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?

Telco to "Techco?"

For a couple of decades now, executives in the connectivity business have expressed concerns about competing with the likes of Google or other hyperscale app and content providers. What that meant is complicated. On one level, it meant the need to “move faster” or “innovate faster.” 

But in addition to an up-tempo business culture, “competing with Google” sometimes was more tangible: Google was beginning to compete directly with connectivity providers in the area of products: voice services, mobile services, home broadband. 

These days that same concern often is said to be an instance of “telcos becoming techcos.” And that is complicated as well. 

Many telcos--or those who advise and sell to them--say telcos need to become techcos. So what does that mean? At least in part, the earlier concern about “move fast” culture remains. But some also would add that a techco uses modern computing architectures and practices. “Cloud native” provides one example. 

But there are other possible meanings, as well. 

At least as outlined by Mark Newman, Technotree chief analyst and Dean Ramsay, principal analyst, there are two key implications: a culture shift and a business model.

The former is more subjective: telco organizations need to operate “digitally.” The latter is harder: can telcos really change their business models; the ways they earn revenue; their customers and value propositions?

source: TM Forum

It might be easier to describe the desired cultural or technology changes, even without a change in business model. Digital touchpoints; higher research and development spending; use of native cloud computing; a developer mindset and data-driven product development.

Most of us might agree that doing such things is good, but does not necessarily mean telcos become something else. 

The key to possible business model changes comes specifically with the notion that telcos can become “platforms.” And even that overused term is subject to huge differences of meaning. Some use the classic “computing” definition that a platform is “hardware or software that other software can run on.”

Think “operating system” or even containers, program application interfaces, languages or X as a service as examples. In that sense, telcos might hope to become “techcos” by advancing their capabilities as application enablers. 

There is a tougher definition, though. A platform business model essentially involves becoming an exchange or marketplace, more than remaining a direct supplier of some essential input in the value chain. It is, in short, to function as a matchmaker. That is a different business model entirely.

For most of history, most businesses have used a pipe model, creating and then selling products to buyers. 

The platform facilitates selling and buying. A pipe business focuses more on efficiency in its value chain, where a platform focuses more on orchestrating interactions between members. 

The platform allows participants in the exchange to find each other. 

Platforms are built on resource orchestration; pipes are built on resource control. Value quite often comes from the contributions made by community members rather than ownership or control of scarce inputs vertically integrated by a supplier. 

In other words, using a “computer function” definition of “platform” implies one set of changes; using the “business model” definition is something else entirely. 

The point is that as useful as the phrase “we are not a telco; we are a techco” might be, it is marketing jargon. “Being digital” or “moving fast” or “being cloud native” or “boosting research and development” arguably are cultural changes many businesses can benefit from. 

It is not so clear that such changes (equivalent perhaps to the change from analog to digital) necessarily change a business model, though they might often improve the existing model. 

As helpful as it should be to adapt to native cloud, developer-friendly applications and networks, use data effectively or boost research or development, none of those attributes or activities necessarily changes the business model. 

If “becoming a techco” means lower operating costs; lower capital investment; faster product development or happier customers, that is a good thing, to be sure. Such changes can help ensure that a business or industry is sustainable. 

The change to “techco” does not necessarily boost the equity valuation of a “telco,” however. To accomplish that, a “telco” would have to structurally boost its revenue growth rates to gain a higher valuation; become a supplier of products with a higher price-to-earnings profile, higher profit margins or business moats. 

What would be more relevant, then, is the ability of the “change from telco to techco” to serve new types of customers; create new and different revenue models; develop higher-value roles and products or add new roles  “telcos” can perform in the value chain or ecosystem. 

That is the profound meaning some of us would say “techco” represents, if it can be achieved. To what extent can “telcos” earn lots of money--perhaps most of their money--from acting as a marketplace, rather than as creators and sellers of products built around connectivity?

To be sure, if “becoming a techco” has other intermediate value, such as boosting revenues and profits while reducing costs and speeding new product creation, the process would still have value. 

It would perhaps be the business model equivalent of the transition from analog to digital processes overall. That is important, but does not transform a telco into something else, which is what all the verbiage about “techco” implies. 

It is too early to assess whether “techco” is simply a change in marketing hype or something more profound. 

Inelastic Pricing; Exponential Usage is Core ISP Business Model Problem

These two charts explain, in a nutshell, the business model problem faced by mobile service providers. In the U.S. market, for example, data consumption--and therefore capacity--grows exponentially. That means ever-growing investment in facilities. 

source: CTIA

Service revenue, on the other hand, does not grow much, if at all. On an inflation-adjusted basis, U.S. mobile subscription prices have generally been flat for the past decade or more. 

source: in2013dollars.com  

Access provider revenue sources are multiple: business and consumer; flat-ate and usage-based products; base and value-added components. But revenue growth is driven by data usage. And relatively little of that usage is directly usage based. 

To be sure, “buckets of data” are somewhat related to usage, at least in the mobile segment of the business. But in the fixed networks business, charging tends to be usage insensitive, with pricing variability based on downstream speed, not consumption. 

And that, in a nutshell, illustrates the core problem for access providers: flat revenue and ever-growing capacity requirements.

History Suggests Web3 User-Generated Content Monetization Upside is Limited

For decades, in various forms, advocates have touted the enabling of a creator economy that allows individuals to monetize their work. Much of that attention has been bandied about since the time we began talking about user-generated content and social media, which is to say decades. 

source: The Business Model Analyst

 

A newer variation on that theme is the sharing economy, where latent assets are monetized by turning consumers into producers. That might include ride sharing services, lodging services, or even e-commerce sites such as eBay.

Some might say there also are analogies to e-commerce retailers such as Amazon, which connects buyers and sellers.

The latest argument is Web3, which supposedly will enable content creators or asset owners to monetize their own assets and work securely and easily. 

All that sounds fine, but scale matters in any business. The themes of radical decentralization and participation have been part of the internet ethos since the beginning. But commercial activities supported by, or enabled by the internet, require scale. 

Sometimes platforms win even as individuals win. But few individuals will ever attain mass influence or business scale. On social networks, for example, everyone has the right to speak. But what matters more is who gets an audience. Really-big influencers are few and far between. 

One might therefore argue that even if some Web3 tools and platforms succeed, none of those tools will change the economics of attention very much. Having the ability to publish might be ubiquitous. Garnering an audience is really the issue. And that is much harder.

Will Interconnection Fee Regime Change to Include All Traffic Sources?

“All segments of the internet ecosystem should have the opportunity to make fair returns in a competitive marketplace,” says the GSMA. Translation: a few hyperscale app providers who represent a majority of the traffic on ISP networks should pay interconnection fees as do telcos. 

The basic interconnection payment principle is that terminating traffic uses network resources, and receiving networks are therefore entitled to compensation. The idea is fundamentally that traffic sources (sending networks) owe money to traffic sinks (receiving networks). 

source: Researchgate 

What does this remind you of? Former SBC chairman Ed Whitacre said in 2005, referring to VoIP providers: “Now what they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it.”By the end of the year SBC had completed its acquisition of AT&T. 

“So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using,” he said. 

Separately, Whitacre also said “Nobody gets a free ride, that’s all.” Also, he said “I think the content providers should be paying  for the use of the network.” 

Nearly two decades later, it appears app provider payments to telcos for use of access networks might expand from South Korea to Europe and then possibly elsewhere. 

One needs patience in the global connectivity business. Some developments take decades to reach fruition, whether that is artificial intelligence, the metaverse, cloud computing, the end of network neutrality or replacement of copper access with fiber facilities.

Are Disaggregated or Vertically Integrated Models Ahead for "Telecom?"

One unknown about private equity investments in digital infrastructure is who winds up owning those assets. The PE business model entails selling assets after they have been restructured in some way that boosts the financial value of the assets. 

In principle, buyers could be operators of digital infrastructure businesses, such as mobile operators, bigger data centers, other connectivity providers or even other investment entities. Institutional investors, for example, might be attracted to the stability of long-term cash flows from assets that are complementary to other asset classes. 

source: CFA Institute 

Private equity, almost by definition, involves “fix and flip,” as returns are earned only when assets are sold. In that sense, PE operates as does venture capital, where returns are earned only when assets are sold. 

But none of that suggests any particular preordained form of exit. Whether public or private sales happen, assets often are sold to operating rather than financial buyers. Smaller data centers are acquired by larger data centers; smaller fiber networks are bought by larger networks; smaller tower networks are purchased by larger tower operators and retail internet service providers are purchased by larger ISPs. 

But assets might also be purchased on a longer-term basis by financial entities such as pension funds, more interested in predictable cash flows than operations, per se. The pattern of purchases can inform us whether something fundamental in the business model is changing. 

Among the bigger potential changes is a shift from monolithic, vertically-integrated service provider models to more loosely-coupled models used in the computing industry. Wholesale access network regimes and mobile virtual network operator models provide early examples, as do wholesale tower companies. 

Vodafone Portugal, for example, is buying Llorca JVCO Limited, parent company of MasMovil.

MasMovil was taken over by private equity funds Providence, Cinven and KKR two years ago, so those assets might return to service provider ownership. 

In a typical PE deal, an investment manager (the general partner, or GP) pools money from investors (limited partners, or LPs) to purchase an operating company. After a certain number of years, the PE fund exits its stake from the company by selling it in either the public or the private market. 

“Who” the buyers are matters in terms of industry structure. It matters whether business models are wholesale or retail, and whether ownership patterns are relatively short term or long term. Wholesale PE assets might be sold to new owners who operate using wholesale models (business to business), selling only to other businesses in the ecosystem (such as radio sites for mobile operators). 

Similarly, PE assets might be sold to wholesale-focused providers of internet access and other communication services. That is a different long-term model than if assets are sold to a retail-focused service provider using an integrated model (owning both infra and supplying services). 

All that matters since the decisions move the industry more in the direction of a disaggregated model (where roles are separated) or maintain the traditional integrated model (where roles are combined). 

In a broad sense, digital infra ownership models might then range from a “computing” model (almost everything separated into layers or functions) to a traditional “telco” model (all essential elements are vertically integrated). 

Where all the PE assets ultimately wind up will tell us quite a lot about the future direction of digital infra. 

The Willie Sutton Rule and Taxes on App Providers to Support Access Networks

Some might be tempted to argue that efforts to add application providers to funding of access networks is bandied about as an example of the Willie Sutton rule: that's where the money is. 

Willie Sutton famously was asked why he robbed banks. Though untrue, he is said to have responded “because that is where the money is.” 

That has led to the Willie Sutton rule, which is that, when trying to solve a problem or gain an outcome, it is best to choose the most-obvious route. 

source: Market Business News 

For a variety of reasons, ranging from competition to the economics of bandwidth growth and charging for consumption, the internet access business model is strained. In some regions, government regulations also play a part, as in Europe, where regulators have forced price reductions on service providers in various ways. 

For regulators and internet service providers, finding new ways to fund infrastructure is simply an application of the Willie Sutton Rule: take the easiest route to solving the problem.

Raising prices on business and consumer users seems to them not to be the easiest route. Tying consumption to prices also seems not to be the easiest route. Convincing the government to levy taxes on some app providers is an application of the Willie Sutton Rule.

Genie's Coming Out of the Bottle: Net Neutrality is Dead

Communications policymakers are about to let the genie out of the bottle. Once they feared the possible impact of internet service providers charging some app providers for using their networks. That gave us network neutrality. 

Now, some appear more worried about a few hyperscale app providers, to the extent that they are willing to gut network neutrality entirely. 

It is hard to know just what else might also change. As with any tax, the firms affected by the tax will not “pay” it. Customers, shareholders or business partners will do so. The only question is which sets of stakeholders see higher costs. 

And, as with any tax, once the principle is established, other sets of payees might emerge later. And tax rates will tend to grow. 

But network neutrality will be an early casualty. 

One might well argue the whole net neutrality policy was wrong from the beginning. We may someday look back and argue the “sending party pays” policies for app providers were equally wrong. 

Some might argue that new taxes on a few hyperscalers shed more light on broken business models of some ISPs, in some regions. Almost always, such taxes bear the mark of attempted industrial policy as well: efforts to protect domestic suppliers from foreign suppliers. 

Ironically, many of the same people and policymakers who touted the value of network neutrality now are appearing to kill network neutrality. Net neutrality was supposed to protect app providers from internet service providers. 

The overturning of net neutrality will happen to protect ISPs from hyperscalers. Never was it more clear that every act of public policy has private consequences; winners and losers. 

The new policies--similar to taxes levied in South Korea--would charge fees on a few hyperscale app and content providers, and represents a shift in funding of universal service and access networks in general.

Basically, customers and taxpayers have funded universal service and, by extension, universal service. For the most part, customers have paid the costs of the access networks. The new policies proposed for EU countries would add taxation of a few large app providers to that mix. 

This will kill the logic behind network neutrality. Once governments accept the principle that the big providers of apps ISP customers use must pay to use the access networks, the door is open to charge other app providers. 

The door is open to effectively subsidize some apps and not others; to allow some apps expedited access or higher quality of service, as has been true for business grade services, even where network neutrality rules are applied. 

It is difficult to see all the potential ramifications. Once the notion of taxing traffic sources gains traction, how might other business practices change? And what traffic sources might be taxed next? Large data centers? Content delivery and edge network providers? 

Will peering relationships return to the older transit model, at least where traffic imbalances exist? 

The debate over how to fund access networks, as framed by some policymakers and connectivity providers, relies on how access customers use those networks. The argument is that a disproportionate share of traffic, and therefore demand for capacity investments, is driven by a handful of big content and app providers. 

But the list of “traffic sources” is larger than that. The South Korean and proposed EU regulations distinguish between traffic sources and traffic sinks (senders and receivers). In pre-internet days, that traffic was considered to be voice traffic between telcos. At the end of the true, firms would “true up” payments to cover any unequal traffic flows. 

The new principles essentially apply that same sort of logic to some traffic sources. But if “sources” are broadened, why would the category of sources not be later broadened further?

It is a novel argument, in the area of communications regulation. Business partners (other networks) have been revenue contributors when other networks terminate their voice traffic, for example. 

But some point to South Korea as an example of cost-sharing mechanisms applied to hyperscale app providers.

South Korean internet service providers levy fees on content providers representing more than one percent of access network traffic or have one million or more users. Fees amount to roughly $20/terabyte ($0.02/GB).

Some might argue it is inevitable that European connectivity providers will get government sanction to levy fees on a few hyperscale app and content providers as a matter of industrial policy and faltering economics. The measures are protectionist in that all the proposed app payers are based in the United States. 

Opponents--especially the hyperscalers--view it as an internet app tax. It arguably is all of the above. 

Yet others might note that such a policy undermines the argument for network neutrality regulations, at its core. The fundamental argument for net neutrality was to prevent unequal treatment of bits, no matter who the owner. 

Can Lumen Increase Consumer FTTH by 10X?

Lumen Technologies is expanding its fiber to home expansion activity, expecting to boost the availability of fiber-to-premises beyond the 27 percent of homes it already supports.  With the caveat that Lumen’s future success rests more with its enterprise portfolio than its consumer broadband business (all mass markets revenue is about 25 percent of total), the fiber upgrades should boost subscription rates. 

Where the fiber access network gets about 27 percent adoption, the copper access network gets about 14 percent take rates. In other words, FTTH gets almost double the adoption of the copper access product, with FTTH average revenue per account of about $59 a month. 

source: Lumen 

In principle, Lumen should be able to gain a price advantage over its key cable TV competitors, at least if most customers on all the networks buy the advertised products at the advertised prices (ignoring promotional or bundle pricing). Whether that is the case in practice is far from clear. 

source: Lumen 

Nor is it always completely clear that 5G and 4G mobile networks are outclassed to the point that they cannot gain significant market share. The early evidence suggests that a significant portion of the consumer market is content with lower-speed service (up to 200 Mbps), and will buy a fixed wireless service. That value segment could represent about 33 percent of the present market. 

As always, that value segment will be offered higher speeds over time, for about the same price (less than $50 a month). 

Some of us would argue that the real advantage over cable will lie in symmetrical broadband features, not price per bit or downstream speed. 

The issue is how fast cable companies will move to boost upstream speeds; how fast Lumen can upgrade its home broadband access facilities and how fast both Lumen and the cable firms can boost downstream speeds. 

Of these three, the first two are likely going to be crucial, as the salient performance advantage Lumen will be able to claim, once facilities are upgraded to fiber, is upstream speed. Lumen believes it will be able to build the network for $1,000 per passing or less, with incremental capital required to activate each customer location. 

The issue then will become the penetration rate (customer adoption rate): can Lumen relatively quickly boost its customer share from 27 percent up closer to 40 percent? Possibly equally important, can Lumen get a higher share of the performance-oriented segment of the market, willing to pay more? 

Much could hinge on whether Lumen can hit its own goal of upgrading to a total of about 12 million FTTH  locations over the next six years, at the expected capital investment cost, at the expected take rate.

Shift from Multicast to Unicast Underlies Access Network Economics

The debate over how to fund access networks, as framed by some policymakers and connectivity providers, relies on how access customers use those networks. The argument is that a disproportionate share of traffic, and therefore demand for capacity investments, is driven by a handful of big content and app providers. 

It is a novel argument, in the area of communications regulation. Business partners (other networks) have been revenue contributors when other networks terminate their voice traffic, for example. 

But some point to South Korea as an example of cost-sharing mechanisms applied to hyperscale app providers.

South Korean internet service providers levy fees on content providers representing more than one percent of access network traffic or have one million or more users. Fees amount to roughly $20/terabyte ($0.02/GB).

The principle is analogous to the bilateral agreements access providers have with all others: when a traffic source uses a traffic sink (sender and receiver), network resources are used, so compensation is due. 

Such agreements, in the past, have been limited to access provider networks. What is novel in South Korea is the notion that some application sources are equivalent to other historic traffic sources: they generate remote traffic terminated on a local network. 

So far, such claims are not officially bilateral, which is how prior arrangements have worked. The South Korean model is sender pays, similar to a “calling party pays” model. 

Those of you with long memories will recall how the vested interests play out in any such bilateral agreements when there is an imbalance of traffic. Any payment mechanisms based on sender pays (calling party pays) benefit small net sinks and penalize large net sources. 

In other words, if a network terminates lots of traffic, it gains revenue. Large traffic generators (sources) incur substantial operating costs. 

Of course, as with all such matters, it is complicated. There are domestic content implications and industrial policy interests. In some quarters, such rules might be part of other strategies to protect and promote domestic suppliers against foreign suppliers. 

At the level of network engineering, the imbalances and costs are a direct result of choices about network architectures, namely the shift of content delivery from broadcast or multicast to unicast or “on demand” delivery. 

This is a matter of physics. Some networks are optimized for multicast (broadcast). Others are optimized for on-demand and unicast. Satellite networks, TV and radio broadcast networks are optimized for multicast: one copy to millions of recipients. 

Unicast networks (the internet, voice networks) are optimized to support one-to-one sessions. 

So what happens when we shift broadcast traffic (multicast) to unicast and on-demand delivery is that we change the economics. In place of bandwidth-efficient delivery (multicast or broadcast), we substitute bandwidth “inefficient” delivery.

In place of “one message, millions of receivers” we shift to “millions of messages, millions of recipients.” Instead of launching one copy of a TV show--send to millions of recipients-- we launch millions of copies  to individual recipients. 

Bandwidth demand grows to match. If a multicast event requires X bandwidth, then one million copies of that same event requires 1,000,000X. Yes, six orders of magnitude more bandwidth is needed. 

There are lots of other implications. 

Universal service funding in the United States is based on a tax on voice usage and voice lines. You might argue that made lots of sense in prior eras where voice was the service to be subsidized. 

It makes less sense in the internet era, when broadband internet access is the service governments wish to subsidize. Also, it seems illogical to tax a declining service (voice) to support the “now-essential” service (internet access). 

The point is that what some call “cost recovery” and others might call a “tax” is part of a horribly complicated shift in how networks are designed and used.

Home Broadband Costs Keep Falling

In the twelve months to the close of the second quarter of  2022, global fixed-line home broadband subscribers saw their average monthly charges decrease by four percent on copper, cable and fiber-to-home based tariffs, says Point Topic.

source: Point Topic 

Across the three technologies the average bandwidth increased by 22 percent year-on-year. 

source: Point Topic 

Still, the typical cost of each megabit-per-second unit of capacity was markedly lower on hybrid fiber coax and fiber to home networks, compared to slower copper-access networks. In substantial part, that is because of the vast difference in capacity between copper and other networks. 

As speed climbs, cost-per-bit falls.