cross subsidy. There is a no-recourse surcharge on LPC's electric bills, used to fund the construction and operation of NextLight, and it is applied to all LPC customers, regardless of whether they subscribe to NextLight service.

That said, NextLight has gotten a legal opinion from the Colorado Attorney General's Office stating that NextLight is not engaging in cross-subsidization, and that the non-bypassable surcharge is a fair and reasonable way to fund the network. 

In fairness, what revenue-generating entity would not look to leverage its current assets to create new lines of business? Cable operators used their video subscription networks to create fully-functional telecom networks; use their fixed network to support their mobile service provider operations; extended their consumer networks to provide business-specific services; used their linear video customer base to leverage a move into content ownership. 

Telcos do the same, when trying to extend their core operations to new services. In the more-regulated era, they had to establish separate subsidiaries to enter non-regulated lines of business. That is less an issue in today’s largely-deregulated markets. 

The city of about 100,000 is about 30 miles north of Denver, so might be considered a suburb by some, a neighboring city by others. Using either characterization, population density varies quite substantially. 

The population density of Longmont, Colorado in its city core is 11,999 people per square mile while the population density of the outlying areas is 1,369 people per square mile  

 

Housing density and population density obviously are key indicators of potential access network cost and revenue possibility. Housing density enables and constrains home broadband market size, while population density is correlated with business revenue potential. 

To a large extent, housing and population density also affect network cost: the lowest-cost-per-passing networks can be built in dense areas while the most costly networks are in rural areas. 

Among U.S. internet service providers, the “average housing density is 400 locations per square mile, with Comcast sitting squarely on that level of density. Smaller telcos tend to serve more-rural areas and have housing densities an order of magnitude or two orders of magnitude less than the largest ISPs. 

Company	Housing Units	Average Housing Density (dwellings per square mile)
Verizon	58.2 million	1,500
AT&T	51.8 million	1,300
Lumen (formerly CenturyLink)	25.7 million	600
Charter	22.9 million	500
Comcast	19.5 million	400
Windstream	14.8 million	300
Brightspeed	1.9 million	40

At least historically, that explains why Verizon was early to invest in fiber to home facilities. It has the most-dense serving areas, so has the best economics. Only recently have many smaller and independent ISPs been able to make a business case for investing in FTTH in rural and exurban areas, though lots of small rural telcos have been doing so for years. 

Housing density	Cost per home passed
40 homes per square mile	$2,000
40 homes per square mile	$800
1,300 homes per square mile	$500

Figures of merit for FTTH construction might range from $1,000 to $1,250 per household at 400 homes per square mile but $1,500 to $2,000 per household at 40 homes per square mile, for example. 

At higher densities of 1,300 homes per square mile, costs might range from $500 to $750 per household. 

The business case also includes less revenue per account potential at lower densities as well. 

All that matters as attacking ISPs and infrastructure investors weigh their odds of success when competing with legacy service providers. To be sure,  FTTH payback models seem to have changed greatly since 2000. 

The economics of connectivity provider fiber to the home have always been daunting, but they are, in some ways, more daunting in 2022 than they were a decade ago. The biggest new hurdle is that expected revenue per account metrics have been cut in half or two thirds. That would be daunting for any supplier in any industry. 

These days, the expected revenue contribution from a home broadband account hovers around $50 per month to $70 per month. Some providers might add linear video, voice or text messaging components to a lesser degree. 

But that is a huge change from revenue expectations in the 1990 to 2015 period, when $150 per customer was the possible revenue target.  

You might well question the payback model for new fiber-to-home networks which assume recurring revenue between $50 and $70 per account, per month, with little voice revenue and close to zero video revenue; take rates in the 40-percent range; and network capital investment between $800 and $1000 per passing and connection costs of perhaps $300 per customer. 

In the face of difficult average revenue per account metrics, co-investment and ancillary revenue contributions have become key. Additional subsidies for home broadband also will reduce FTTH deployment costs. 

The point is that FTTH revenue models, and the ability to sustain a competitive ISP operation, either as an incumbent or attacker, now seem to make possible more competition than was previously thought possible. 

NextLight is a good example.