Is the RBOC FTTP initiative for real? - Business Networks

BellSouth, SBC and Verizon announced their intention to adopt common technical requirements for fiber to the premises (FTTP) just before SUPERCOMM, launching an immediate stock market rally and turning a potentially dour tradeshow into one filled with optimism. It also offered hope to the carriers' customers that better and more affordable service offerings would soon be on the way. Now that the euphoria has subsided, it's time to assess the importance, motivation and likely timing of this potential move to an all-fiber optic network.

The carriers cite a primary motivator in their press release: influencing the FCC. The carriers have long linked investment in new facilities to relief from rules mandating CLEC access to ILEC facilities. The FCC preliminary ruling states that copper cables and circuit switches must continue to be shared but that fiber optic- and packet-based facilities will be excluded from sharing mandates. The joint press release attempts to reassure the FCC that if it sticks to its preliminary ruling, the incumbents will make good on promises to modernize their networks.

Business strategy also favors movement from twisted-pair copper cables to fiber in the access network. Wireline carriers are seeing decay of their consumer service franchises due to the attractive alternative services offered by wireless carriers, MSOs and ISPs. FTTP provides wireline carriers with a technological trump card that would move telephone networks ahead of the cable industry's HFC technology. Finally, once installed, FTTP is less costly to maintain and supports very flexible and low-cost service adds, moves and changes.

Despite its attractiveness, in the long run the business case for upgrading everyone to FTTP is problematic. Consumers and small and medium enterprise (SME) sites constitute a substantial majority of RBOC revenue and profit. Essentially all consumers and more than 95 percent of SME sites are accessed via twisted-pair copper cables. POTS, T1 and sub-rate T1 are the overwhelmingly dominant services. The existing plant provides these services efficiently and effectively. New technology including DSLAMs (DSL access multiplexers), DLCs (digital loop carriers), Ethernet over copper and VoIP provide service extensions that leverage existing investment very low incremental cost. Selling new services that require FTTP--the second part of the business case--is equally daunting. Consumer DSL sales have been disappointing and no RBOC has yet succeeded as a video service provider. Furthermore, MSOs' installed HFC technology is able to offer all the services consumers are willing to pay for now.

Cable TV pioneers such as John Malone and Ted Turner show what could be done if FTTP is provided to tens of millions of households and SME sites anytime soon. Cable TV enjoys its success due to the pioneers' development of innovative services such as MTV, CNN, ESPN and HBO. A FTTP pioneer needs to create a service that can't be delivered by HFC or twisted-pair. While it seems unlikely that the RBOCs will develop such creative offerings internally, they have an opportunity to work with the large media companies that are also in the midst of strategic turmoil. The breakup of Vivendi and the turmoil within AOL Time Warner are two high-profile examples of the kind of stress that could lead to this sort of alignment.

The key to the successful marriage of content and technology will be a service that utilizes 30 Mbps to 60 Mbps of Internet access capacity at about $15/month for consumers and $100/month for SMEs. This price would necessarily be bundled with voice and digital video for consumers and voice alone for SME sites. The service bundle helps cover operating costs and provides value beyond the direct revenue contribution of the individual services. The MSO could not easily match services offering each consumer 30 Mbps to 60 Mbps of Internet access in addition to several telephone numbers, 300 broadcast video channels and thousands of video-on-demand choices. The challenge in the SME market will be met more easily since no one provides SMEs with that much affordable bandwidth.

FTTP can affordably provide the technical solution. I estimate a PON (passive optical network) system deployed at high volume costs about $1,500 per subscriber now and will cost $500 per subscriber in 2010. These numbers are much lower than the estimates of others because I believe they've failed to account for the rapidly increasing bandwidth capacity of optical systems and the corresponding advances being made in fiber optic cabling and installation methods.

I believe the move to FTTP will be evolutionary unless a compelling new service as attractive as MTV, CNN and HBO is found or we see an unprecedented partnership between a major media company and a RBOC. An optimistic projection might be 3 percent of U.S. lines by 2010 and 15 percent by 2020.

Michael Kennedy is co-founder and managing partner of Network Strategy Partners, LLC (NSP)--management consultants to the networking industry ([email protected]).

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