Home Broadband is a Market Like Any Other: Segments Exist

One would be hard pressed to name any market where there are not segments such as "value" and "premium;" "youth" versus "mature;" "urban" or "rural;" segments based on consumer values or interests or high-usage versus low-usage.

Many of those segments also exist in the home broadband market, which has at least a few key segments.

Some believe U.S. multi-person households (four people) might require symmetrical 2-Gbps internet access by perhaps 2030. Others believe capacity requirements will be less stringent, with download speeds possibly in the 1.4 Gbps range and upstream only at about 600 Mbps by 2030. 

Such forecasts for home broadband have key implications for capital investment and access strategy choices for suppliers of home broadband services, including architecture choices, the pace of platform upgrades and investment and choices about which customer segments to chase. 

As we are seeing with 5G fixed wireless, for example, networks operating far below what is possible on the most-advanced fixed networks are viable, since some customers will prefer services operating far below the headline speeds possible on all-fiber access networks of the fastest hybrid fiber coax networks, for example. 

That is especially true for single-person households. For telcos (mobile and fixed), cable TV companies and independent internet service providers, the overall principle might be to deploy “fiber to wherever you can make money.”

In other words, platform decisions are a complicated matter based on local competitive pressures capital requirements and expected customer demand. As mobile operators have demonstrated, fixed wireless offering maximum downstream speeds of 200 Mbps or less might appeal to perhaps 20 percent to a quarter of the market, and requires zero access fiber.

Cable operators have shown they can serve most of the home broadband market with hybrid fiber coax that keeps improving, but that a major platform shift is likely once mainstream customers start demanding upstream speeds closer to 0.5 Gbps up to 1 Gbps. 

Coverage and capex requirements, more than speed, are key considerations for most fixed network telcos and independent ISPs relying on fixed network platforms, given the capex requirements and payback models for new fiber-to-home deployments. 

source: Ookla 

But new cost-reducing improvements keep coming. For FTTH installations, for example, the ability to pull fiber directly to the in-home router eliminates the hardware cost and installation time required to activate a new account. 

Study Title	Authors	Year	Methodology	Findings
A Comparative Cost Analysis of Next-Generation PON Architectures for Residential Broadband Access	Hossain et al.	2020	Compared costs of traditional GPON with XG-PON and NG-PON2, including FTTR considerations	FTTR with XG-PON and NG-PON2 showed potential for lower deployment costs compared to traditional GPON with ONTs
FTTH Deployment Scenarios for MDUs: A Cost-Benefit Analysis	Kim et al.	2019	Compared costs and benefits of FTTH deployment options in multi-dwelling units (MDUs)	PON with integrated routers showed potential cost advantages over traditional ONT-based deployments in MDUs
The Economic Feasibility of Fiber-to-the-Premises Access Networks	Sorrentino et al.	2018	Analyzed economic factors impacting FTTH deployments	FTTR solutions and advancements in PON technology could contribute to reduced deployment costs for FTTH

Platform capabilities notwithstanding, home broadband markets likely will always have value and premium segments; high-use and low-use segments. There also will be differentiaion by supplier platforms as well. Satellite might never offer as much bandwidth as a fixed network, but has the advantage of ubiquitous access, which is why smartphone vendors are moving to add satellite access as an "emergency connectivity" feature. 

Fixed wireless might similarly fail to reach fixed network capacity, but also features a lower-cost, faster time to deploy platform that is "good enough" for a substantial portion of the market. 

And mobile phone access might be all some consumers really want to pay for. Headline capabilites do matter, as they increase over time. But not all consumers want to buy the headline service capabilities, and likely never will. 

FTTH Payback Depends on the Business Model

It always is difficult to figure out the payback period for any fiber-to-home investment, as the number of key competitors; regulatory encouragement or discouragement issues; retail versus wholesale business models and possibility of joint venture arrangements; amount of aerial versus underground construction vary widely. 

But everyone agrees the FTTH asset is long lived, and has payback periods that are optimistically less than 10 years, but can run up to 20 years. And that obviously increases incentives for FTTH investors to reduce risk and lessen capital investment burdens. 

Joint ventures that reduce any single firm’s capital investment and also speed up deployment rates are an obvious solution. So are wholesale business models that increase network utilization rates. 

Study Title	Source	Market	Payback Period Estimate
"Fiber to the Home: The Economic Viability for Competitive Local Exchange Carriers"	National Telecommunications and Information Administration (NTIA), U.S.	U.S.	7 to 14 years
"The Economics of Full Fibre Deployment: Costs and Benefits"	University of Oxford, U.K.	U.K.	10 to 20 years
"Fiber to the Home: The Path to Success"	Federal Communications Commission (FCC), U.S.	U.S.	5 to 15 years

Firms backed by private equity have different business models than other long-term operators of connectivity assets. PE-backed firms aim to create value (typically double the asset value within seven years) and then sell the assets. 

That is a different payback model than used by connectivity service providers who operate for the long term, where fundamental issues of free cash flow, revenue growth and profit, as well as the ability to pay dividends, are the key constraints. 

And so it is with investors in fiber-to-home assets. For a private equity firm, all that matters is the ability to flip the asset for a higher multiple than acquired assets, even after the FTTH upgrades.

For an operator of internet access services, payback must include considerations of revenue per customer and revenue per passing as well as profit margins long term.

Asset value drives the logic of investment for a PE firm. Gross revenue, operating cash flow and ultimately profits are what matter for a service provider. But acquiring assets from PE and other firms can make sense for a service provider if it accelerates time to market and time to cash flow, while also possibly having the benefit of eliminating a potential key competitor in a market.

When "Growth" Capex Becomes "Maintenance" Capex

In a fundamental sense, much capital investment previously described as "growth" capex (infra investments supporting capacity, speed, new products such as SD-WAN or

One almost-perverse reality in the connectivity business is that legacy products often are more profitable than the newer products intended to replace the legacy offerings, even as demand for the legacy products dwindles.

Almost perversely, the strategic rationale for many investments, such as next-generation mobile networks or fiber-to-home, is driven less by expectations of highly-profitable new services but by the necessity of doing so to remain in business.

To be blunt, "you get to keep your business" is the investment rationale, more so than "you will boost revenues significantly." In fact, even when new products or services are created, profit margins will be lower than for legacy products.

Cable TV companies and telcos face precisely that problem with video streaming services, compared to linear video, for example. Telcos faced the same problem with VoIP and messaging. Home broadband and mobile internet access seem to be faring the best, though each of those services is precisely a "dumb pipe" offer: access but not apps; bandwidth but not "services;" flat fees for usage but not participation in app and service revenue models dependent on internet access.

There are several reasons why products with declining demand are more profitable than newer services, starting with the strategy of “harvesting” the products. Since the investments to create legacy products often have already been amortized, there is relatively little additional capital investment or operating cost required to run the business supporting those products, compared to building infrastructure and demand for new products.

Also, revenue upside from more-advanced products can actually be lower, per unit or per user, than the legacy products. Cloud computing, for example, lowers the cost of creating new software products. Open source and multimedia, general purpose networks do too. 

Legacy public switched network voice was generally more expensive to create as it used proprietary technology to create a single-purpose network. Voice over IP is generally less costly as it uses a multi-purpose network, more open platforms and more-generic hardware, with resources that can be more centralized (so less investment is required). 

Factor	PSTN Voice Services	VoIP Services
Upfront costs	High	Low
Ongoing costs	Medium	Low
Scalability	Medium	High
Flexibility	Medium	High
Complexity	High	Medium

In a classic example, service provider profits and gross revenue from VoIP can be lower than what was the case for legacy voice products. 

Product	Type	Revenue Expectation	Profit Expectation
Voice over IP (VoIP)	Newer	Low	Low
Mobile data	Newer	High	Medium
Cloud computing	Newer	High	Medium
Traditional landline service	Legacy	Medium	High
Cable TV	Legacy	Medium	High
DSL internet	Legacy	Medium	High

Almost perversely, profit margins from selling digital subscriber line home internet access, though an “inferior” product, might actually be higher than selling home broadband using fiber-to-home or other platforms. 

Service providers used to make high profits from text messaging, but they have almost no ability to monetize the multimedia messaging alternatives such as WhatsApp. In principle, one might ask why development of new products makes sense, if the financial returns are low. 

The issue, strategically, is that harvesting does not solve the “what is my business of tomorrow” problem. As with any industry, connectivity services have product lifecycles. Each product eventually faces declining demand. So a company that only harvests will eventually go out of business.

So new products, even when they feature lower-profit margins, must be created. 

One is left with the almost-inescapable conclusion that often, when new products are envisioned as substitutes for legacy products, they become “features.” 

Voice communication once was the primary value provided by a mobile network. These days, though, voice is more often a feature of a mobile service. 

A mobile service unable to handle voice calls or text messaging features would not be a competitive product, but service providers earn less revenue from voice over time. 

Voice and text/multimedia messaging might be an essential feature of the service. But spending lots of effort and money to create a new voice and messaging experience might not produce satisfying financial returns. 

In other cases, such as upgrading networks from DSL to FTTH, the strategic rationale is quite clear: a telco has no future without that upgrade. But the actual revenue and profit impact might vary quite a lot in the near term. 

In other cases, such as the transition from linear to streaming versions of entertainment video, the outcome for service providers remains unclear. In the transition from dial-up internet to DSL and cable modems, a whole class of internet service providers was forced out of business, as success shifted to ownership of access facilities. 

It’s an open question right now whether connectivity service providers will retain a role, and what sort of role, in a future where most video entertainment has shifted to streaming delivery. Can network service distributors be disintermediated, and to what extent? 

Will distribution shift to the streaming video providers who go direct to consumer? And will that shift the connectivity provider role to that of mere sales agent? It remains unclear. 

The broad point to be made is that new substitutes for legacy products are not uniformly as revenue producing or profitable as the legacy products, often because demand has shifted away, because new forms of competition limit pricing power or because the new products require high levels of investment. 

“Doing nothing” is a strategic death sentence for any copper-access-based fixed network provider. But upgrading to FTTH is not a panacea, either. FTTH creates a sustainable platform for competing, but is not an automatic net generator of higher revenue and profits. 

In a nutshell, that is the problem with much technology innovation. Some strategic imperatives that allow a firm to remain in business are not automatically going to solve the business problem of replacing legacy products. 

VoIP is not a strategic answer if the product itself faces declining demand (people shift to mobile phones for calling, for example). And there are cases where changing demand actually destroys a business opportunity. Dial-up ISPs went away when home broadband emerged, for example. 

Nor is it clear what roles might be left for connectivity providers when a fuller shift to video streaming has happened.

The point is that investments in new platforms, networks and services, often without huge expectations of higher revenues and profit margins, is a necessity in the connectivity business. In a business sense, almost all infra capital investment is for "maintenance" rather than "growth," in a fundamental sense.

5G has to replace 4G, often less because revenue will be higher but because additional capacity must be added to remain competitive and meet customer desires for data consumption and app experience. The same holds for FTTH.

Even if "Fiber is Always the Answer," It Does Not Change Buyer Behavior

Incumbent internet service providers claim they need financial support from a few major hyperscale app providers as they arguably cannot sustain their home broadband networks without such support. 

Governments, on the other hand, have pursued all sorts of policies to ensure that home broadband service is affordable for citizens, resulting in “low prices” for home broadband, in many countries. But low prices are a disincentive for investment, and governments want that as well. 

So some of those governments now seem receptive to the idea that perhaps they have pushed for “low prices” at the expense of sustainability of their ISP supplier bases and incentives for investment. 

Which is a bit of a seemingly-enduring paradox. To a large extent, incentives for investment, which require relatively higher prices, but lead to faster speeds, clash with the desire for low retail costs, which are a clear disincentive to invest and tend to result in lower speeds.

But even a shift to “all fiber” access does not necessarily solve the “low price, high speed” dichotomy, though that can be the case. 

Even where fiber-to-home networks are widespread, and considered the “best” home broadband platform, they sometimes face facilities-based competition from hybrid fiber coax networks, for example. 

In many such cases, only 40 percent to perhaps 50 percent of customers buy those services from the FTTH provider. In markets where there is no significant facilities-based competition, and there are “best, better, good” service plans, we see the same pattern.

Country	Network	Best Plan Price	Best Plan Speed	Good Plan Price	Good Plan Speed	Better Plan Price	Better Plan Speed	Take Rate for Best Plan	Take Rate for Good Plan	Take Rate for Better Plan
United Kingdom	Openreach	$50/month	1000 Mbps	$35/month	500 Mbps	$45/month	750 Mbps	20%	60%	20%
New Zealand	Chorus	$75/month	1000 Mbps	$50/month	500 Mbps	$60/month	750 Mbps	15%	65%	20%
Singapore	Singtel	$80/month	1000 Mbps	$50/month	500 Mbps	$65/month	750 Mbps	10%	70%	20%
Australia	Telstra	$100/month	1000 Mbps	$60/month	500 Mbps	$75/month	750 Mbps	15%	60%	25%

As with any other consumer product, not every customer buys the “premium” product version. So is “fiber always the answer?” Yes, in a long-term sense, for fixed networks, as a physical media choice. 

But even when a single FTTH wholesale network operates, customers still seem to choose “good enough” service plans, not the “best” and not the “value” tier, either.