Business Models Matter More than Access Media

Though the standard prescription for better broadband globally is fiber to the premises, there are some significant differences in a few countries. Looking at where gigabit internet access speeds are now available, In the United States 80 percent of locations are reached by cable operators. About 25 percent of telco FTTH homes supports those speeds, Analysys Mason data indicates. 

In South Korea, about 60 percent of homes can buy gigabit service. About 80 percent of homes served by telcos can do so. In Japan, nearly the same percentage of cable homes can buy gigabit service, while 75 percent of telco homes can do so. 

In Europe, about 40 percent of homes can buy cable gigabit service from a cable operator, compared to about 25 percent of homes able to buy gigabit service from a telco. 

source: ETNO, Analysys Mason 

Two points are noteworthy in this regard. FTTH and HFC refer only to access media. Use of either media does not mean “gigabit per second speeds.” Cable networks also can do so. But most U.S. FTTH networks are not yet supporting gigabit speeds. 

The point is that the traditional telco framing of the FTTH deployment case is about access media, not speeds. If speed, and coverage, are the issues, then hybrid fiber coax often is a major--if not the leading--platform. 

Future proofing also is an issue. Still HFC architects have successfully boosted speeds to gigabit ranges, with a roadmap to 10 Gbps speeds and higher speeds (up to 100 Gbps over the next decade), before the platform possibly reaches a limit. 

As a practical matter, one might ask whether the cable HFC business model ever reaches a point of limits over the next few decades, if speeds can be pushed to 100 Gbps, and made more symmetrical. 

The issue is not simply speed, but what it costs competitors to invest in platforms to do so, what the expected take rates might be, and what the business model therefore delivers, in financial terms, when most consumers rely on mobile service, and mobility drives total revenue and profit. 

The existence of strong cable competition in some markets necessarily limits the financial return any leading telco can expect from new FTTH deployment, and increases the risk of substantial stranded assets which produce zero return. 

In deployments to date, telco FTTH networks have struggled to exceed 40 percent take rates, which means 60 percent of the assets serving consumers are stranded. Conversely, only about 30 percent of cable assets typically are stranded. 

As always, the better mousetrap does not always win, assuming FTTH is deemed the better technology than hybrid fiber coax. The HFC upgrade path seems always to have been more incremental and more graceful (financially), as FTTH is “rip and replace.”

It remains true that for a legacy telco, FTTH remains a “better” technology choice than copper access. Whether it always is the better business decision remains the issue. 

How Much Share Can Telcos Claim as They Step Up FTTH Investments?

U.S. cable operators have taken market share in consumer broadband for most of the last two decades. But some analysts believe a new wave of investment in fiber to home facilities will allow telcos to claw back significant amounts of installed base. 

Long term, MoffettNathanson sees cable having a 50 percent broadband market share in markets in which they compete with fiber-to-home facilities. That implies a shift of 20 percent of the installed base from current levels. 

Not all observers agree with that analysis. S&P Global Market Intelligence, for example, does not expect stepped-up telco FTTH investment to change share statistics very much. 

But S&P Global Market Intelligence does believe new competition from mobility suppliers using fixed wireless (T-Mobile, for example) will gain about six percent share of the aU.S. residential broadband market with about 7.19 million subscribers. 

It is not yet clear how much of that share gain will be claimed by upstarts in the home broadband market such as T-Mobile, and how much will be gotten by fixed wireless operations conducted by incumbents such as AT&T and Verizon. 

The former gains will represent market share gains by telcos, but perhaps some losses for AT&T and Verizon. The latter could increase the installed base held by AT&T and Verizon. 

Also, some of that share will be gained by independent wireless internet service providers. 

S&P Global Market Intelligence also estimates there will be about 1.52 million satellite customers by the end of 2021, accounting for just one percent of the installed base of home broadband accounts. 

Today, cable operators get as much as 85 percent market share when facing telcos using VDSL and 95 percent market share competing against telco DSL facilities, the firm says. Where cable companies compete against telco FTTH, the big telcos have gotten somewhere in the range of 40 percent or slightly-higher share of the installed base. Some smaller telcos manage to get 50 percent of the installed base.  

In the first quarter of 2021, the largest U.S. telcos had about 31 percent share of the installed base and got about eight percent market share of net new accounts, according to Leichtman Research. 

Mobile market share gains could also be an issue. T-Mobile, for example, expects to gain home broadband share, especially in rural areas, at the same time it gains mobile account share. 

Some 15 percent of U.S. adults are mobile only for home broadband, says Pew Research.  The point is that telco FTTH competes against cable, other mobile companies, independent ISPs and satellite. 

And stranded assets and financial return remain issues for telcos investing in new FTTH facilities. As voice and video entertainment revenue streams have dwindled, the business case for home broadband using FTTH increasingly relies on internet access as the main revenue driver for the FTTH business case. 

That is why some see fixed wireless as important. It might be the only way for telcos to compete against cable and other competitors in many geographies. 

Always a difficult business decision, the economics arguably have become worse as voice and entertainment revenues dwindle, increasingly making FTTH viable in some urban or suburban locations, not all. Rural deployments rely on subsidies. 

Rural customers represent about 40 percent of the entire mobile services marketplace, including 54 million households and about 140 million people, according to T-Mobile. Historically, T-Mobile has been underrepresented in rural markets, compared to AT&T and Verizon.

Fixed Wireless Might be the Only Way U.S. Telcos Compete with Cable

Despite much skepticism in many quarters, there is a simple reason why 5G fixed wireless will get serious attention by U.S. telcos. There is almost no other platform that viably could keep telcos within some distance of cable operator internet access offers.

The traditional answer has been to install fiber to the home networks, but the business model now is rather sharply llimited, and the risk of stranded assets explains the dilemma.

Clearly, cable TV dominates residential broadband. Cable has about 60 percent market share nationally and has been getting essentially all the net new additions for a decade.

The problem for any new telco FTTH supplier is that 60 percent of the potential customer locations (cable operator customers) will not generate any revenue. Immediately, the problem is building a business case when 60 percent of assets are stranded and producing zero revenue.

And though linear video is undergoing a transition to on-demand streaming formats, cable operators as an industry segment continue to have the greatest share of linear video accounts. So linear video helps the business case, in the near term, but is challenging over the next decade, as that business will dwindle.

Residential voice is declining for both telcos and cable companies and is not a driving revenue opportunity for either industry segment, and not a reason for building FTTH.

Ignoring for the moment business services and residential mobility, where cable operators also are taking market share, it is a reasonable statement that upgraded fiber to home networks pose a difficult challenge for telcos, as the business case is challenging, in terms of payback. In most markets, the revenue drivers for a residential fixed network are internet access and entertainment video.

And there are many instances where those two services, supplied by a telco, face grueling odds. If cable has 60 percent share of internet access, with networks able to supply 1 Gbps now, and having a glide path to 10 Gbps, then a telco building FTTH is playing catch-up, and no more. How many observers are confident that a telco can ever gain more than 44 percent share in the U.S. residential market, at scale? Perhaps not many.

The number of third parties entering the consumer fixed network business, mostly leading with internet access, slowly is growing. And that means the residential market becomes, in some areas, a three-provider market, further limiting potential telco gains.

Video helps the business case in urban and suburban markets, but always has been a money-loser in rural areas, and in any case is a mature and declining revenue source.

Some might argue that, in the 5G and succeeding eras of mobility, the primary value of a fixed network is backhaul. That might be an overstatement, but is directionally correct. Even cable operators expect wireless backhaul to be an important opportunity.

That is why a wave of asset dispositions, which have had fixed network operators selling fixed network assets, has happened. Most recently, CenturyLink has said it is open to selling the consumer business it operates.

The bottom line is that the market limits the potential for profitable telco investments in FTTH.

All of that sharply limits telco options in the next-generation network area. The business case for FTTH simply might not work, and yet abandoning the business also often is impossible (the assets cannot easily be sold).

All that explains the interest in 5G mobile and fixed wireless access. As mobile substitution for fixed service has cannibalized fixed voice, so the hope is that wireless internet access can become an effective substitute for fixed connections. For AT&T and Verizon, that is the business answer to next-generation fixed networks where the FTTH business case does not work.

For T-Mobile US, fixed wireless is a way to participate in the fixed networks businesses it could not enter as a mobile-only service provider. For cable operators, fixed wireless is an obvious way to enter adjacent markets without full fixed network overbuilds.

Other markets might have more-favorable upside from FTTH. But it is hard to avoid the conclusion that, in a great many portions of the U.S. consumer fixed networks business, cable operators have market share that telcos will be very hard pressed to attack.

Consumer internet access speeds must be boosted, to stay within reach of cable offers, and to maintain the value of their fixed networks. Doing so when FTTH does not offer a payback is the challenge 5G fixed wireless is meant to solve.  

What Has Changed for FTTH?

For more than two decades, U.S. cable operators have won the market share battle with telcos (net new additions) as well as the installed base battle (percentage of total customers). That appears poised to change, with telcos now believed to be possible installed base gainers. 

To accomplish that, telcos also would likely have to win the market share (net new additions) battle. We haven’t seen that in two decades (some might argue telcos never have won the market share battles) but it seems possible for the first time. 

So what has changed? Several things, probably. Some important tier-two telcos that had been capital constrained have now restricted to the point where they can afford to invest in new fiber-to-home facilities where they had not been able to, in the past. 

Tier-one suppliers also arguably have altered options. Verizon, which had largely halted FTTH deployments because of the business model, now sees different returns as a result of fiber deployment to support its 5G small cell deployments. One byproduct is a denser optical transport network that can change the incremental cost to provide FTTH. 

But market share or installed base can change in other ways directly related to that denser fiber transport footprint. In some cases, 5G fixed wireless can allow Verizon to gain share without full FTTH. If the issue is “bandwidth to the home” or “gigabit to the home,” then 5G fixed wireless might work, irrespective of the platform. 

AT&T has been deleveraging, and is the telco with the most room to upgrade its access networks to FTTH. 

source: Standard & Poors 

Lumen Technologies, on the other hand, recently divested itself of about half its total consumer access lines, to concentrate on its denser metro areas. 

It might seem paradoxical that perceptions of return from FTTH investment are higher than once was the case when three mass market services--each with high adoption--were possible with FTTH. With the decline of voice and linear video entertainment revenues, the fixed network business case for consumer services largely rests on internet access. 

Logically that should create a worse business case, as revenue mostly must come from a single lead application. But other parts of the revenue and cost model also are changing. Third party sources of funding sometimes are more lucrative (either from joint builds or bigger government subsidies). 

Divesting linear video reduces revenue, but also cost. Harvesting voice while concentrating on internet service provider operations might in some cases lead to lower operating costs. 

Also, though telcos failed to halt the slide in broadband market share over the last two decades, the growing need for more-symmetrical bandwidth now offers telcos a possible marketplace advantage over cable operators. 

Also, telcos increasingly are building models that rely on broadband for nearly all the financial return from a new FTTH build, based on steadily-improving efficiencies. Telcos with 5G backhaul networks now can leverage those other fiber transport investments to support consumer home broadband investments. 

Expectations about installed base share also help the new payback models. Where telcos once might have held only 30 percent share of the installed base, they now can reasonably expect to eventually take 50 percent share of the installed base, which changes the financial return. 

Up to this point the U.S. FTTH footprint has been rather modest. All together, telco FTTH probably today passes only about 29 percent of U.S. homes. That percentage will grow closer to half of all U.S. homes over the next five years or so. 

That still leaves telcos with a problem: they wil be able to sell FTTH-based gigabit services to only half of U.S. homes. What to do about the rest is the logic behind 5G fixed wireless. 

In 2021, for example, Comcast, the biggest U.S. cable operator, faced an FTTH competitor in less than 30 percent of its footprint. That obviously limits the amount of total share loss Comcast is exposed to, as cable trounces digital subscriber line platforms  in performance. DSL simply is not competitive with cable modem service. 

Then there are the strategic issues. Absent the upgrades to FTTH, can a fixed network service provider reasonably expect to remain in business? Increasingly, the answer is “no.” To the extent that internet access is the paramount driver of fixed network revenue, then FTTH either is installed or the telco faces bankruptcy. 

The argument then is not so much “we will make more money” as it is “we get to stay in business.” 

FTTH is the Platform of the Future, But Might "Always Be"

People often forget that, in the communications business, there is no platform that always is best for every use case. What matters are the particular advantages. In other words, it has proven largely pointless to argue whether mobile or Wi-Fi access is “better.” Both have their contributions to make. 

In the fixed networks business, the belief has been--for many decades--that fiber to the premises is the future of the next-generation fixed network. 

With the caveat that there always is a private interest corresponding to every public policy, one cable TV industry vice president decades ago quipped that “fiber is the technology of the future...and always will be.”

Keep in mind, that was said about 40 years ago. And while North American access platforms have a different pattern than in most parts of the world, 40 years later, hybrid fiber coax platforms have about 70 percent share of the U.S. installed base of broadband connections. 

That creates a huge stranded asset problem for brownfield fiber-to-home deployments. Assuming a new FTTH network is deployed at scale, it might find that up to 70 percent of the assets are not generating broadband revenue. 

To be sure, there is still some amount of voice, but the old copper access network works well enough for that application. Investing capital on FTTH does not necessarily improve user experience, value or features for voice customers. 

For decades, though, there was one clear assumed advantage to deploying FTTH: the ability to sell linear entertainment video. So the basic thinking was that FTTH would allow telcos to hold broadband share while losing voice share and gaining video account share. 

It sort of worked that way until about 2012 for video services.

source: Business Insider 

But the “voice” part of the model never worked well at all, as usage, lines sold and value began to drop in the U.S. market as early as 2000, the peak year for telco access lines and long distance revenue. 

But business cases matter, and in the U.S. market the business case for FTTH, always difficult, has become quite challenged with the dominance of cable operators, and their seeming ability to keep pushing commercial bandwidths ahead faster than FTTH platforms. Already, at least 80 percent of U.S. homes have the ability to buy 1 Gbps internet access service, provided by cable operators. Not even most telco FTTH networks can do that, yet. 

Nor does it seem likely the cable cost advantage can be overcome any time soon, as technologists already are working on ways to boost HFC bandwidths to 10 Gbps or beyond, symmetrically. Sure, FTTH can do that as well, but not at the cost per home that HFC can provide. 

And that leads to telco interest in fixed wireless access, using 4G and 5G. The issue is not whether “fixed wireless can match FTTH” in potential speeds. The issue is whether fixed wireless can create a positive business case in areas where a new FTTH build is not financially feasible. 

Globally, matters can be quite different, as it often seems as though only one nationwide broadband fixed network can be supported. Still, in many other countries a mix of platforms is called for, based on home density. And then there is the matter of how people use the internet. 

By 2020, mobile accounted for more than half of all of Internet access revenue in more than 75 percent of countries, researchers at PwC said early in the year. Some analysts noted mobile Internet access revenues already had surpassed fixed network broadband revenue as early as 2013 or 2014.

That trend is expected to continue. By 2024, consultants at PwC say, mobile revenue will account for 68 percent of global Internet access market revenues. In other words, more than two thirds of all internet access revenue globally will be generated by mobile internet access. 

source: PwC 

FTTH is, in many countries, perhaps always the next-generation platform. In some countries, though, a mix of platforms is likely for decades. In a few countries, FTTH seems to be infeasible for consumer accounts, if deployed by telcos on a ubiquitous basis. Hence the interest in mobile access, or mobile network fixed access.

Co-Investment Changes FTTH Business Model

For a number of reasons, the business model for telco and cable TV fiber to home is changing. A higher degree of government subsidy support; a desire for investment in FTTH facilities as alternative investment and competitive dynamics in the home broadband industry all mean the business case for FTTH improves. 

As one example,Cable One is part of a joint venture with GTCR LLC,  Stephens Capital Partners, The Pritzker Organization and certain members of the management team to build optical fiber to premises networks by Clearwave Fiber.

Clearwave Fiber holds the assets of Cable One’s subsidiary Clearwave Communications and certain fiber assets of Cable One’s subsidiary Hargray Communications. 

At the same time as capital investment requirements are changing, there is a shift in the assumptions about business model. 

In the late 1990s FTTH was seen as the only viable way for telcos to take market share in the linear video subscription business from cable TV operators. So the revenue upside was subscription video and internet access speeds. To be sure, video arguably was seen as the bigger revenue driver, as late 1990s telco FTTH speeds were in the 10 Mbps range. 

Bundling (triple play or dual-play) also was seen at that time as the way to compensate for competition-induced account losses. While telcos or cable each competing across the voice, business customer, internet access and video entertainment markets might have fewer total accounts, revenue per account from triple-play services would compensate. 

source: S&P Global Market Intelligence 

But something else now seems to have changed. A decade ago, independent internet service providers began to attack the market increasingly based on one service: home broadband. To be sure, many independent ISPs tried a dual-play or triple-play approach for a time. 

But nearly all eventually settled on a home broadband-only approach. Since virtually all independent ISPs face both telco and cable TV competitors, the single-product business model makes some concessions on potential revenue that necessarily must be balanced by lower capital investment and operating costs. 

The latest developments are that such tradeoffs are seen as feasible even for incumbent telcos: in other words, the business model increasingly relies on broadband as the foundation, with some contributions from voice. Video (linear or streaming) plays a lesser or no role in revenue assumptions. 

There are other changes. Subsidies have been rising for broadband deployment, and that also changes the capex requirements. Some of the investment in optical fiber also is helped by the denser optical fiber networks necessary to support 5G networks. Essentially, the payback model is bolstered by the ability to defray some optical media costs from mobile service revenue opportunities. 

Also, 5G supports home broadband using the same transmission facilities as does mobile service, often offering a chance for mobile operators to compete in the home broadband business at relatively low incremental cost. That also helps lower the cost of fixed network FTTH as more revenue is wrung from the installed assets. To the extent that higher revenue produces incrementally higher free cash flow, more capital is available to invest in additional FTTH facilities.

The incremental cost of consumer home broadband is lower once a dense trunking network must be put into place to support small cell mobile networks. 

Also, the value of FTTH facilities has changed as rival investors (institutional investors, private equity) view consumer broadband as a legitimate alternative investment. That boosts the equity value of an FTTH network and supplies new sources of investment. 

Also, the cost of FTTH construction has improved steadily over the past few decades. Also, the expected reduction of operating costs from fiber networks, as opposed to copper networks, now is well attested. So there are opex savings. 

FTTH remains a challenging investment, nonetheless. But it is noteworthy that assumptions about the business model now have changed for incumbent and new providers as well. Where it once was thought an FTTH upgrade virtually required revenue from three services, in an increasing number of cases the investment can be justified based on home broadband alone. 

In greater numbers of cases, the primary value of home broadband is supplemented by some revenues from other sources. But where a triple-play might have produced $130 per month to $200 per month revenues, home broadband might produce $50 to $80 a month. 

That projects increasingly are feasible with a $50 monthly revenue target and adoption around 40 percent to 50 percent shows how much the capex and opex assumptions have changed.

Good News, Bad News for Telco FTTH

There is good and bad news in Cincinnati Bell’s latest report on its fiber to home adoption. In the first year of marketing, Cincinnati Bell gets about 30 percent of customers to buy. After about four years of marketing, the company seems to get about 50 percent adoption.

So the good news is that fiber to home internet access seems to compete well with cable modem services, after a few years, in terms of market share. In a two-provider market, the company roughly splits the internet access market with cable operators.

The bad news is that no telco yet has been able to demonstrate that its fiber to home efforts, or fiber plus other access platforms, are able to take market share leadership from cable companies.

source: Cincinnati Bell

In rough terms, the upgrade to fiber to home networks allows a telco to battle back to splitting the market with cable, instead of losing share to cable.

There appears to be additional upside in linear video revenue, though some might question the magnitude of those contributions, long term.

So though there are other ways to monetize such investments, the cautionary note is that even with high-performance FTTH networks in place, about the best any telco has been able to show so far is an ability to split the internet access market with cable.

No telco has shown an ability to dominate that market, after upgrading to FTTH. In the future, the business case could be challenged to a greater extent if new rivals emerge. Independent ISPs and  mobile substitution are the prime examples.

If a new provider is able to gain 20 percent market share, that would limit telco and cable share to a theoretical maximum of 40 percent each. Some ISPs believe they will routinely do better than that, gaining perhaps 30 percent market share. Ting believes it can get as much as 50 percent share.  

Calculating share can be difficult, as these days, “revenue generating units” often are the metric used to derive market share. And RGUs are different from “homes” or “locations.” EPB, the poster child for municipal networks, offers voice, video and internet, and claims 45 percent market share.

But it does so by counting RGUs and comparing that to homes in the service territory. Internet access share is likely closer to 27 percent.

Still, the point is that, in a growing number of consumer markets, there might be three sustainable suppliers, not just two. That will have important ramifications for potential market share.

The larger point is that, in a two-supplier market, FTTH seems capable of allowing a local telco to get as much as half the market for internet access services. That drops in a three-provider market.

FTTH really does help. But how much it can help depends in part on the number of contestants in the market.  

Verizon's Home Broadband Scale Gambit

Though some might criticize the debt implications or the strategy, there is a reason Verizon is pursuing an acquisition of Frontier: it is one way to gain scale in the home broadband market.

Consider that although all telcos trail the two leading cable providers (Comcast and Charter) in national market share (those two firms have at least 63 percent national share, Verizon has just nine percent share compared to AT&T at 23 percent share. 

That is a result of the smaller geographic footprint Verizon has, relative to AT&T, Comcast and Charter. 

ISP	Subscribers (millions)	Market Share (%)
Comcast (Xfinity)	32.1	32.6
Charter (Spectrum)	30.4	30.9
AT&T (Fiber)	22.6	23
Verizon (Fios)	9.2	9.3
Lumen (CenturyLink)	4.8	4.9
Cox	7	7.1
Altice USA	4.7	4.8
Other (including smaller ISPs)	1.6	1.6
Total	98.5	100

U.S. internet service providers compete on a geographic basis and not all providers face all other providers. Comcast and Charter, both cable companies, generally do not compete head to head. Neither do AT&T, Verizon and Lumen Technologies. 

But sheer numbers of homes and other locations passed vary as well, with Comcast and Charter passing the most U.S. homes. 

ISP	Estimated Homes Passed (Millions)
Comcast	60
Charter	55
AT&T	30–35
Verizon	15–20
Lumen	10–15
Frontier	10–15
Altice USA	8–10
Windstream	6–8

ISPs also generally count small business broadband accounts within their “home broadband” totals, as well. 

ISP	Estimated Homes & Small Businesses Passed (Millions)
Comcast	65–70
Charter	60–65
AT&T	40–45
Verizon	20–25
Lumen	15–20
Frontier	12–15
Altice USA	10–12
Windstream	7–9

Also, differences in “homes and businesses” passed by any single ISP’s network long have mattered for assessments of the degree of competition. For example, when looking at telco fiber-to-home competition for cable hybrid fiber coax networks, the actual degree of competition has been shaped by the huge cost of upgrading telco copper access networks to fiber. 

That has limited the actual degree of competition between telcos and cable companies for decades, as it rarely is the case that a given telco has FTTH deployed ubiquitously in all its geographies. 

ISP	FTTH Homes & Small Businesses Passed (Millions)	Total Homes & Small Businesses Passed (Millions)	FTTH as % of Total Passings
AT&T	25–30	40–45	60–67%
Verizon	17–20	20–25	80–90%
Lumen	5–7	15–20	25–35%
Frontier	6–8	12–15	50–53%
Windstream	3–4	7–9	35–45%
Consolidated	1.5–2	4–5	30–40%

Traditionally, the “best” data we have had on the market share positions of cable and telco competitors has come from Verizon areas, as that is were FTTH facilities are most-ubiquitously deployed. And in those areas, Verizon has been able to gain a bit more than 40 percent market share, while the local cable operator has been able to hold on to 45 percent to 55 percent of the market, with other independent providers holding generally single-digit shares but growing. 

In a growing number of markets third-party providers have targeted areas where telco FTTH is not available, and in such areas have generally been able to garner up to 20 percent share. 

In some instances, where a cable company mostly competes with a municipal fiber network, and the local telco has no appreciable residential and small business fiber coverage, the municipal provider tends to get 20 percent to 30 percent market share. 

Provider Type	Estimated Market Share (%)
Cable Company	60–70%
Independent ISP	20–30%
Telco (non-FTTH)	5–15%
Other ISPs	2–5%

The degree of “other ISP” market share is shaped by the coverage area selected by the attacking independent ISP. Generally speaking, such ISPs will choose portions of an incumbent’s territory to operate in, rather than overbuilding an entire city or town, for example. 

As in the case of telco-cable competition, that necessarily restricts the degree of head-to-head competition across an entire market area, and is reflected in the lower take rates we generally see when a cable company competes against any fiber provider that does not cover the whole local market.