US losing interest in FTTH

Verizon, once the standard-bearers for FTTH in the US, seems rather to have gone off the idea. They've said that once they complete their current deployments, they will stop. To some extent the slack has been taken up by smaller, more local players. However, a graph of the pace of roll-out (measured in homes passed per day in North America) tells an interesting story:

Note: Figures are average daily homes passed over preceding year

These figures are based on numbers for total homes passed over time from RVA (the research firm of choice for the North American FTTH Council). As you can see, the pace of roll-out peaked in September 2008, and has been falling ever since, bar a slight up-tick in the year to March 2012, which RVA attributes to the combination of stimulus funds and a mild winter. The rate of deployment is now roughly 40% that at the peak.

Is this because FTTH coverage is already widespread? Not exactly - the 22.6m homes passed represent just 18% of total households in the US and Canada. At the current rate of deployment, it will take another nine years to get to 30% coverage (and even this is 'artificially' accelerated by government subsidy, which is unlikely to last).

A more likely reason for this decline in FTTH investment is that carriers are realising that is it very hard to make a return on such capex. A particular challenge for US carriers is the competition they face from cable operators, who have roughly 55% share of the broadband market and rising - something to keep in mind the next time you're told cable operators' HFC platforms are yesterday's technology which can never compete with FTTH.

Contention on the Thames

I've now given my oral evidence to the House of Lords Superfast Inquiry. They ended up changing the format - rather than simply cross-examining me, they arranged a double-header: me and Chris Holden, Chair of the Policy & Regulation Experts Group of the FTTH Council Europe. We obviously represent opposite ends of the spectrum of opinion on superfast.

The members of the Committee would ask a question, and Chris would say 'absolutely yes', and I would respond 'absolutely no'. I hope the members got at least some value out of the arguments we each supplied for our positions. All very civil though - more 'Contention on the Thames' than 'Rumble in the jungle'.

The debate ran for almost 2 1/2 hours, and covered a lot of ground. But if I were to try to boil it down, I think the critical question was whether or not you had faith that applications, currently unidentified, would come along that would use the full capabilities of superfast.

Chris acknowledged that today there were no applications with societal benefits that depended on superfast. However, he (and clearly some members of the Committee) felt they were bound to appear in due course. Personally, I think that human factors mean that it is unlikely that future applications will depend on superfast bandwidth, since we are unlikely to able process the amount of inbound information that represents - an issue I'll address in a coming post.

For those of you with serious time on your hands, here's the video of the session:

Fibre-to-the-House-of-Lords

I've been invited to give oral evidence to the House of Lords inquiry into Superfast. This is sporting of the Committee, since one of their key questions is whether the UK government "is being ambitious enough in its plans" for Superfast. I of course believe the government is being too ambitious.

I've already submitted written evidence to the Committee, so at least they're aware they've invited a dog into the manger.

The instructions for witnesses tell them to find the committee room by turning right at the statue of Joseph Chamberlain. I'm reviewing mug shots of 19th century politicians to be sure I recognise him when I see him.

Do consumers care about HDTV?

This might seem like a silly question. In the UK retailers don't even try to sell standard definition TVs any more - all 9.5m sets sold in 2010 were HD ready. Moreover, 3.5m households, or about 14% of the UK total, were paying for HD TV subscriptions from Sky by the end of that year. On top of this, all cable households were getting HD for free, as were at least some Freeview (digital terrestrial) households. However, as we will see, ability to view is not quite the same as actually choosing to view.

Ofcom consumer research suggests that 32% of households have HD TV channels. As Ofcom says, this may be an overestimate, since not all consumers distinguish between having an HD TV and getting HD channels. However, we know that at least 28% of households receive HD channels, given the Sky HD households mentioned above, plus the 3.8m cable customers (though a few of the latter may not have HD sets). Freeview HD households are on top of this. For the purposes of discussion, let's say a round 30% of households can watch HD.

Several UK channels broadcast in both SD (standard definition) and HD. In HD households, it is a simple manner of selecting the HD version of the channel to get the higher video quality. The interesting thing is, audiences generally don't bother.

ITV1 is the largest UK commercial channel (and second only to BBC1 overall), and broadcasts in both modes. The average person watched 5 hours, 46 minutes of ITV1 (SD+HD) per week in December 2010. Of this, 14 minutes was of ITV1 HD. Of course all this HD viewing came in HD households, so that implies the average ITV1 HD viewing was 46 minutes in those households.

However, this means that in households with the option to watch ITV1 in HD, viewers chose to do so for just 46 minutes out of their 5 hours 46 minutes of ITV1 viewing in both modes, or 13% of their viewing.

This is a striking result. Even in these HD households situation, where consuming exactly the same programme in HD rather than SD is simply a matter of clicking a few buttons on the remote, 87% of the time audiences simply don't bother.

This doesn't prove HD is irrelevant, but it does suggest it has limited general value for audiences. It is, for instance, likely more valuable for films or sports than for quiz shows.

Which brings us to superfast broadband. HD is regularly cited as one of the strong arguments for superfast, and often features heavily in proposed 'app stacking' (multiple activities in a single home using one broadband connection). However, if consumers see HD as irrelevant to most of their viewing, then it's hard to justify spending large sums on superfast to bring it to them.

Moreover, the strength of the internet for TV is in on-demand programming (since broadcast works perfectly well for linear TV). But sports are very heavily consumed live. Most countries already have infrastructure to deliver HD TV versions of sports channels and programmes, be it via terrestrial, satellite or cable. Superfast therefore adds very little to HD live sports.

This leaves movies as the key remaining TV content that might have substantial value as on-demand HD, and therefore contribute to the case for superfast (though cable VOD is also capable of this). This is a limited use, and certainly not used heavily enough to contribute regularly to an 'app stack'.

Thus those building the case for superfast on the back of HD need to explain why they expect consumers both to become much more interested in high definition and on-demand services than they have been to date.



[Note that for the purposes of this simple analysis I have ignored issues of secondary sets and different channel shares in HD/non-HD households, though these are unlikely to change the outcome materially]

Chancellor offers you £17 to upgrade your broadband

In today's UK budget the Chancellor announced ten cities that will "share £100m to introduce ultra-fast broadband". The cities are Belfast, Birmingham, Bradford, Bristol, Cardiff, Edinburgh, Leeds, London, Manchester and Newcastle. You will have spotted that there are some big cities in this list - their combined population is 14.6m.

At 2.5 people per household (the rough UK average) this is equivalent to 5.9m households. So, the £100m works out to £17 per household in the relevant cities. Given average civils (construction) costs of £50-60 per metre, this would get the duct carrying your fibre roughly 30cm down your front path / driveway.

My point is not of course that the government should be throwing more money at superfast - they certainly shouldn't, particularly in cities where existing broadband is likely to be of a reasonable standard. Rather the fact that £100m gets you 30cm of duct per household just shows how expensive fibre-to-the-home is.

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]

'Future proof' - A flawed justification for fibre

Fiber-to-the-home (FTTH) enthusiasts often say that it is the essential choice because it is 'future proof' (see, for example, this). While this sounds good, there are a number of problems with this argument.

We perfectly sensibly invest in things that aren't future proof all the time. Newly weds do not immediately buy houses to accommodate a brood of children, we don't build all airports with three runways on day one, we don't build all roads as six lane highways and so on.

There are two fundamental reasons for this - we don't know if the anticipated demand will materialise, and even if it does, there is value in delaying the investment to accommodate it. The newly weds might never have children, and even if they knew for cast iron certain they were going to, why spend the money on empty bedrooms today? The cash could be put to better use in the meantime (particularly if, say, the newlyweds were facing a global financial crisis at the time of their wedding).

In the world of superfast we can take a look at the choice between FTTH and fibre-to-the-cabinet (FTTC) in these terms. The latter is considerably cheaper, since it doesn't involve digging up the roads all the way to individual houses, but on the other hand its theoretical capacity is lower. It's possible that at some future point demand for speeds even greater than FTTC can provide (currently in the region of 80 Mbps and rising) will mean that we'll feel obliged to overbuild with FTTH.

At that point, will those crying 'future proof' in 2012 be proven right? Well, it all depends on the numbers - the costs of the two technologies, how much of the FTTC build cost would be wasted, how long before any overbuild is required, the probability of overbuild being required and the discount rate (a measure of value of delaying spend).

Below is an illustrative analysis of this. One critical assumption is the relative costs. I've assumed FTTH is three times the cost of FTTC (this may be conservative - Ofcom says 3-4x, and WIK says 5x in urban and suburban areas). Don't worry to much about the absolute dollar figures - $400 per household for FTTC and $1200 for FTTH - it's the ratio that matters for our purposes.

I've somewhat arbitrarily assumed that there's an 80% chance that overbuild will be necessary, and that it will be required in year 4. These sound generous to me, but there's room for reasonable people to disagree, certainly. However, keep in mind that the 80% is not the chance that there will be any demand for FTTH speeds, but rather the chance that there will be enough demand for incremental speeds beyond those of FTTC to justify the cost of the overbuild. Given that FTTC can provide 80 Mbps and rising, 80% feels like a high number to me.

I've assumed that 50% of the investment in FTTC is a write-off if it's overbuilt with FTTH (based on Value Partners' view). Finally, I've assumed a 10% discount rate, fairly typical for commercial investments. So how do the numbers play out? See below:



As we can see, going for FTTC now saves us $198 per household, even allowing for the fact that overbuild with FTTH later may be necessary. The fundamental reason is that there is huge value in delaying the substantial spend on FTTH. Note that even if we were 100% certain that FTTH would be required in a few years, it would still make sense to start with FTTC now, though the saving drops to $49.

All the above analysis assumes (generously) that FTTH itself won't be replaced by something better. Certainly it is today the way to deliver the highest bandwidth to the home, but the future has a way of surprising us. Want to know what was being called 'future proof' in 1995? ISDN, now a product in its twilight years - BT killed of consumer ISDN in 2007, for example.

So, the next time someone tells you we have to spend money on FTTH because it's 'future proof', keep in mind that they may be wrong, and even if they're right, it may still make sense to build FTTC now and see if we need FTTH later.