Incumbent telco fiber access deployments in Europe pose financial risks for the telcos that undertake them, says FitchRatings. In part that is because cable TV DOCSIS 3.0 upgrades are several times less expensive than either fiber-to-cabinet or fiber-to-home networks telcos contemplate deploying.

 

Costs in the United Kingdom imply that FTTH could potentially be six times more expensive per home connected than the cable alternative, say analysts Stuart Reid and Micahel Dunning.

 

The greatest danger is in those markets where there is extensive cable TV operator penetration, network readiness for DOCSIS 3.0 and geographic coverage. Those markets where danger is especially high include the United Kingdom, Belgium, the Netherlands and Portugal.

 

Paradoxically, incumbent operators in these markets probably have a more urgent need for high-speed broadband capabilities, as much of the bandwidth that fiber investment would enable is needed to support content streaming and internet protocol TV, they argue.

 

The immediate risks to telco incumbents in Germany, Spain and France are considered lower for a combination of reasons. In Germany, cable has some limitations, though it is well deployed. 

 

German, Spanish and French incumbents also have well-developed broadband access networks. To some extent, IPTV (News - Alert) also helps French and Spanish incumbents, who also face cable competition with relatively limited financial flexibility.

 

“Ultimately, the long payback periods of any FTTH deployment of significant scale suggest that perhaps traditional telcos are not the players best suited to deploy and manage the next-generation networks,” says Benoît Felten, Yankee Group (News - Alert) principal analyst.

 

Yankee Group’s analysis is based on fixed cost per home passed at $1,000 and cash margin for FTTH at 45 percent, as well as two variables, penetration and average revenue per user.

 

The model is a lot more sensitive to penetration than it is to ARPU, Felton says. “In other words, it’s more important to connect a high proportion of the customers targeted by the network than to make them pay a lot for it.”

 

It’s virtually impossible for FTTH to pay for itself in less than five years unless penetration is at least 30 percent, and even then a time frame of seven to eight years is more realistic, Felton notes. That would be the case for a network with ARPU of $80 per customer per month.

 

But it is worse. That initial calculation does not account for the cost of borrowed money to finance the builds. Discounting for the cost of capital at 12.5 percent, the payback takes considerably longer.

 

In fact, says Felton, payback takes 16.5 years. That is going to be a sobering fact for executives whose typical framework is payback within five years.

 

So getting wholesale customers to buy access on the new fiber-rich networks might be necessary, says Felton.