FTTH Payback Models Have Changed

Larger U.S. internet service providers using fiber-to-home platforms sometimes continue to face an excruciatingly difficult business case for such investments. Consider Lumen Technologies, which has been relatively slow to upgrade copper access to FTTH. Lumen says average revenue per user (account) for new fiber connections is $59 a month. 

source: Lumen Technologies 

If average FTTH capex is about $1,000 per passing, and take rates are about 40 percent, then capex per account is about $2500. At $59 a month revenue, annual proceeds are about $710 per account.

That can make for a long payback cycle, which is why assets are being purchased by more-patient investors such as private equity, pension funds and other institutional investors. Such investors buy access assets as an alternative investment that produces predictable cash flow and offers some diversification from other asset classes. 

Recent presentations BY Frontier Communications also have shown fiber-to-home home broadband average revenue per user of about $63. 

source: Frontier Communications 

That is lower gross revenue than many had expected three decades ago. Where a triple-play bundle might have produced $130 per month to $200 per month revenues, home broadband might produce $50 to $80 a month. 

With the shrinkage of both fixed network voice revenues and entertainment video, ISPs increasingly must build their revenue models on home broadband. 

And payback models have changed. Increasingly, it seems, capex costs are not the most-important element of such models. Instead, take rates matter much more. Customer density and competitive conditions still matter, but government subsidies and expected equity value increases also are a factor. 

The former aids the investment cost; the latter increases the total expected return by increasing exit multiples or exit prices. 

That new FTTH projects increasingly are feasible with a $50 to $60 monthly revenue target and adoption around 40 percent to 50 percent shows how much the capex and opex assumptions have changed over the past three decades. 

Of course, some ISPs are able to justify the dense fiber networks by including the benefits of fiber to support cell sites and business customers. Government subsidies also help. 

Nor are profit margins in home broadband especially high. AT&T profit margins for new broadband builds are said to produce profit margins “in the mid- to upper teens,” AT&T has said. 

Such revenue prospects are one reason why co-investment has grown in popularity. If expected revenue is at such levels, a reduction in capital investment burdens is necessary.

Innovation Takes Time, Be Patient

Anybody who expected early 5G to yield massive upside in the form of innovative use cases and value has not been paying attention to history. Since 3G, promised futuristic applications and use cases have inevitably disappointed, in the short term. 

In part, that is because some observers mistakenly believe complicated new ecosystems can be developed rapidly to match the features enabled by the new next-generation mobile platform. That is never the case. 

Consider the analogy of information technology advances and the harnessing of such innovations by enterprises. There always has been a lag between technology availability and the retooling of business processes to take advantage of those advances. 

Many innovations expected during the 3G era did not happen until 4G. Some 4G innovations might not appear until 5G is near the end of its adoption cycle. The point is that it takes time to create the ubiquitous networks that allow application developers to incorporate the new capabilities into their products and for users to figure out how to take advantage of the changes. 

Non-manufacturing productivity, in particular, is hard to measure, and has shown relative insensitivity to IT adoption.

source: MIT

Construction of the new networks also takes time, especially in continent-sized countries. It easily can take three years to cover sufficient potential users so that app developers have a critical mass of users and customers. 

And that is just the start. Once a baseline of performance is created, the task of creating new use cases and revenue models can begin. Phone-based ride hailing did develop during the 4G era. 

But that was built on ubiquity of mapping and turn-by-turn directions, payment methods and other innovations such as social media and messaging.

Support for mobile entertainment video also flourished in 4G, built on the advent of ubiquitous streaming platforms. But that required new services to be built, content being assembled and revenue models created. 

The lag between technology introduction and new use cases is likely just as clear for business use cases. 

The productivity paradox remains the clearest example of the lag time. Most of us assume that higher investment and use of technology improves productivity. That might not be true, or true only under some circumstances. 

Investing in more information technology has often and consistently failed to boost productivity.  Others would argue the gains are there; just hard to measure.  There is evidence to support either conclusion.

Most of us likely assume quality broadband “must” boost productivity. Except when it does not. The consensus view on broadband access for business is that it leads to higher productivity. 

But a study by Ireland’s Economic and Social Research Institute finds “small positive associations between broadband and firms’ productivity levels, none of these effects are statistically significant.”

“We also find no significant effect looking across all service sector firms taken together,” ESRI notes. “These results are consistent with those of other recent research that suggests the benefits of broadband for productivity depend heavily upon sectoral and firm characteristics rather than representing a generalised effect.”

“Overall, it seems that the benefits of broadband to particular local areas may vary substantially depending upon the sectoral mix of local firms and the availability of related inputs such as highly educated labour and appropriate management,” says ESRI.

Before investment in IT became widespread, the expected return on investment in terms of productivity was three percent to four percent, in line with what was seen in mechanization and automation of the farm and factory sectors.

When IT was applied over two decades from 1970 to 1990, the normal return on investment was only one percent.

This productivity paradox is not new. Information technology investments did not measurably help improve white collar job productivity for decades. In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

Some now argue there is a lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge.

Work from home trends were catalyzed by the pandemic, to be sure. Many underlying rates of change were accelerated. But the underlying remote work trends were there for decades, and always have been expected to grow sharply. 

Whether that is good, bad or indifferent for productivity remains to be seen. The Solow productivity paradox suggests that applied technology can boost--or lower--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative. 

All of that should always temper our expectations. 5G is nowhere near delivering change. It takes time.

Mobile Innovations Often Fail to Arrive as Predicted

Exponential technology change never is matched by exponential human and culture change, which means the use of technology by humans will lag what  the technology enables. As rates of change climb, it is reasonable to assume that what “can be done” will diverge from “what is being done.”

Much of the capability change is driven by Moore's Law and its effect on computing power and cost. 

source: Intel

As computing costs decline, capabilities are embedded where it would not have been commercially possible in the past. That drives innovation. 

  

source: Cadbury Communications 

But humans, organizations and culture do not change at exponential rates. 

So even if we can envision implanted communications, it is unlikely to happen as fast as some predict. 

source: Astro Teller 

In fact, it is normal for developers and hardware designers to be “behind the curve” where it comes to matching product capabilities with technology advances. That is the case for 4G internet of things products, for example. 

source: Embedded Computing 

For such reasons, we commonly see forecasted innovations fail to arrive as early as expected. That will likely be true of implanted communications, as has been the case for other innovations. 

The established trend in mobile communications, for example, has been for product expectations to take a decade or more to achieve commercial adoption. If implanted communications devices are expected to displace phones in less than 10 years, it might take 20 years to happen at scale. 

Some innovations will simply never happen, and others will take 30 years or more to arrive.

Hybrid Video Streaming Revenue Models Coming?

How video streaming business models might change in the future now is a growing issue. For the past several years, most content owners have been working to assure investors that they have a growth plan for transitioning away from linear formats and towards on-demand streaming. 

The new issue raised by slowing Netflix subscription growth is the addressable market potential. Might the potential market be smaller than earlier forecast? And though original content on a global scale has been an unquestioned tactic in recent years, observers are starting to wonder what changes if growth starts to slow. 

How much investment in original content makes sense? The other issue is whether subscription fees are sufficient to drive the revenue model or whether some shift, where possible, to other monetization schemes begins to make sense. 

source: CCbill 

Think Amazon Prime with its “free shipping” focus, or ad-supported services, product placement fees or licensing original streaming content to linear services. Some might ponder whether a streaming subscription could be bundled with other services beyond video entertainment, such as gaming or delivery services. 

Netflix is at least considering introducing release windows for its top original content, shifting to the older model of theatrical release before making new content available to other distributors. And though Netflix was built on a foundation of pre-recorded content, it is thinking about getting into the business of non-scripted live video as well. 

Content owners are looking at different revenue models as well. All of that means video streaming might be heading towards a hybrid model where multiple revenue streams are relied upon: subscriptions, advertising and transactions.

Telcos, Cable Will Keep Trading Market Share

As important as new sources of revenue might be--from edge computing, private networks, internet of things--gains and losses of market share in legacy products will determine the fortunes of U.S. cable and telco contestants, as has been the pattern for two decades.

In other words, what moves financial fortunes has generally been the ability to gain or protect market share. Some 20 years ago, the plan was for telcos to build fiber-to-home networks to take video share as cable took voice share, while holding their own in home broadband. 

What none of the contestants initially saw was that aggregate demand for linear video and voice would decline. That reframed the strategy of "taking market share."

As both voice and video have become declining businesses, the focus shifted to home broadband and mobility services. Cable won the home broadband market share battle, while telcos owned mobility.

Now the new issue is how much share will shift as telcos take home broadband share while cable operators take mobile share. Of all the leading service providers, Verizon and T-Mobile seemingly have the most to gain from 5G fixed wireless, while cable operators have the most to lose from fixed wireless.

Ability to meet customer demand matters in any competitive market, and limited spectrum resources seem to explain Verizon’s struggles to meet demand for 5G in the U.S. market. Ample capacity hleps explain T-Mobile's success.

Over the past two years, T-Mobile, with the most-capacious spectrum resources, has led net account additions, while Verizon, the most challenged, has lagged. That is why C-band assets are important for Verizon: new mid-band spectrum addresses the 5G capacity supply issue. 

source: Ookla 

To be sure, there are other shapers of supply and therefore demand. The quality of 4G network performance, 5G coverage and pricing policies, plus new competitors (Dish Network and cable operators), all shape demand and could shift market shares. 

source: Ookla 

AT&T and Verizon seem determined to raise prices, while T-Mobile notably is capping them. Cable operators are gaining share and might be the long-term challengers to all the mobile leaders, as they have proven to be the key competitors in the home broadband business. 

Fixed Wireless, FTTH Will Eat Into Cable Market Share

Most equity analysts following U.S. home broadband expect cable TV operator market share to continue dipping as telcos and other independent internet service providers ramp up investments in fiber to home and 5G fixed wireless. 

The amount of fiber to home investment also will be propelled by private equity and institutional investor interests who are buying access network assets with an eye to upgrading copper access networks to optical fiber. 

source: NextTV, Lightshed Partners 

For most of the past two decades cable operators have steadily gained market share and installed base, often getting 80 percent to 100 percent of net home broadband account additions in any given year. 

But that has largely been possible because hybrid fiber coax networks have trounced telco digital subscriber line networks in terms of performance. That changes as DSL is replaced by fixed wireless and FTTH. 

So we can be sure that mobile accounts will eventually replace home broadband as the cable operator revenue growth driver.

Some "Metaverse" Related Trends Will Detract from Realism

It is not clear how soon metaverses will be commonly used for gaming, commerce or other content use cases. It is safe to argue that some platforms providing realism and a three-dimensional representation of reality could come much sooner. 

As we experiment, it also is possible that the movement towards higher realism will be set back, as when people on a video conference use avatars instead of a live image. Still, as a rule, the advantage of any of the technologies underlying the metaverse is "greater realism."

In some cases that also applies to the ability to model changes to any system if one or more parameters are changed. It is safer and a better use of deployed capital to conduct a "what if" experiment not on an actual real world system but on its virtual twin.

Digital twins seem ideally suited for many industrial use cases, for example. Real-time reporting might not always be the advantage. Sensing and control functions might already be available. 

What is new is the ability to vary parameters and play “what if” scenarios, much as accountants in the early days of the personal computer used spreadsheets for financial analysis. 

The other new element is the ability to apply machine learning to performance data. 

source: SWAN 

Such practical implementations are both easier to create, as they are confined to a bounded universe of requirements. Other more-immersive environments will take longer to construct, as they are more complex and have the relative disadvantage of an uncertain advantage over legacy ways of doing things.  

It is easy to underestimate the challenge of introducing major immersive new experiences to any legacy process. Though not a full “metaverse,” three-dimensional experiences are expected to improve video conferencing, for example. 

source: Rave 

But the shift to business and consumer use of video conferencing already has consumed the better part of a half century in practice, and nearly two centuries as a concept. Some users might prefer the use of avatars within the conferencing experience. Others might see that as a step backwards in terms of realism.