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.

The Compromise

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.

Measuring Success

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?”

Smart Communities

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.

Conclusion

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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11 Responses to Sweating the Copper

  1. Mike Kiely says:

    I enjoyed your article. The UK is experiencing pretty much what you describe for the reasons you describe.

    1.) The Capital Employed for an all fibre network 1,000 handover points v 5,600 exhanges is much more lower so this impossible to communicate to shareholders. I have under estimated this one.

    2.)FTTC over existing copper, gives you freedom on fibre pricing + a regulated return on copper. This is easier for incumbents, regulators and Govs especially in rural.

    3.) There will need to be well designed interventions on the provision of passives while incumbents will need to be obliged to use but not own those passives.

    FTTC + Copper – provides two wholesale revenues, – FTTH reduces it back to one, and good policy making provides FTTH customers a choice. Tough one this and its mostly not direct costs.

    • Eamon Hoey says:

      Nick

      Goods points. If I can just digress and raise the bar to 30 K foot level. What does all of this mean?

      In Canada the game is fixed. The Oligopoly and the bureaucrats have agreed to protect the Oligopoly. Hence they took years to remove for example the foreign investment rules for new entrants. They then gave the members of the Oligopoly a head start by giving them tons of free spectrum 850 and 1700. But they insisted that the new entrants pay millions for AWS spectrum and 700.

      So don’t be surprised if competition is not working in the wireless market and broadband. Don’t be surprised if the Oligopoly crowd can sit back and serve up inferior broadband services at high prices. Not hard to conclude that the oligopoly structure is not serving the needs of consumers or of the country.Consider that we have the lowest wireless penetration among developed countries(G7) but CDN wireless carriers enjoy the highest ARPU in the world. Many studies have concluded that Canada is deploying ICT to a lesser degree than other countries. Hence our productivity is lower. Moreover, we are missing out on opportunities. This is a big subject – it needs more room than what we have here. PS George Cope BCE/Bell CEO has been quoted as saying he thinks the oligopoly is a great structure.

      Eamon

  2. Eamon D. Hoey MBA, CMC says:

    Mike

    Thanks for your comments. Your points are well taken. FTTC is OK for the interim. It does not get us to the Gig E world, or to a FTTH and platform for Economic Prosperity. Capital aside we need to go there for Western Prosperity. Agreed none of this is easy.

    Eamon

  3. Nick Tang says:

    Nice article – I would also argue that smart national governments must drive the agenda to help their citizens prosper as well.

    Nick

    • Eamon D. Hoey MBA, CMC says:

      Nick
      Thanks for your comment.Not sure our National Governments are in a position to drive this agenda. They have several competing needs ex. the economy, job creation, roads, education etc. They would likely take the easy route and give limited amounts of capital to established carriers to bridge the digital divide. That would not raise the bar. We would not get to Gig E in every home in this Century. My thoughts is that rather than coming from above it will come from below. For example, that is what is happening in the USA. In Canada we relied on Senior Government to bring us broadband. After a decade little has been accomplished save for the fact that the Senior Government has capitalized the carriers. Our observations in many countries suggest that if it comes from below it will be successful.
      Eamon

  4. Eamon Hoey says:

    Nick
    Thanks for the article.
    Deutsche Telekom is just echoing what the copper based carriers are doing “Sweating the Copper”. That does not help us bring GigE services to the customer or put technology in the hands of customers. It avoids doing what they should be doing that is building FTTH.
    Eamon

  5. Nick says:

    Yep to the FTTH but until the day arrives, you’re left with state governments issuing contracts/investing in broadband with the private sector:
    http://www.benningtonbanner.com/news/ci_22743571/local-region-benefits-from-ny-broadband-investment-project

  6. James Van Leeuwen says:

    Earning customers is a daunting prospect if all you’ve ever known is monopoly or duopoly, and owning customers is in your DNA.

    Competing to own a customer is fundamentally different from competing to earn a customer, and it’s all about which side of the market has more power… the supply side (-> owning) or the demand side (-> earning).

    Canada’s legislative and regulatory status quo in telecom (facilities-based competition) entrenches far too much power on the supply side of our markets.

    This is what enables incumbent network operators to sweat their assets, and it also greatly hinders the potential of demand-side forces to drive wealth creation.

    Smaller and more innovative service providers can only compete effectively in markets where there is a level infrastructure playing field, and this is the last thing incumbent network operators want.

    For a federal government so dogmatically committed to market-driven economic development, this is a rather ironic state of affairs.

    A misguided commitment to facilities-based competition has led to Canada having among the least productive and least competitive telecom markets in the developed world, especially rural and remote markets where economic development is needed most.

    Open access fibre is the best way to unleash the constructive forces on both sides of Canada’s telecom markets, and the municipal utility model is the most promising solution for open access fibre.

    Communities across the country are figuring this out:

    http://www.qnetbc.net
    http://www.swiftnetwork.ca

    The future of Canadian telecom is already here, it’s just not evenly distributed.

    • Eamon Hoey says:

      James great comments, much appreciated. I agree entirely with your comment that service providers should be competing to earn a customer. However, the Government of Canada has established an industry structure that will not deliver. The guys and gals at Industry Canada are fully supportive of the supply side. You wouldn’t want to know who gets to go to sit in those VIP Boxes at hockey games in Ottawa. The regulators, Industry Canada and the CRTC walk in the shadow of the regulated companies. Being market driven is OK as long as the industry structure permits it. That is not the case in Canada -0 we have failed in driving a structure that is competitive, rather we have an oligopoly. What we need to do is establish performance standards for service delivery and pricing. So for example by 2025 to have a broadcasting license, spectrum license, or Cable TV license renewed you would have to demonstrate that you are in urban areas delivering 1 GIG to 95% of the premises in your urban serving territory. Moreover we need to set a ceiling on internet pricing as say $79 per month with service charges for installation set at no more than $300.

      Communities need to start building their own fiber networks. If they plan to wait for the likes of Telus, Rogers, Bell etc they will have a long wait. The digital economy will have passed then by.

      Thanks for you thoughts, much appreciated.

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