By Eamon D. Hoey MBA, CMC and Ronald J. Pickett MBA, CMC
North American telephone and Cable TV companies have a significant investment in last mile copper networks. They are generally not deploying last mile Fibre-to-the-Home (FTTH). Where they are deploying FTTH, they are not offering gigabit speeds needed to support emerging information age applications. This represents a barrier to communities seeking economic prosperity enabled by ultra-broadband.
Sweating the Copper
Telephone and Cable companies are hesitant to deploy capital to build FTTH. As a senior Canadian Telco executive recently remarked, “we are sweating the copper”. Carriers prefer to make incremental investments in their aged copper plant, rather than investing in FTTH. The tactic is to squeeze bandwidth from their legacy networks. The aim of “sweating the copper” is to maximize revenue, margins, and minimize capital deployment. This is not unlike any other firm. The tactic may be excellent for the companies but not necessarily for the communities they serve.
Much of the cost in delivering FTTH is in the last mile or the last 800 feet of a drop wire to the home. The compromise is to build Fibre-to-the-Node (FTTN). The node is generally within close proximity to the residence or business. This tactic permits a carrier to offer download speeds up to 50 Mbps. Its cousin Fibre-to-the-Curb (FTTC) can deliver download speeds up to 80 Mbps. Generally, the fibre terminates in an enclosure close to the residence or business. While these are interesting approaches neither FTTN nor FTTC are capable to deliver 21st Century information age applications. What is required is ubiquitous symmetric FTTH.
Low Lying Fruit
Where Carriers are deploying fibre, is where the pickings are easy. Such settings include multiple-dwelling units (MDUs), new subdivisions, where there is effective competition, and where the outside plant is aerial. Where the telephone and cable firms are delivering FTTH, they are providing internet access services at speeds well below the capacity of fibre optics technology.
Capital Allocation Conflict
Compounding the lack of FTTH investment is the carrier’s capital allocation conflict. Many telephone and cable companies have a mobile and a local telephone or cable TV business. They choose to allocate a higher proportion of capital to their higher margin 4G mobile networks versus investing in FTTH. For example, Verizon U.S. has greatly diminished investing in FTTH. It has chosen to leave a large number of its subscribers, particularly those outside large urban areas with a low likelihood of being served over fibre. It continues to make significant investment in its higher margin mobile business. Similarly, Bell Canada and Telus have made small investments in FTTH while investing heavily in 4G mobile.
How Much Capital
Capital Intensity (CI) is the percentage of revenue that a carrier allocates to capital investment. A high CI results in lower profits and decreased dividends. Typical, in the telecom industry the ratio of revenue to capital investment is 15% – 20%. Carriers who do not maintain a consistent CI suffer a decline in their stock price. The market punishes those carriers with a high or inconsistent CI. The CI limits the amount of expended annual capital. There is only so much capital to allocate.
The emerging community based networks measure success by attracting knowledge based industries, highly paid jobs, increasing average income, lowering telecommunications costs, digital inclusion, and improving the overall quality of life. Wall and Main St. measure success markedly differently. Carrier success measurements include profitability, revenue growth, dividend return, earnings per share, and capital intensity. Community based networks are responsible to their citizens, whereas carriers answer to their stockholders. These are very divergent objectives. Communities should not hold out the prospect that telephone or cable companies will meet their needs. It is simply an unrealistic expectation.
When is enough speed enough?
The President of a medium size telephone company recently suggested, at a Toronto investor conference, that download speeds of 40 Mbps is adequate for most customers. Only in extreme situations would a consumer require a download speed of 250 Mbps. Another Telco executive posed the question “When is enough speed enough?” While an interesting question, in reality we really do not know the answer. The relevant questions are “What are the needs of communities today and in the future?”, “How can these needs be satisfied today and in the future?”, and “What will ensure economic prosperity in a highly competitive global world?”
The tactic of “sweating the copper” satisfies investors and Wall Street analysts. However, it does little for communities seeking the economic advantages enabled by FTTH. Accordingly, many communities in North America have grown impatient with the speed at which Telcos/Cablecos are deploying FTTH. They are unwilling to rely on them to provide the 21st Century infrastructure to enable economic prosperity for their communities.
Bristol, VA, Chattanooga, TN, and Lafayette, LA provide successful examples of how communities can develop an economic strategy enabled by an FTTH community-owned network. That is despite the opposition of the incumbent telecommunications companies. These communities have increased the average income in their communities. They have attracted knowledge-based firms with high paying jobs to their communities and advanced manufacturing. By building a FTTH network, they have improved the community’s quality of life. They are economically prospering.
It is clear that incumbent carriers are not motivated to deliver 1 Gbps symmetric FTTH networks in the near future. They have a capital allocation conflict. They much prefer allocating capital to their mobile networks versus FTTH. Smart local governments must lead the deployment of FTTH. They need a clear vision and communicate why broadband FTTH matters. The need for broadband is stated within a framework of driving economic prosperity.
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