Here's a piece I wrote as an Industry Comment in the latest issue of Informa's Telecoms Market (Issue 552 - September 25th, 2007). It's republished here with permission.
A year ago, the few operators who dared to admit they were thinking about fibre-to-the-x (FTTx) deployments were laughed at, and analysts were looking at Verizon’s deployment plans and shaking their heads.
A year later, Verizon’s market valuation is back up, and it signed its millionth FiOS customer before the summer. In Western Europe, every single incumbent has, at the very least, had to explain why it didn’t think FTTx was an immediate priority, and in many countries operators are not only planning but also deploying FTTx networks.
Sweden already boasts more than 150,000 fibre customers, FastWeb in Italy has been going for a couple of years now, and Lyse Tele in Norway, Telekom Slovenje in Slovenia and Free, Neuf and Orange in France, to name only a few, are connecting customers as we speak.
Furthermore, in many areas, local governments didn’t wait for operators to make the first move. In Stockholm, Amsterdam, Pau, Cologne and elsewhere, local governments facilitated investment in order for private players to deploy fibre networks to their inhabitants. So what has changed in one year? Why did investing in fibre sound so risky a year ago and so necessary now? Because for all involved, the paradigm has shifted.
It used to be that investors thought about FTTx in terms of customer attractiveness. Will it attract more customers than DSL? Will it generate higher ARPUs? Since the answer to both these questions is overall negative, they concluded that it wasn’t a sound investment. Fortunately, it was the reasoning that was unsound.
The justification for fibre, at least for the time being, is not to be found in customer needs, and whether it will radically change the amount the customer pays to the ISP each month. There are already several other reasons why investing in fibre now makes sense.
First of all, the copper network has done its time. It was deployed 50 years ago, and the maintenance costs are getting ever higher. It’s being used increasingly for data services, for which it wasn’t designed, with strong limitations in terms of coverage, bandwidth and stability.
Second, the copper network belongs to the incumbent. Ultimately, competitors can lease this network only through wholesale or unbundled offers, thus being pushed into opex models that severely limit their financial margins. Their interest is therefore in owning their
own network if at all possible.
Finally, as broadband is increasingly recognised as a force for social and economic development, it is becoming crucial for governments (local or otherwise) to integrate FTTx into their policies.
For all these reasons, incumbents, ISPs and, more important, investors are starting to realise that fibre-deployment projects cannot be examined with short-term gains in mind. The deployments will take time, the investments will be heavy, and the yields may be some time away still.
But the first movers, assuming they have the financial capacity and market savvy to carry it though, will be on the top of the hill in 10 years’ time.
Does this mean that the justifications are completely disconnected from the market itself? Of course not. First of all, operators, incumbents or otherwise, with significant customer bases on DSL have a much bigger incentive to migrate their customers to fibre since they may cover their investments that much faster.
And although customers may not be willing to pay a high premium to move from DSL to fibre, there is no doubt that the very high upload and download capacity provided by fibre will develop new uses. Some of these won’t generate revenue for the ISP (and might even increase costs), but others the ISPs may be able to monetise.
ISPs should stop looking for a killer app for fibre; there isn’t one. They should build their ROI calculations based on all the costs and revenues, not just substitute DSL costs and revenues. They should set up an agile framework for service development and billing so that they can quickly offer the contents and services that customers could purchase over the Internet.
What it means is that governments should look at facilitating alternative network deployment instead of enforcing the incumbents’ monopoly by maintaining antiquated constraints on digs and last-meter build. They should also set up a regulatory framework that avoids the development of local monopolies.
Finally, they should think hard about how ISPs can access content, especially premium TV and video. That’s one of the remaining issues for a lot of players thinking about investing in fibre.
Ultimately, what it means is that investors should think long-term, or at least not as short-term as they tend to these days. Only in the best of cases will FTTx pay for itself in five years. But in 10 years, in most instances, it will have paid for itself. And in 15 years it’ll be the new cash cow, good for another 50.
Fibre is here to stay. It’s up to each player to try and catch an early train or be late.
