FTTH ARPU Between $50 and $70 Supports the Payback Model?

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. 

But that is the growing reality. Among the reasons: higher government subsidies; indirect revenue contributions and a different investor base. 

All that has shifted fiber-to-home business models in ways that might once have been thought impossible. 

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. All that matters as revenue expectations are far different from assumptions of two decades ago. 

“Our fiber ARPU was $61.65, up 5.3 percent year over year, with gross addition intake ARPU in the $65 to $70 range,” said John Stankey, AT&T CEO, of second quarter 2022 results. “We expect overall fiber ARPU to continue to improve as more customers roll off promotional pricing and on to simplified pricing constructs.”

Mobility postpaid phone ARPU at AT&T was $54.81. According to some studies, fiber-to-home recurring revenue is lower than that. But AT&T appears to be taking market share from key competitors where it has deployed new FTTH facilities. 

Different investors also are becoming important for access infrastructure. Retail connectivity providers are judged by their ability to generate cash flows, but hampered by the huge capital investments they must make to do so. Institutional investors, on the other hand, have longer payback horizons. They value the predictable cash flow just as much as do telcos, but can afford to be more patient on payback.

Ongoing reductions in operating costs and complexity also play some role in lower breakeven points for connectivity provider access investments. Also, government support mechanisms can reduce deployment costs by as much as 30 percent, in some cases.  

Lumen reports its fiber-to-home average revenue per user at about $58 per month. For those of you who have followed fiber-to-home payback models for any length of time, and especially for those of you who have followed FTTH for many decades, that level of ARPU might come as a shock. 

Though some honest--and typically off the record--evaluations by some telco executives 25 years ago would have predicated the FTTH business model as “you get to keep your business” rather than revenue increases. 

Few financial analysts would have been impressed. 

The theory was that upgrading to FTTH would allow incumbent telcos to essentially trade market share with cable companies: gaining video subscription market share from cable as cable took voice share. The assumption was that home broadband share would remain about where it was. 

The thinking was that per-home revenue could range as high as $130 to $200 per month, even as overall market share was gained by cable and lost by telco providers. 

Econstor

So the business case remains challenging, and especially so in less-dense areas. The main point is that firms deploying fiber to home facilities must do so with radically-reduced expectations for ARPU. 

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 

Two decades ago, the business model might have assumed far higher revenue per account. A telco or cable TV customer with a voice line generating $30 a month, plus internet plus video could have been worth about $100 a month in revenue. 

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. 

Lower-density areas might only be upgraded with fixed wireless, though higher subsidy levels will increase deployment of FTTH in rural and lower-density areas.  

For at least some observers, the change in FTTH business model asumptions is stunning. 

Lower Prices are a Feature, Not a Bug, for Policymakers

Lower prices are a policy feature, not a bug. Government policy promoting competiton is designed to create lower retail prices. So it should not be surprising that pressure on average prices per user or customer or account now are a major service provider concern.

What else would you have expected? Lower prices are the intended outcome of competition policy.

To what extent is it correct to characterize legacy service provider revenue trends as “down and to the right?” Obviously legacy services such as fixed network voice, mobile messaging and voice and linear entertainment video generally show that pattern. 

What we often forget is that the very objective of introducing competition for connectivity services, and the government policies to support that objective, are intentionally designed to create lower prices. The objective of policy is a “down and to the right” pattern. 

In other words, “down and to the right” is not a bug, it is a feature. It represents the outcome policy intends, and is not a defect of policy. 

source: United Nations

The other angle is that a proven way of increasing ARPU is to increase speed, despite another clear trend: over time, speeds grow but prices remain relatively flat, or even decline. In other words, the cost of a 300-Mbps connection is the same, or less, than a 512-kbps connection three decades ago. 

Over the short period of 2007 to 2017, for example, U.S. typical speeds grew by two orders of magnitude, while prices dropped. 

At the moment, up to 80 percent of U.S. locations can buy internet access operating at least the gigabit per second level.  

source: Versa Technology 

The global pattern is not always transparent. If one looks only at total service provider revenue, that tends to grow each year, in large part because new customers are added in growing regions (Asia, primarily, but also eventually in Africa). 

So global service provider revenues will grow 14 percent between 2022 and 2027, according to researchers at  Omdia. Monthly average revenue per user will fall by four percent. So the pattern is more customers, each paying less than the “typical customer” used to pay. Revenue might ber “up and to the right” but ARPU clearly is “down and to the right.”

source: Omdia 

Every management team seems to emphasize that value can be enhanced, preventing further commoditization. You can make your own assessment of how effective such efforts have been, or could be. 

Disposable income is among the other limitations. It will be hard to boost ARPU very much in lower-income countries. If policymakers succeed in reducing the cost of connectivity to perhaps two percent of gross national income per capita, that further limits ARPU upside. 

source: S&P Global Market Intelligence 

In other words, the goal of policy in developing countries is to actively reduce ARPU. The objective is precisely “down and to the right” pricing. 

Until recently, home broadband was the major product line producing “up and the right” results, but growth now has slowed in mature markets. That pattern looks more like “flat and to the right.”

When service provider executives talk about a transition from “telco to techco” they essentially are saying such moves will change the revenue picture to “up and to the right.” 

Service providers in emerging or younger markets have advantages, in that regard. They can still hope to rely on mobile subscription growth and uptake of mobile internet access to fuel their continued “up and to the right” growth prospects.

Mature market executives who own infrastructure assets have no such luxury, and strategic options often hinge on whether mobility revenues exist. Contestants in mobile or fixed businesses who operate using wholesale access, rather than owning infra, have other options. 

Competitors with Infra-based business models complain about higher capital investment requirements and limited abilities to monetize those investments, not without basis in fact. 

Still, we often forget that the whole point of introducing competition in access markets is to drive average costs “down and to the right.” It is a policy feature, not a bug.

Cutting the Video Cord Sounds "Good" to Some, But Isn't a Perfect Substitute

Around 80 percent of what most Americans watch on TV can be had for free, some would argue. Some of us would say that is a pretty big and overly-broad generalization. But keep in mind there is an 80-20 rule.

The 20 percent of programming people really cannot get "for free" includes what many would consider the "most valuable" programming.

Also, few people really seem to be willing to live with their video subscriptions, at the moment.

About nine percent of U.S. respondents to a Deloitte  survey say they have stopped buying video entertainment subscriptions from cable, telco or satellite providers, while another 11 percent report they are considering doing so.  Nine percent have cut the video cord

Cable providers lost about 1.77 million subscribers over the past year, similar to 1.76 million lost in 2010, according to Leichtman Research Group. But cable industry losses are virtually directly balanced by subscribers gained by telco and satellite providers.

The implication is fairly clear: video cord cutting remains largely a potential danger, not a current reality.

Telcos added 1.53 million video subscribers in 2011, compared to 1.61 million in 2010. Satellite providers added about 480,000 subscribers in 2011 and 930,000 in 2010. 2011 video market was stable, overall.

One complicating factor, Leichtman notes, is that growth traditionally has come from new housing starts. Since housing construction is down, the opportunity to grow the universe of subscribers is stilted. On the other hand, customer churn generally increases when people are moving. To the extent that people are not moving domiciles as much as they have in the past, that should contribute to lower churn.

What those figures do not shed light on is whether average revenue per accounts is stable, rising or dropping. One might argue that new features such as digital video recorder or HDTV are pushing average revenue up, while a desire to save money could be leading some customers to drop premium channels such as HBO.

Evidence seems to have been mixed in the third quarter of 2011. Comcast's basic video ARPU remained flat $72.7 during the period while broadband ARPU increased 2.2 per cent to $42.6. Telephony ARPU declined 2.4 percent from the previous quarter's $31.9.

DirecTV ARPU increased almost two percent from the previous quarter, reaching $92.20. Third quarter 2011 ARPU

Time Warner Cable had declines across the board in ARPU, with the sole exception of broadband.

DISH saw its ARPU decline two percent from the previous quarter, marking the company's first consecutive quarter ARPU decline since the recession in 2009.

AT&T U-verse and FiOS TV ARPUs continued to grow, however. FiOS monthly ARPU increased two percent from the previous quarter and U-verse's monthly ARPU was up 2.5 percent.

The larger point is that though service provider market share is changing, and average revenue per account is mixed, with no clear pattern, there is, at least according to Leichtman Research, no evidence that video cord cutting is happening on anything more than an insignificant level.  
But it always has been clear that some content is "more valuable" to consumers than others. Cable TV executives used to say that "nobody watches more than seven channels; the problem is that each person watches a different seven."
That is why distributors continue to argue that, for all its problems, a "bundled" approach still makes the most financial sense for consumers and suppliers. Cord cutting still minor

Does Home Broadband Data Consumption Really Tell Us Anything about Economic Lift?

Is it really possible to quantify the economic uplift from internet access or home broadband operating at 100 Mbps or 500 Mbps? One might argue there is a difference between access at 100 Mbps or 1,000 Mbps. But do we actually know that? 

And consider data consumption as a “good thing” if it is higher. My own account recently surpassed 1 Tbyte per month (and continues to climb). One might argue that is evidence of some sort of “productivity” advantage. It is not.

The reason more data is being consumed is because the household watches streaming video, often in 4K. Consumption of linear video (which does not increase data consumption has dropped to the point that only some live news and sports are ever viewed.

So in my case, higher data consumption has nothing to do with productivity, or learning or work. It is entertainment video consumption, pure and simple. If there were any heavy gamers on the account, that might also drive higher consumption. 

But productivity? The increased amount of consumed data has nothing to do with it.

Many industry trade groups have to walk a fine line when addressing usage, take rates, revenue and speeds, in relation to societal or economic benefits.

Proponents must argue their industries create lots of value for economies and society; are well positioned for growth and at the same time, still need some help. The connectivity industry seems always to be in that position.

A new report on digital communications issued by the European Telecommunications Network Operators’ Association points out that fiber-to-home coverage has passed 50 percent of locations and that 5G coverage likewise has doubled over a single year from about 30 percent to 60 percent. 

On the other hand, ETNO says, peers are doing much better. “Uptake of 5G in Europe has been lagging behind,” says ETNO. “Despite being available to 62 percent of the population, 5G in Europe constitutes only 2.8 percent of the total mobile connections, compared to 13.4 percent  in the US and 29.3 percent in South Korea.”

That implies that uptake is a problem. 

On one hand, ETNO argues that “telcos” have increased their  commercial activities in edge computing, Open radio access networks, internet of things, “big data” and security, making the argument that telcos are innovating and investing. 

ETNO also notes that  average mobile data usage per capita per month, in 2020, was 8.52 GB in Europe, 10.62 GB in the US and 12.52 GB in South Korea.The implication there is that usage volume is a problem. 

Average spend per capita on communications in Europe is forecasted to be €33.8 per month, lower than global peers (€71.7 in the US, € 36.1 in South Korea). So lagging average revenue per account is deemed to be a problem. 

source: ETNO

Service provider revenues in Europe are also lower than in other geographies. Mobile average revenue per user (ARPU) was €14.4 in Europe, compared to €37.9 in USA and €25 in South Korea. Again, this is viewed as a problem, ETNO notes. 

source: ETNO

The same general pattern holds for home broadband revenue, ETNO says. 

source: ETNO

ETNO also argues that average home broadband downlink speeds are higher in some peer markets. 

source: ETNO

The message is equal parts “we are vital contributors to society and economy” and “our financial survival is imperiled.” Says ETNO, “networks are vital, but the financial outlook remains unclear for the telecoms sector.”

This is the sort of argument any industry would make when it wants to show it is important for the government to support the industry, and also arguing why that support is required. 

Aside from arguments over which other participants in the ecosystem should be compelled to contribute additional support (capital investment, usage fees, support payments), how one thinks about usage, customer revenue magnitude, ISP revenue magnitude and prices are an areas where more debate is possible.

For example, the explicit assumption is that higher data consumption by customers is better than lower data consumption. Higher customer spending is assumed to be better than lower spending. 

The assumption is that uptake of the newest networks is good, in and of itself. Hence, higher 5G adoption rates are good; lower rates are bad. 

ETNO notes that average public market equity values for ISPs are lower than for other categories of firms, the typical argument being that content and app providers earn higher multiples of revenue and therefore are valued more highly. 

That is obviously true, but also ignores the fact that each industry can have a different market valuation, for reasons the market assigns. Growth companies are valued differently from value assets. Retailers are valued differently than software and information technology companies. 

Different parts of the financial services business are valued differently as well. The point is that markets assign valuations. The mere existence of differences only indicates that the market values some firms and industries higher or lower, for reasons related to growth potential, business moats, revenue consistency or any number of other reasons. 

The implicit argument made by suppliers and proponents of information or communications technologies is always that society and the economy profit when such adoption happens. Most often, the claims go further and argue that economic growth actually is driven by the rate of new technology adoption. 

All of those assumptions can be challenged. At some level, we might all agree that universal availability of electricity is correlated with economic growth. But correlation often is not evidence of causation. If areas with the same degree of access to electricity still have different outcomes and growth rates and magnitudes, something else is at work,. 

Also, most policymakers embrace lower consumer prices as a positive good. So some would argue lower prices are a good thing, not a “problem.” 

Also, demand is different from supply. In arguing that consumption is an issue in Europe, ETNO essentially argues that lower demand is a problem. As much of a problem as that might be for ISPs, it is not so clear that demand actually is a “problem.” 

We need to separate two different issues. One issue is making sure home broadband and high-quality mobile service is ubiquitous. But a separate issue is how consumers avail themselves of those resources. 

But data consumption, data rates, average revenue per account or average cost per access might not have much to do with social or economic uplift. 

LTE Grows Usage, But Revenue Gains are Uneven

The good news about Long Term Evolution networks is the faster speed and lower latency end users experience. The sometimes good news is that some mobile operators can charge a premium for use of the LTE network.

The in some ways good news is that people consume more data on an LTE network.

SK Telecom, for example, has seen average monthly data consumption per user rise significantly since the launch of its 4G network in 2011, with average consumption doubling between the fourth quarter of  2011 and first quarter of  2013, rising from 1.1 GB to 2.1 GB.

By way of comparison,  data usage on the 3G network remained flat. Basically, total 3G and 4G network traffic almost doubled in the space of 15 months, on a two-percent  growth in total connections.

What that means is that 4G users typically consume twice as much data per month as other users, according to GSMA.

That can have a direct impact on revenue when mobile service providers are able to charge somewhat incrementally for the additional usage. In other cases, where operators cannot bill for the higher usage, LTE can represent a problem.

Significantly, South Korean users actually are using Wi-Fi less, and using the LTE network more, than they had been doing in the past. GSMA believes that is happening because LTE now offers faster uploads and downloads than Wi-Fi does.

South Korean operators are generating significantly increased revenue from their 4G customers, GSMA notes. At KRW46,000 ($43), SK Telecom’s 4G average revenue per user in the the third quarter of 2013 was 32 percent higher than its blended ARPU.

In part, that is because more than 70 percent of new and upgrading 4G customers are buying higher-priced service plans.

At Korea Telecom, 4G ARPU of KRW44,000 ($42) was more than 40 percent higher than blended ARPU.

Operators in the United States are seeing similar trends. In October 2013, Verizon Wireless reported that the 38 percent of its retail 4G customers generated 64 percent of total data traffic.

But traffic is not revenue. Verizon Wireless third quarter 2013 average revenue per account was up 7.1 percent year over year.

Also, ARPA has grown 21 percent since the launch of the 4G network in 2010.

Cricket Communications says “usage from a 4G customer is about twice that what it is for a 3G customer,” while ARPU was up 8.4 percent year over year in the third quarter of 2013.

The picture in Europe is a bit more mixed. To be sure, 4G users consume more data than 3G users.

In the first quarter of 2013, Vodafone reported that average monthly data usage for its 4G smartphone users in Europe was 640 MB, approximately twice that for a 3G smartphone (350 MB) and roughly the same as a tablet operating on 3G.

In Germany, O2 reported third quarter 2013 monthly average data consumption by 4G users was three times that of non-4G users.

The UK’s EE said second quarter 2013 revenue from 4G customers was higher by about 10 percent. In the third quarter of 2013, 4G customers provided ARPU gains in the high single digits, EE said.

This contributed to a slight annual rise in blended ARPU (+0.5%), to £19.00 ($29.45) in Q3 2013.

In France, there has been no ARPU growth from 4G, however, among the three largest mobile providers. In part, that is because the operators have had to cut prices to compete with Illiad’s Free Mobile offers.

The average ARPU in France was down 13.2 percent year over year in the third quarter of 2013 to €22.82 ($30.23). GSMA expects the downward trend to continue.

But France isn’t the only market where an operator has chosen to offer 4G services without charging a premium. For example, 3UK, which switched on 4G last month, is allowing customers to migrate without switching from their 3G contracts and will continue to offer unlimited data allowances. Telefonica Movistar also is offering 4G at the same price as 3G.

                                       SK Telecom Data Consumption

Source: SK Telecom

Lower Mobile ARPU in Latin America

The current strategy used by virtually all mobile service providers to combat declining voice average revenue per user is increased data revenue. So far data revenue growth has slowed the decline of blended ARPU, but it hasn’t stopped the bleeding entirely, in South American markets.

Excluding Venezuela and Argentina, voice ARPU in Latin American markets are declining at about two percent per quarter, according to Yankee Group analysts.

“Simple linear projections indicate nominal voice ARPU won’t stop declining until late 2017,” Yankee Group says. “By then regional voice ARPU would be just over U.S.$5.80, about 40 percent less than it is today.” Lower Mobile ARPU in Latin America - Carrier Evolution

Shocking FTTH Revenue Assumptions

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. 

But that is the growing reality. Among the reasons: higher government subsidies; indirect revenue contributions and a different investor base. 

All that has shifted fiber-to-home business models in ways that might once have been thought impossible. 

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. All that matters as revenue expectations are far different from assumptions of two decades ago. 

“Our fiber ARPU was $61.65, up 5.3 percent year over year, with gross addition intake ARPU in the $65 to $70 range,” said John Stankey, AT&T CEO, of second quarter 2022 results. “We expect overall fiber ARPU to continue to improve as more customers roll off promotional pricing and on to simplified pricing constructs.”

Mobility postpaid phone ARPU at AT&T was $54.81. According to some studies, fiber-to-home recurring revenue is lower than that. But AT&T appears to be taking market share from key competitors where it has deployed new FTTH facilities. 

Different investors also are becoming important for access infrastructure. Retail connectivity providers are judged by their ability to generate cash flows, but hampered by the huge capital investments they must make to do so. Institutional investors, on the other hand, have longer payback horizons. They value the predictable cash flow just as much as do telcos, but can afford to be more patient on payback.

Ongoing reductions in operating costs and complexity also play some role in lower breakeven points for connectivity provider access investments. Also, government support mechanisms can reduce deployment costs by as much as 30 percent, in some cases.  

Lumen reports its fiber-to-home average revenue per user at about $58 per month. For those of you who have followed fiber-to-home payback models for any length of time, and especially for those of you who have followed FTTH for many decades, that level of ARPU might come as a shock. 

Though some honest--and typically off the record--evaluations by some telco executives 25 years ago would have predicated the FTTH business model as “you get to keep your business” rather than revenue increases. 

Few financial analysts would have been impressed. 

The theory was that upgrading to FTTH would allow incumbent telcos to essentially trade market share with cable companies: gaining video subscription market share from cable as cable took voice share. The assumption was that home broadband share would remain about where it was. 

The thinking was that per-home revenue could range as high as $130 to $200 per month, even as overall market share was gained by cable and lost by telco providers. 

Econstor

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 at least some observers, the change in FTTH business model assumptions is stunning. Who would have thought FTTH projects would be undertaken when expected revenue per account was $50 to $70 a month?