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Cable Technology Feature Article

September 17, 2010

Debate Over DSL, Hybrid Fiber Coax Networks Won't Go Away

By Gary Kim, Contributing Editor

If you had to assess the degree to which executives in the communications business believe fiber-to-the-home is needed right now, you would find Verizon (News - Alert) Communications and hundreds of small, independent telcos who would answer "yes."

But if you counted the number of subscribers served by all wireline companies in total, you also would find that executives at firms serving about 90 percent of U.S. consumers have voted not to deploy fiber to home facilities already. If you added all providers of wireless service (satellite or mobile), you'd find an even-stronger consensus that FTTH is not needed to have a viable, even thriving, business model. 

If you counted up the number, or percentage, of U.S. consumers who have demonstrated by their purchases that they actually are willing to pay for FTTH-enabled high-speed services (100 Mbps or higher), you'd find an infinitesimal number, or percentage, of customers who actually have chosen to pay to receive such services.

You might argue that even services at 50 Mbps should be counted, but the problem is that such speeds actually are achievable, at low penetration, by hybrid fiber coax networks running DOCSIS 3.0 protocols, and actually do not require FTTH.

Verizon, of course, does run FTTH access networks, and does offer 50 Mbps service, but no firm has trumpted extraordinary success selling services at those speeds. 

That is not to say the demand curve will never reach the point that FTTH and similar networks are required. Bandwidth demand increases rather linearly. But demand arguably is powerfully affected by the pricing of such services, the business case for deploying such assets, and an unstable marketplace where mobile broadband networks are on a path to challenge fixed networks more directly. 

Basically, the historic position of the U.S. cable TV industry has been, and continues to be, that FTTH is a waste of capital; that high speeds can be provided using hybrid fiber coax networks. Most telco executives tend to agree in practice, even when they say that FTTH is the best long term solution. 

Some will point to the hundreds of small, often rural telcos that have built, or are building FTTH access networks. One might also point to the subsidies required to create a business case for those endeavors. In other words, subsidized networks do not prove the FTTH business case. In fact, the requirement for subsidies tend to prove the opposite case, that FTTH is not a viable investment in the absence of subsidies. 

So it is that Frontier Communications executives have been customers in western New York not to expect FiOS (News - Alert) style fiber-to-the-home technology from them anytime soon. The argument is a practical one, that residents in upstate New York either do not want, or will not pay for, such services.

Ann Burr, general manager of Frontier’s Rochester division has said she believes the current DSL service is more than adequate for residents in the company’s largest service area. The issue arises because Frontier recently acquired a handful of FiOS markets purchased from Verizon Communications.  While Frontier has promised to continue delivering the fiber-to-the-home service in areas already offered the service started by Verizon, they have no plans to expand FiOS.

That does not mean FTTH will not prove viable in greenfield developments or neighborhoods whre physical plant has to be replaced in any case. 

But Frontier continues to insist that in Rochester, a flagship market, FTTH is not needed for business reasons. Burr's stance is consistent. She used to run Time Warner (News - Alert) Cable’s Rochester division from 1995 to 1999, and has maintained, as do all cable executives, that hybrid networks can handle expected demand, and can grow incrementally over time as demand increases.

The issue here is eminently practical. Industry executives simply do not believe they can provide 50 Mbps to 100 Mbps capabilities at prices below $100. One can note that is a business decision. One always can argue operators can use lower broadband pricing as a "loss leader." But that flies in the face of a business model where the two dominant legacy services--voice and entertainment video--are themselves either declining, or peaking. 

Broadband access is the only service in the landline triple play that actually has growth prospects across the board. Cable companies and telcos are trading market share in voice and video, but the voice market is declining, and the video entertainment market might be on the cusp of passing its historic peak as well. 

Under those sorts of circumstances, "merchandising" broadband might not actually be possible. And so long as prices for very high speed services remain in the $100 to $150 range, not many consumers are going to buy the service.

Recently, in fact, operators in markets ranging from Singapore to western Europe have found themselves facing rather more limited demand for 50 Mbps to 100 Mbps service than one might have thought, as well. 

In an environment where fixed-line networks face declining demand and tougher profit margins, it is unlikely executives will be willing to "overspend" on those fixed networks, especially when alternative investments with a clearer payback (such as mobile broadband, managed services in the cloud or machine-to-machine applications) exist. 

One wry way of putting matter is that "FTTH is the network of the future....and always will be." That likely overstates the matter. FTTH will be deployed when the business case makes clear sense. Right now, in most cases, it does not, even if rational observers would say it is the logical and obvious long term network of choice. That is why FTTH now already gets deployed in greenfield or rebuild situations, but not ubiquitously, when the existing network still is usable. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Juliana Kenny