Is New Thinking on FTTH Payback Models Required?

There is an increasingly-good argument to be made that take rates determine the payback from any fiber-to-home investment. Traditionally, that meant the percentage of homes passed by the network that had paying customers connected.  

There is an equally-good argument to be made that the payback analysis can no longer be developed solely on the basis of consumer revenues and networks “to the home,” especially when a service provider is supporting both fixed and mobility services. 

That tends to make a shambles of the conventional way of comparing access media and platforms (FTTH, hybrid fiber coax, fixed wireless, digital subscriber line upgrades, satellite). That made sense when the “home” was the driver of payback.

That makes less sense when the fiber distribution network is viewed as necessary for supporting the mobile network and a variety of low-latency use cases. 

Starting with 5G, and presumably intensifying with each coming mobile next-generation network, some of the value is derived from the backhaul network for mobility services. 

Additional revenue might be earned from edge computing, internet of things, “smart” cities,  private networks, and additional small business revenues. Those revenue streams can be wholesale and retail; direct or indirect. 

So the difference is that FTTH payback arguably is determined by the payback from fixed and mobility services (wholesale and retail) sharing use of the same infrastructure. 

Though it might still make sense to evaluate different “last mile” platforms on a fiber-deep distribution network (radio, copper or fiber as the last-mile connection), only fiber is deemed suitable for urban and suburban networks. A greater range of options applies for rural networks. 

This is far more complicated than once was the case, as it involves all revenues from all customer segments (enterprise; small and medium business; consumers); any kind of network (fixed and mobile) and any type of service (internet access, voice, apps and content, wholesale, edge computing, internet of things). 

To be sure, that means payback models might be quite different for integrated operators and mobile-only or fixed-only assets. 

“If the technology penetration rate decreases 60 percent, the cost per subscriber increases 278 percent,” said João Paulo Ribeiro Pereira of the Instituto Politécnico de Bragança, Departamento de Informática e Comunicações in Portugal. “However, if the penetration rate increases 60 percent, the cost per subscriber decreases 39,7 percent.

In other words, the cost of construction and bill of materials arguably no longer determines the payback model, at least in urban and suburban markets. 

It is take rates (penetration) that overwhelmingly shapes returns in such areas. On the other hand, construction arguably continues to dominate the payback model in rural areas. 

Beyond all that, equity value and deployment assumptions also have changed over the last few years, in at least some markets. Aside from the nuts and bolts of a customer payback model, the equity value of access networks has changed as institutional and private equity investors buy up access network assets as an alternative asset for portfolios. 

So FTTH is not only a platform for revenues, it also is a way of creating new equity value. At the same time, there is new thinking about how to leverage  joint ventures for new access infrastructure that trade some ownership for more outside investment in access infrastructure. 

In other words, telcos, cable companies, mobile service providers and independent internet service providers historically have preferred to own their own infrastructure, even in some markets where wholesale is the infrastructure model. 

But there is new thinking about accepting outside investment in exchange for a share of operating profits. 

Also, in some cases, assumptions about levels of government support also have changed, as more money is made available to speed broadband deployment. That effectively lowers investment hurdles and payback assumptions. 

The point is that our traditional ways of evaluating payback from optical fiber investments in access networks are changing. “Fiber to the home” does not quite capture all the value of a fiber-deep distribution network. 

Fiber to the small cell site; fiber to the colocation site; fiber to the enterprise; fiber to the small business and fiber to the home all are parts of the payback analysis. Beyond that, thinking about the financing and ownership mechanisms is changing. 

It might make sense to own less than in the past. It might be sensible to trade some revenue and profit for less exposure to capital investment. 

The takeaway is that our older payback models make less and less sense.

The "Iron Triangle" of Connectivity, App Development and All Infrastructure

There is an adage that goes “Fast, Cheap or Good? Pick Two.” In other words, when developing an app, service or network, one can choose “quick and cheap” at the price of inferior quality and features. 

One can choose “quick and high-quality,” at the forfeiture of “cost” (“cheap”). Or one can choose “high quality and low cost,” but that will not be “quick.”

That arguably also generally applies to access network choices and regulatory frameworks. The obvious example are fiber-to-home networks. With the key caveat that what can be done in a small area is a different challenge than wiring a continent, rapid universal deployment will be costly. 

Alternatives to FTTH might be possible, offering rapid coverage at low or lower cost. But FTTH is virtually never high-quality and low-cost and “accomplished quickly.”

In the 5G realm, the tradeoff might be that a mobile operator can build a coverage network quickly, at lower cost, but at the expense of bandwidth improvement (quality). Or coverage and bandwidth might be attempted, but only at high cost. 

A “low or lower cost” network with “high quality” (lots of bandwidth) might be chosen, but that cannot be done quickly. 

source: Big Fish 

Likewise, most communications regulators believe monopolies are injurious to competition, innovation and investment. Most arguably believe oligopolies are not much better. And yet the degree to which that is true is a bit unclear. 

But the iron triangle also applies to communications policy objectives. Policy frameworks seeking lots of bandwidth and which can be deployed fast are expensive. Frameworks emphasizing high-bandwidth and low cost will take longer to produce results. 

Policies emphasizing good coverage at low cost will sacrifice bandwidth.  

More competition can lead to lower profit margins and hence less ability to make investment, with fewer possible suppliers. 

source: Pyragraph 

Uganda has a mobile duopoly and yet subscriptions keep climbing. In the fixed networks market, while some would argue that the cable operator-telco duopoly is not competitive, others would point to declining prices, heavy investments in bandwidth supply and available speeds as evidence that competition is producing results. 

In the telco world, faster home broadband is nearly synonymous with fiber to the home upgrades. In the U.S. and many other markets, the issue is available bandwidth, not physical media. 

More than 80 percent of U.S. homes can buy gigabit per second internet access if they choose, from the local cable operator. And though U.S. telcos are stepping up their optical fiber access investments, fewer homes are reached by FTTH. 

The point is that even a duopoly is capable of producing robust competition. Consider the U.S. market, where cable TV providers have about 70 percent of the installed base of home broadband accounts. 

The point is that duopoly, oligopoly or even monopoly can produce retail competition. There is room to argue about how much competition, investment or innovation is possible. But connectivity no longer is a “natural monopoly” in terms of retail competition. 

There is a stronger argument for infrastructure monopoly in many markets. And duopoly might be the only realistic outcome in some mobile markets, even if most regulators believe three is the minimum number of mobile firms necessary to promote robust competition. 

And duopolies can produce serious competition. 

According to the Federal Communications Commission, 88 percent of U.S. homes can buy internet access at gigabit speeds, and most of those homes are able to buy from cable TV providers. 

Telco fiber-to-home coverage is about 43 percent of homes, according to the Fiber Broadband Association.  

The NCTA says home broadband speeds have increased 1880 percent over the last decade alone, and sometimes argues gigabit service is available to as much as 80 percent of U.S. homes. 

source: NCTA 

Former FCC staffer George Ford has quipped that, for policymakers, the desired number of competitors is always “one more.” Ford, now Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist, 

The other obvious problem is the capital intensity of communications access networks. That limits the number of viable firms. 

In most countries, “one” is believed to be the viable number of fixed access networks, leaving wholesale as the only option to increase the number of retail providers. Ford has noted that, if the FCC had realized there could be fixed network competition by two facilities-based providers as now exists, it would have declared victory and gone home, so rare an outcome that would have been. 

“In my experience, ‘promoting competition’ is unlikely to have a material effect on actual competition.  In fact, it often has the opposite effect,” says Ford. 

So it is possible to debate whether infrastructure or retail competition produces better outcomes, especially since, in many markets, rival fixed network facilities-based competition is deemed infeasible for financial reasons. 

The mobile markets have emerged as exceptions to the rule, as virtually all markets have had multiple facilities-based competitors. But even there, some argue single wholesale networks have drawbacks, compared to infrastructure competition.  

source: Strategy Analytics 

But we cannot attribute better consumer outcomes--such as declining internet access and data usage costs--solely to competition frameworks, as global costs have dropped no matter what form of regulation is in place. 

Moore’s Law also operates,meaning network infrastructure costs can drop. Moore’s Law also allows commercial use of formerly-unusable resources, such as millimeter wave spectrum. 

All networks, public or private, wide area or local area, now are computer networks, able to take advantage of continual advances in virtualized approaches to building and operating networks. 

The disaggregated and layered approach of the internet also allows innovation to be unbound from gatekeepers. And that innovation includes ways to avoid closed, captive and scarcity-bound features and services. That also pushes prices lower and raises rates of innovation, under any network policy framework. 

The point is that consumer benefits might rely less on the form of competition (single or multiple facilities-based networks) and more on application layer competition. That noted, retail access competition, however provided, arguably still is a requirement for better consumer welfare outcomes.

The iron triangle is a tough constraint for app developers, network infrastructure suppliers or policymakers.

Innovation is Hard; So is Digital Transformation

Innovation, including digital transformation, is hard. Perhaps 70 percent of efforts will fail. “Most of the leaders we surveyed (companies representing 17 countries and 13 industries) reported poor returns on their digital investments,” say Accenture executives Mike Sutcliff,

 Raghav Narsalay and Aarohi Sen. 

“A whopping 73 percent of enterprises failed to provide any business value whatsoever from their digital transformation efforts, according to an Everest Group study last year,” says Peter Bendor-Samuel is CEO of Everest Group, a management consulting and research firm. “Furthermore, 78 percent failed to meet their business objectives.”

Among the reasons for failure is “company culture.” Human beings and business processes must change for DX to be successful. 

source: Capgemini

source: Capgemini

 

source: Capgemini

A Handful of Hyperscale App Providers Drive Global Bandwidth

There is a simple reason why hyperscale app providers now drive global data traffic and build and own their own networks: a handful of firms generate most of the demand. In 2021 just six firms generated 57 percent of global traffic. 

source: Sandvine, IN Forum

These days, voice demand is paltry in relation to content bandwidth--largely video--that flows between hyperscale application provider data centers and internet points of presence where local internet service provider traffic pours onto the backbones. 

In other words, if you know the locations of the hyperscale app provider data centers, you also know the locations between which most data flows over WANs. 

source: Telegeography 

source: Telegeography 

Global Internet Bandwidth Grows 29% in 2021

Global internet bandwidth usage spiked 34 percent from 2019 to 2020 and a further 29 percent in 2021 to 786 Terabits per Second (Tbps), says Sandvine. 

“We expect the average household to use as much as 650  gigabytes to 750 gigabytes per month by the end of 2021,” Sandvine notes. Video and game content is fueling power user behavior. 

“In fixed network data, we are seeing an increase in 1 terabyte per month power users,” Sandvine says. “The heaviest users spent time on XBOX Live Video, Microsoft Outlook 365, Netflix, PS4 Games downloads, Discord, Twitch, and BitTorrent.”

And the “big six” share of traffic is growing.

source: Sandvine  

What You Do When it Was -7 Degrees Fahrenheit Last Night

This is one of the cats who regularly visits my backyard. I'm not sure whether it is a stray or abandoned cat, but am certain he is not feral (he has interacted with humans in the past; feral cats grew up "wild" with no close human interaction). He could be owned by a neighbor, but allowed to roam outdoors at night, or when it is quite cold, something I would not do. 

I always keep water and food out there, just in case, plus a cat shelter. I've done so for decades, everywhere I've lived, just in case. He's huddling up in the early morning sunshine trying to get warm. 

 

Analysts Signal Belief that Home Broadband is a Material Revenue Driver for T-Mobile

There were lots of questions from equity analysts about fixed wireless on T-Mobile's fourth quarter 2021 earnings call. That is evidence that home broadband is expected by analysts to become a material contributor to T-Mobile's revenue and earnings. 

Perhaps most surprising is the revelation that “the majority of our customers come from suburban and urban markets,” according to Dow Draper, T-Mobile EVP. T-Mobile--and most observers--might have guessed adoption would be driven by rural account additions.

Will FTTH Payback Always be Led by Internet Access Revenues?

Retail mobile and fixed network connectivity providers who sell directly to consumers arguably face some issues related to average revenue per account and cost per account. Whether in the mobile or fixed realms, mobile revenue per account seems to range from a few dollars a month up to $41 per month. 

source: S&P Global Market Intelligence 

Against that must be balanced the cost of infrastructure, operating and marketing costs plus all other overhead, ranging from personnel benefits to debt service and taxes. While not minor, network infrastructure costs are only part of the cost model. 

Some have claimed 5G can reach break even in a five years or less. But that likely rests on excluding all other business costs except the network infrastructure. 5G capex per subscriber might range between $100 and $450 per year, during the network build period. 

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. 

Looking at internet access prices using the purchasing power parity method, developed nation prices are around $35 to $40 a month. In absolute terms, developed nation prices are less than $30 a month. 

That PPP normalization technique compares prices to gross national income per person. There are methodological issues when doing so, one can argue. 

Gross national income is not household income, and per-capita measures might not always be the best way to compare prices, income or other metrics. But at a high level, measuring prices as a percentage of income provides some relative measure of affordability. 

Generally speaking, broadband prices are dropping in developing countries, where the product is most expensive, and primarily because mobile internet access prices are dropping. 

source: ITU 

Looking at mobile voice and data prices, as a percentage of gross national income per person, one easily can see that very-high prices in lesser-developed countries skew global indices. In some developed markets, prices are less than one percent of GNI (without adjusting for purchasing power parity). 

source: ITU 

The unadjusted 2019 average price of a broadband internet access connection--globally--was $72..92, down $0.12 from 2017 levels, according to comparison site Cable. Other comparisons say the average global price for a fixed connection is $67 a month. 

Looking at 95 countries globally with internet access speeds of at least 60 Mbps, U.S. prices were $62.74 a month, with the highest price being $100.42 in the United Arab Emirates and the lowest price being $4.88 in the Ukraine. 

Another study by Deutsche Bank, looking at cities in a number of countries, with a modest 8 Mbps rate, found prices ranging between $50 to $52 a month. 

The point is that network infrastructure investment now seems to hinge on revenue--depending on how we count it--that could range from a few dollars a month up to perhaps $72 a month. 

Most of the market--with prices adjusted for currency and living standards--seems to be $40 a month or less. 

That is challenging for fixed network operators deploying fiber to the home, if less a challenge for mobile operators, whose networks cost less, per customer or passing. 

Among countries that are members of the Organization for Economic Cooperation and development, prices prices in 2016 seemed to cluster around $40 per month. 

A more recent study confirmed those figures. 

The take away is that FTTH payback--in many markets--cannot rest solely on home broadband revenues. Other revenue drivers likely must also contribute. Right now, that includes backhaul for 5G and future mobile networks, internet of things, edge computing, internet of things and applications that are owned by the connectivity providers. 

Over time, those other sources might be even more important. Payback models of several decades ago assumed significant contributions from sources such as voice and video entertainment that have declined steadily. 

The net change is a revenue-per-account ranging from $130 per month to $200 a month to the present $40 to $50 a month level. FTTH costs per passing have gotten better, but probably not enough to support revenue as low as $40 a month or even $50 a month. 

Other value must be involved, or the payback model is not there. 

Are Mobile-Plus-Fixed Bundles on the Verge of Marketing Push?

If a projection by the European Telecom Network Operators’ Association proves to be accurate, and if it is mirrored in some other markets, a growing portion of the consumer market will be amenable to buying both mobile and fixed network services as a bundle. 

Basically, a growing percentage of European customers are doing so. 

source: ETNO

How Long is the FTTH Payback Cycle?

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. 

source: Analysys Mason 

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.

In Honor of Freedom Fighters Everywhere

Did Not See This Coming

This I did not see coming.  AT&T will spin off AT&T’s interest in WarnerMedia  to AT&T shareholders. I had assumed AT&T would retain its 71 percent interest in WarnerMedia. 

In doing so, AT&T will shrink--in terms of equity value--to the fourth-biggest connectivity firm, behind Verizon, Comcast and T-Mobile. 

I was wrong about AT&T’s “exit” from content. The characterization of AT&T’s merging of WarnerMedia assets with Discovery has been called a strategy shift that gets AT&T out of the content business. I had been characterizing it as AT&T monetizing part of the asset, since it still owned 71 percent. 

But by spinning out the interest in a tax-free transaction--along with the shifting of DirecTV to a private equity joint venture--AT&T really is getting out of the content business. 

Should AT&T also decide to spin out its interest in DirecTV, it will shrink even further, in terms of equity value. 

It is at least the second big strategic shift we have seen AT&T make over the past three decades. Each time, there was a retreat, but arguably because the debt load associated with the strategic moves was burdensome. 

Consider AT&T’s big move into cable TV in the mid-1990s, a time when the long distance provider was seeking a way to reenter the local access business with its own facilities. The thinking at that time was that a largely one-way cable TV plant could be upgraded to become full communications facilities, supporting home broadband and voice. 

Given that development by virtually all cable TV companies in North America and Europe, the thinking was sound. 

AT&T also made its first investment in  DirecTV in 1996, owned and spun off Liberty Media. 

Beside TCI, at that point the largest U.S. cable company, AT&T also bought  Teleport Communications Group, a $500-million-a-year local business phone company, for $13.3 billion; MetroNet, a Canadian phone system, for $7 billion; and the IBM Global Network, which carries data traffic, for $5 billion. He also signed a joint venture with Time Warner ( to carry phone calls over the entertainment conglomerate's cable TV systems, and with British Telecom to serve multinationals overseas. 

But the debt burden was too high and AT&T reversed course in 2004 and sold most of those assets. AT&T Broadband (the former TCI and US West Broadband assets) were sold to Comcast, making that firm the biggest U.S. cable TV company. 

By 2005 AT&T itself was acquired by SBC Communications, which promptly rebranded itself AT&T. 

AT&T's move into content with the full acquisition of DirecTV and Time Warner content assets was the second big diversification move AT&T has attempted since the mid-1990s. 

AT&T spent about $170 billion since 2015, including taking on new debt, to transform itself into a media conglomerate. 

By spinning out WarnerMedia, AT&T will shrink in equity value to about $130 billion. That is shocking in some ways. Verizon is valued at about  $232 billion, Comcast at $262 billion and T-Mobile at $175 billion.

Beyond all that, one wonders what big tier-one carriers are going to do to keep revenue growing, given the pressures on their core businesses, and especially if they decide to retrench on their core businesses. 

Growth rates are low and average revenue per user or account is flat to dropping. 

source: Statista 

Especially important is mobile data ARPU, as mobility drives global revenues, while mobile internet access drives revenue growth. 

source: Strategy Analytics

The declining ARPU poses revenue growth constraints in any market where subscriber penetration is close to saturation (every customer who wants to have a mobile account already has one). 

 

source: Telefonica 

And falling ARPU is a trend in both mobile and fixed network domains, though some hope the declines in mobile ARPU can be arrested. 

source: Researchgate 

Still, some think it is possible that revenue in the mobile industry could have peaked in 2021. That might be unduly pessimistic. Still, many expect flattish global revenue, going forward. 

source: Statista

The strategy implications of another AT&T retreat from diversification are basically the fundamental problems the industry has been dealing with for some time. Where can growth be found, especially if one assumes service providers will largely stick to connectivity services?

Perhaps the better way to characterize the issue is to ask “where can growth be found within the connectivity realm at a level high enough to stay ahead of inflation?” Perhaps we ought to simply acknowledge that the public communications business remains a slow-growth industry that is challenged by disruptors of many sorts. 

Perhaps “growth” needs to be framed in a modest way: enough revenue growth to replace lost revenues from declining product segments while staying ahead of inflation.