Facilities-Based Competition Often Matters Quite a Lot

Though BT’s Openreach wholesale network has been designed to support an evolution to higher-speed internet access in the United Kingdom, but to this point most of the speed gains have been supplied by rival facilities-based providers, which might be a good argument for allowing facilities-based competition where it makes sense. 

In 2020, some 18 percent of U.K. homes could buy FTTH-based gigabit services. That equates to about five million lines. Somewhere more than two million lines were supplied by BT’s Openreach network in May 2021, though the pace of installation is increasing fast. 

That means three million lines--or about 60 percent--of U.K. FTTH accounts were supplied by facilities-based competitors to BT. 

However, in 2020, a total of eight million homes actually could buy gigabit service, the difference being Virgin Media’s gigabit service available to another three million homes. 

According to Ofcom there is about a two-percent overlap between the two different types of networks, in terms of supply.

 

source: Ofcom 

Supply is one thing, take rates another. In the U.S. market, for example, gigabit connections are purchased by about 10.5 percent of households, though available to more than 80 percent of homes passed by networks that can supply it. 

Over the last half decade, Virgin Media has had more “higher speed” customers than have all the competitors using BT’s wholesale network. Today, “altnets” have emerged as additional suppliers of gigabit speeds. 

Many might assume FTTH means gigabit speeds. It does not. Historically, FTTH might have meant speeds in the hundreds of megabits. Some U.S. FTTH networks installed in the mid-1990s to late 1990s offered speeds only up to 10 Mbps.    

Also common are price comparisons or tracking of “average” or “typical speeds experienced by consumer customers.  Less common are measurements of provisioned speeds. In other words, instead of looking at access technologies, what is the expected bandwidth a customer might obtain, on any network?

That matters for a simple reason. FTTH is not the only available access technology, and not the only possible fixed network platform. Looking only at the numbers of deployed lines, or take rates on those lines, tells us much. It does not tell us the whole story. 

In Germany, for example, Vodafone expects gigabit-per-second connections to be driven by rival hybrid fiber coax networks, not FTTH/B. By 2022, Vodafone expects 72 percent of all gigabit lines to be supplied by cable operators, not FTTH/B providers. 

source: Vodafone 

The point is that we get different pictures of where advanced fixed network internet access stands when we measure by access technology instead of available speed. 

FTTH available lines or provisioned lines alone does not necessarily tell us all we would like to know about user experience. What is the designed-for speed, upstream as well as downstream? A “mere” statistic on FTTH homes passed does not shed light on that question.

If one asks a different question, such as “what percentage of home passings offer downstream speeds of 1 Gbps,” we get a different answer. Or perhaps we cannot get a very good answer. Very few connections are capable of offering such speeds, even using FTTH. 

If we ask other questions, such as “what percentage of lines are symmetrical?” we would get yet another set of answers.  

Even when deploying FTTH, an internet service provider must yet decide what optoelectronics to use, and that of course affects network capabilities. So FTTH does not necessarily tell us much about available speeds.

Nor does the deployment of FTTH by one legacy provider necessarily tell us much about the actual state of gigabit per second or even “hundreds of megabits per second” service. Cable hybrid fiber coax is important in many markets. Rival overbuilders or altnets are important in some markets. 

Eventually, mobile networks will emerge as challenges in some instances. 

Methodology always matters when evaluating the quality of consumer broadband. FTTH is one measure of potential progress. But it is not the only important metric. We always need to know the designed-for speeds. And other platforms also compete. 

So, in many cases, the issue is not “FTTH.” The issue is “gigabit per second speeds.” FTTH is a matter of media, not commercially-available gigabit speeds.

How Much is Home Broadband About Physical Media?

Knowing what physical media is used by an access network does not necessarily tell one much about actual capacity or expected customer speed experiences, on any access network. Nor does physical media necessarily drive customer choices in an exclusive way. 

Personally, I’d buy a gigabit service provided by any network compared to an FTTH network supplying less capacity than that. Media does not matter, in that regard. Of course, price, upstream capacity and other issues play a part in such decisions. 

The point is that we sometimes fetishize FTTH, when we should be looking also at speed and other elements of the customer experience. Before FTTH became available, I’d assumed most people would prefer to buy it. In the abstract, that makes a good deal of sense: it’s the better network, right?

But price-value relationships matter. FTTH availability is one matter; buying decisions are driven by a much-wider set of considerations. 

Even though we conventionally assume fiber to home is much faster than copper access, with other platforms such as geostationary satellite, low earth orbit satellite, fixed wireless or hybrid fiber coax somewhere between copper and fiber home broadband platforms, FTTH networks can be activated at a range of speeds. In some cases, FTTH might not represent the fastest-available home broadband choice. 

So comparisons and targets are, in one sense, better evaluated in terms of speed capabilities and price-value relationships, matched by consumer buying behavior. What a policymaker wants is gigabit speeds or multi-gigabit per second speeds, not access media as such. 

There always seems a gap between customer preferences and internet service provider offers. In markets with strong cable operator competition, for example, FTTH tends to get between 40 percent penetration and 45 percent adoption after about three years of marketing. Some FTTH ISPs hope to reach a terminal adoption rate of 50 percent, but that is about the extent of expectations. 

source: IDATE, TelecomTV

Data from other European markets shows similar gaps between facilities deployment and take rates, where take rates hover between 45 percent and 47 percent. And that is a view of physical media choices, not necessarily speed tiers chosen by customers. 

In the U.S. markets, as well, many consumers choose not to buy the “fastest” tiers, but rather tiers someplace in the middle between fastest and slowest. 

source: OpenVault

The point is that enabling fast home broadband networks is one matter; customer demand is another matter. At any given point in time, it is likely that a majority of customers buy services in the middle ranges of capability; not the fastest and not the slowest. 

Consider U.K. fiber to premises networks, where “superfast” networks, by definition, operate at a minimum of 24 Mbps to 30 Mbps. Perhaps 42 percent of U.K. premises can buy FTTH-supplied home broadband. 

source: Uswitch 

Project Gigabit is a UK Government program aimed to bring £5 billion worth of investment to the country’s home broadband infrastructure. The aim is to bring gigabit-capable coverage to 85 percent of the U.K., and maximize coverage in the 20 percent of  hardest-to-reach locations by 2025. 

Based on past experience, it is safe to predict that, at some point, most customers will buy services at the gigabit per second level, just as most now buy services operating at about 30 Mbps. Just as safely, we can predict that, at some point, most customers will buy multi-gigabit per second services as well. 

We sometimes forget that during the dial-up era, people bought services topping out at perhaps 56 kbps in 1997. By 2000, typical speeds had climbed to 256 kbps; by 2002 reaching 2.544 Mbps. 

source: NCTA 

By 2005, typical speeds were in the 8 Mbps range; by 2007 speeds had climbed to about 16 Mbps. By about 2015 we began seeing advertised speeds of 1 Gbps. 

In all those eras save the dial-up period, the top speeds were not purchased by most people. Capabilities are important, to be sure. But consumer demand also matters. 

It is not necessarily a policy failure if most customers choose not to buy a particular product. 

source: Uswitch 

In competitive markets where gigabit alternatives are available on other platforms, FTTH take rates often hover around 40 percent of locations passed. If FTTH were clearly the superior choice, in terms of price-value, take rates would be higher. 

How that changes in the future is a reasonable question, especially in markets with facilities-based competition. In markets with but a single network provider, but multiple retail competitors using one network, FTTH take rates could be much higher, even if market share held by any single contestant 

Big Strategic Shift for FTTH?

The strategic context for U.S. home broadband is evolving. For two decades, cable TV operators have been able to consistently maintain installed base share close to 70 percent, in most years getting the majority to all of the net new account additions. 

That remains the case in 2021, as cable continues to hold its installed base lead and also continues to win the net new additions battle.  

All that now seems set for change, though. The biggest change is an up- tempo pace of fiber to home conversions by telcos. But new 5G high-bandwidth fixed wireless offerings should claim some share as well. 

source: New Street Research 

Also important is the way some telcos are positioning their upgrades. In the past, they might have been content to match cable offers. Now some are aiming to surpass cable offers, with symmetrical upstream bandwidth a weapon.  

Frontier Communications, for example, is preparing rollout of a 2-Gbps offer, in addition to its standard 1-Gbps and entry-level 500-Mbps offers. That will likely feature symmetrical bandwidth. 

To be sure, cable is working on its own 10-Gbps capabilities, as well as methods to add more upstream bandwidth. But many of those solutions are not graceful upgrades from the existing hybrid fiber coax platform. The choice is whether to revamp HFC in significant ways or switch to FTTH as the replacement. 

More upstream bandwidth could be provided, to some extent, by pushing fiber deeper into the HFC network. Alternatively, cable operators can swap frequency plans, moving to mid-split or high-split designs. But all those moves require disruption of the physical plant, and cannot be accomplished by swapping out end user gear, as has been the case in the past. 

And any shift to fiber deeper networks, mid-split or high-split architectures (or two of the above) essentially delays an eventual shift to FTTH in any case, many would argue. So the decision comes down to “spend less now, but more in the long term, while undertaking a major network disruption twice” or “spend more now, and be done with it, and only disrupt operations once.” 

The larger point is that upgrading to FTTH comes with other choices that can confer advantage. Bandwidth can be symmetrical, or not. Bandwidth can top out at various levels: higher or relatively lower. And retail pricing, terms and conditions also make a difference. 

Much thinking now seems to be going into how to tweak those parameters to gain advantage over cable operator competitors. Many might assume FTTH means gigabit speeds. It does not. FTTH is physical media. Service providers still must decide how much bandwidth they want those networks to supply. 

Historically, FTTH might have meant speeds in the hundreds of megabits. Some U.S. FTTH networks installed in the mid-1990s to late 1990s offered speeds only up to 10 Mbps. User experience might be an order of magnitude less than advertised, however, even on FTTH platforms.  

What seems to be changing is a willingness to leverage FTTH to gain a speed advantage. 

 

“Our network is already 10-gig capable end-to-end, so we can carry on driving up speed tiers, as demand requires, in a very low-cost, very quick way, again, in a way that cable can't, says Nick Jeffery, Frontier Communications CEO. 

But that only matters if most Frontier customers can buy the service. 

“Our plan (is) to reach a total of five million fiber locations by the end of 2022 and 10 million locations by the end of 2025,” says Nick Jeffery, Frontier Communications CEO. 

Frontier has 15.2 million locations passed, so 10 million total FTTH passings means about 66 percent of the potential customer base would be able to buy FTTH services. 

Of course, a higher installed base does take time. “Our 2020 expansion cohort continues to show strong penetration of 30 percent at the 12-month mark,” says Jeffery, though noting that figure is based on a small sample. 

“For the overall build plan, we continue to expect a 15 percent to 20 percent penetration rate at the 12-month mark, and with penetration continuing to rise in subsequent years toward a terminal penetration of 45 percent,” he added. 

Government subsidies also are expected to improve the business case for FTTH and other high-speed services, as they are increasing substantially. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

The point is that, compared to the business case 20 years ago, FTTH is better in a number of ways. Strategically, copper facilities simply are outmoded. Any fixed network operator clinging to that platform is destined for death. 

Financially, the older triple-play model--with its cost structure and complexity--now is out of favor. The new model is based on home broadband: the sole service for an independent ISP, and the growth driver for an incumbent telco. 

Oddly enough, the older justification for FTTH--that it allows telcos to support many services--now is eclipsed by the simple value of internet access. The value of the “do anything” platform still remains. 

Only these days the primary value driver for an incumbent telco or independent ISP is “access.” Voice or video entertainment might contribute additional revenue and value, but where there is a choice, new providers simply build on home broadband, leaving apps to be supplied by others. 

All that is a big potential change.

What Contribution Does FTTH Make to AT&T?

AT&T added a million fiber-to-home fiber-to-home accounts in 2021, the fourth consecutive year the firm has done so. AT&T says it boosted broadband revenues up 5.4 percent  with average revenue per user  growth of 4.2 percent. 

Consumer fixed network revenue climbed 1.4 percent, adding $3.2 billion in additional revenue. 

To be sure, AT&T still makes most of its revenue from mobility services. In the fourth quarter of 2021, AT&T earned $41 billion in revenue. Mobility represented $21 billion of quarterly revenue, or about 51 percent of total.  

Business fixed network revenues were $5.9 billion, or 14 percent of total. 

source: AT&T 

Consumer fixed network revenue was $3.2 billion, or about eight percent of total revenue. 

Warner Media generated $9.9 billion, or 24 percent of revenue.  Latin America contributed about $1 billion in revenue, or two percent of total. 

Direct business and consumer revenues driven by access and other fixed network services amount to about 22 percent of AT&T revenues, compared to mobility at about 51 percent of total. 

Just how much revenue contribution overall hinges on the AT&T optical fiber network is a matter of some interpretation. To the extent that the optical fiber distribution networks supports the small cell mobile network, which will grow in importance over time, the value of optical fiber investments is more than what is shown by direct business and consumer service revenue. 

Indirectly, the FTTH investments also support the Warner Media streaming content business. 

Still, to the extent the fixed network now supports the key mobile business, plus supporting the business and consumer fixed network business, the relative revenue contribution from FTTH arguably understates the strategic value of those investments. 

Perhaps consumer FTTH, by itself, does not double consumer segment revenues. But investments in consumer FTTH also support the small, medium and enterprise portions of the business market, plus underpinning the small cell mobile network that will be increasingly important going forward. 

Still, the argument can be made that the fixed network retail business hinges on home broadband. To have a business at all--simply to “keep the business”--AT&T and other telcos have to shift to FTTH. 

In its competitive battle for home broadband customers, AT&T’s fortunes depend on three key drivers: fiber to home coverage; take rates and any average revenue per account gains that could supply, with the primary variable being coverage. 

The reason is simply that AT&T cannot challenge dominant cable TV providers for installed base and market share until the company has much-greater FTTH coverage. Simply put, AT&T and most other local exchange carriers cover too few homes to go head to head with cable home broadband. 

To be sure, AT&T and other telcos are pushing FTTH deployments at an accelerated pace. AT&T expects to have 30 million home locations passed by FTTH by about 2025, up from about 15 million to 15.5 million at the moment. 

source: AT&T 

Keep in mind that AT&T passes a total of about 57 million homes. So the company’s current FTTH coverage is between 26 percent and 27 percent of its total passings. 

AT&T will not be able to go head to head with cable, across the full range of home broadband speeds, until it has FTTH available to most homes in its fixed network footprint. By 2025, when AT&T expects to  have 30 million FTTH passings, it will be able to compete head to head in about 45 percent of its footprint. 

Take rates are arguably the second most-important variable, as there is a difference between an active account and a location able to buy. Over the past year, AT&T has boosted its FTTH take rate from 34 percent of passings up to 37 percent of passings. 

The goal is to approach 50 percent take rates, which would exceed the general take rate of about 40 percent telcos have been able to garner over the past couple of decades. 

Finally, it remains to be seen how average revenue per account changes as more customers take FTTH home broadband services. At the moment, AT&T’s bottom tier FTTH home broadband service (exclusive of taxes) runs about $55 per month. The mid-range tier costs about $65 a month, while the top gigabit tier sells for $80 a month.

In addition, AT&T has added two premium tiers offering 2-Gbps symmetrical and 5-Gbps symmetrical access for $110 and $225 per month, respectively. The mix of accounts could strongly affect AT&T revenues. 

The lowest FTTH tier--offering 300 Mbps--covers more than half of the U.S. home broadband buyer base. Another 17 percent of customers buy services operating between 200 Mbps and 400 Mbps. 

source: Openvault  

Assuming lower-income households take advantage of support programs, those households reached by AT&T could have internet access at 300 Mbps for about $25 a month. 

That is why the pace of FTTH upgrades matters so much for AT&T. To reach parity with cable TV operators, which AT&T defines as market share greater than 50 percent and installed base approaching 50 percent. Without nearly-ubiquitous FTTH deployment, those goals are likely unreachable. 

To be sure, competition at the lower speed levels--up to about 100 Mbps, is an opportunity for Verizon and T-Mobile. Verizon has a limited fixed network footprint of U.S. homes while T-Mobile has had zero share of the home broadband market. 

Even if those two firms use fixed wireless to reach the lower and middle tiers of buyers, that is about 65 percent to 70 percent of today’s home broadband market. 

For AT&T and other telcos, though, the pace of FTTH deployment will be the story. 

Data Consumption Will be Added to Speed and Cost as Drivers of Fixed Network Access Platforms

In the past, access platforms have been differentiated based on speed and cost per passing or cost per customer. Going forward, they might also have to be differentiated based on total bandwidth consumption, in addition to speed and cost per customer or cost per passing. 

In the past, hybrid fiber coax has proven more economical as a fixed network platform than fiber to the home. Fixed wireless has been more affordable than FTTH. But that changes as consumption increases, AT&T argues. 

And many service providers--including cable TV companies who have used HFC--concede that, eventually, FTTH becomes an affordable way to keep boosting speeds beyond multi-gigabit ranges. 

For AT&T, once sustained data consumption per user approaches 250 gigabytes per billing period, FTTH economics get progressively better, since FTTH costs less to continually upgrade for higher speeds. 

source: AT&T 

As always, that assumption is based on AT&T’s total cost structure, the scale of its operations, capital structure and business model. Other internet service providers might have different options, for a longer period of time. 

That is especially true for some firms such as T-Mobile and Verizon that have no realistic opportunities to install FTTH nationwide, and whose prospects in the home broadband market are based on use of fixed wireless. 

Consumer willingness to pay, plus consumption profiles, do vary quite a lot. So for some, the issue is which segments of the market can be served by wireless, and which require FTTH. 

For T-Mobile and Verizon, the issue is how well, and how long, fixed wireless and mobile access platforms can  keep growing speeds and capacity fast enough to continue serving half the market. 

For cable operators the choices are how long to keep enhancing the HFC platform and when the switch to FTTH makes financial sense. 

AT&T passes about 57 million homes and considers about 50 million of those locations suitable--eventually--for FTTH. But that still leaves seven million locations where FTTH might not make sense. By 2025, AT&T expects to pass about 30 million consumer locations using FTTH, a bit less than 53 percent of total home locations. 

But even AT&T, which focuses on fiber for business customers, will see fixed wireless growth. AT&T cash flow from fixed network business customers is expected to rely heavily on cash flow from FTTx and fixed wireless services.

Rural FTTH: Media Does Not Always Tell Us Much About Speed

It is common when measuring internet access progress to look at coverage, take rates, speeds and prices. Fiber to the home adoption almost always is measured in terms of coverage.That is only analytically helpful up to a point. 

In some markets FTTH might be the only practical way to supply gigabit per second and eventually multi-gigabit per second speeds. Not in all markets, however. And though FTTH might eventually be the only way to supply terabit-per-second speeds by mid-century, that is a ways off. 

In the meantime, media choices are one thing, but commercially-available speeds, competition and facilities-based differentiation extend beyond FTTH itself. 

Consider FTTH in rural areas. 

For example, fiber to the home (or basement for multiple dwelling units) covers about 22 percent of rural households, compared to 45 percent for all territories in the European Union and United Kingdom, a new study by the Fiber to the Home Council Europe. 

Spain has 60.5 percent rural FTTH/B coverage in 2020 while Germany has 9,8 percent coverage of rural dwellings.  

source: IDATE 

What is not clear is how much additional bandwidth, and therefore speed, is available on those lines. According to the NTCA, a trade group representing more than 650 rural telcos in the United States, nearly 70 percent of their customers are connected by FTTH, up from 58 percent in 2018.  

That 2020 survey also reported that 68 percent of NTCA member customers can receive downstream speeds greater than 100 Mbps. Some 80 percent can receive downstream speeds greater than 25 Mbps, up from 57 percent and 70 percent in 2018, respectively. 

Just under half (45 percent) of customers have access to 1 Gbps or higher downstream broadband speed, a metric that has nearly doubled in just two years (23.4 percent in 2018), NTCA says. 

So FTTH and gigabit per second speeds are not identical, it appears. Some 45 percent of customer locations can buy service at such speeds, while FTTH is deployed to 70 percent of locations. 

So fiber and gigabit are not identical. Nor does the existence of FTTH tell us anything for certain about available speeds.

FTTH Does Not Predict Gigabit Take Rates

The latest data on United Kingdom fiber to home coverage shows that FTTH availability  is not the same thing as “homes that actually buy FTTH service.” First of all, there are alternative cable hybrid fiber coax networks that seem to represent the majority of U.K. accounts buying service at gigabit-per-second rates. 

source: ThinkBroadband 

That is not to deny FTTH adoption rates will climb over time. But FTTH availability does not highly correlate with consumer demand. Nor does FTTH availability highly correlate with “speed tier purchased.”

In the U.S. market, for example, AT&T says that about 30 percent of customers in areas where FTTH is available buy a speed tier of 1 Gbps. The rest buy some other lower speed tier. 

The implication is that FTTH enables faster speeds, but customer demand does not highly correlate with uptake of service tiers at the highest advertised available rate. FTTH might be “necessary” for some internet service providers, but it is not “sufficient” to drive gigabit service tier take rates. 

Customers tend to buy service plans that offer neither the slowest speeds nor the fastest, but someplace in the middle that offers a value proposition that is “good enough quality for a reasonable price.”

In markets with competitors using their own facilities, take rates for the fastest tiers of service might always be limited, as competent competitors will get a significant share of what demand exists. 

In two-provider markets, that share could range from 40 percent to perhaps 50 percent. In markets with multiple providers operating at scale, it is conceivable that take rates could dip into the 20ish-percent range. 

That degree of market share is likely sustainable for firms with low operating cost structures. Others might find they are not profitable at levels below about 30 percent.