'Compelling applications' for fibre - are we there yet?

Every year at about this time, the FTTH Council of Europe have their conference. They are the most enthusiastic proponents of fibre-to-the-home - they're the folks who claimed that it would be useful for remote surgery (see 0:50 of this). That's fibre to the home we're talking about ...

Anyway each year they present various assessments of the state of the European market. Part of the purpose of this (and it's a skilful bit of lobbying) is to create a sense of competition to see which country can rank highest in FTTH roll-out. The presentations have all sorts of rankings by different metrics, so almost every country can get some kind of recognition. It's like a school fête where almost every kid gets a prize. (The UK and Germany are the sulky kids who sit in the corner and won't even participate in the egg-and-spoon race).

The presentations also talk about some of the challenges that FTTH faces. Here's some disarmingly honest quotes from the Council (or their consultants) about FTTH from the last three years:

  2011: "No really compelling application that requires a fiber connection"
  2012: "No really compelling application that requires a fiber connection"
  2013: "No really compelling application yet"

Are you spotting the pattern here?

Now sometimes we're told this is a chicken-and-egg problem, that of course there aren't applications that need FTTH, because there isn't critical mass of FTTH to sustain them yet. However, according to the FTTH Council there are 107m FTTH connections around the world. Give or take, that's roughly the same as the number of basic broadband connections there were in 2003 (103m, according to the ITU).

By 2003 we had the iTunes store, Skype, streaming video, movie downloads, numerous IPTV services and many other broadband-dependent services that are critical features of the market to this day.

If 100m broadband households were more than enough to support the development of a plethora of compelling applications for basic broadband, why is it that 100m FTTH housholds don't seem to have driven any compelling applications at all?

Not only are we not there yet, it may just be the case that there's no 'there' there.

Is FTTH material to the EU's broadband target?

The European Commission has set a target that "By 2020 ... 50% or more of European households have subscriptions above 100Mbps". A bold target - how is fibre roll-out and adoption tracking against this?

The FTTH council - arch enthusiasts for superfast - publish annual statistics of fibre-to-the-home roll-out and uptake. The story so far looks like this:

Note: These figures include some countries outside the EU27, most notably Turkey

As we can see, both roll-out and adoption have been quite steady over the last four years, adding roughly 5.8m and 1.0m homes per year respectively over that period (with a slight acceleration in the rate of adoption).

As a percentage of homes passed, uptake has been in the range of 15-20% since 2007. This doesn't prove uptake has stalled - each year, adoption is diluted by the new homes passed in that year, which inevitably start with zero penetration. However, with each passing year this dilution effect gets smaller, since each year the portion of passed homes that are new gets smaller and smaller. (For instance, in 2008 57% of homes were new - in 2011 20% were). This suggests that adoption is making only very slow progress even in locations where fibre has been available for some time.

Purely from a financial perspective, this has to be concerning. The costs of fibre include a very substantial fixed element simply to pass homes. Thus the rate of uptake is critical. You lose a lot of money on the homes you pass that don't take fibre, which you have to make up from the homes that do take fibre. Other than in highly urban environments (where costs are lower), I would be surprised if many FTTH business plans show a profit with adoption rates anywhere near as low as 15-20% uptake.

Setting aside the financial challenges for individual operators, what does this rate of progress tell us about FTTH's likely contribution to the EC's target? Using a straight line projection of FTTH adoption based on the slightly higher growth of the last two years, we get a 2020 figure of 6.9% of European households taking FTTH service:

In other words, if FTTH is going to a significant contributor to the EC target, then either roll-out or adoption  will have to improve dramatically. This would be more believable if either of these metrics were on an upward trajectory. However, additional homes passed has been steady over the last four years in the range of 5.3-6.3m (and 2011 was in the lower half of this range).  For adoption, the graph above uses the slightly higher rate for 2010 and 2011, an average of 1.3m homes per year. However, the rate for 2011 was actually lower than than for 2010 (1.2m vs 1.4m), suggesting that FTTH is certainly not enjoying exponential growth.

While it is conceivable there will be a surge of adoption, perhaps driven by some currently unknown, compelling superfast application, it is worth noting that at the current rate of roll-out, FTTH will only pass 24% of European households by 2020. Even if they all took FTTH broadband (and that at 100 Mbps), FTTH would still only be contributing less than half of the EU target.

Does this mean the EU target is doomed? Not necessarily. FTTH is not the only way to deliver 100 Mbps. Cable broadband already can, and by 2020 FTTC (fibre to the cabinet) may very well be offering such speeds. (BT is launching 80 Mbps FTTC in April 2012).

However, this analysis does suggest that unless there is some radical change, FTTH is something of a sideshow for the EU's superfast target. If policy makers have serious ambition to meet that target, they will need to focus on cable or FTTC solutions.

[The underlying data for the above charts is available from here: 2008, 2009, 2010 and 2011]