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Financing FTTH deployment: Show us the ROI for Fiber to the Home

The cost of FTTH deployment is high and demands heavy upfront equipment costs, yet competition keeps profit margins low. Find out how carriers are trying to improve the network ROI and reinvent the fiber to the home business model to help mitigate build costs.

Fiber to the Home (FTTH)

The idea of a publicly owned FTTH network with open access to multiple service providers is an increasingly attractive alternative.
David Hashman
Knowledge Works LLC

has always held the promise of delivering nearly unlimited bandwidth to the residential consumer. Verizon has embraced FTTH deployment, as have a few other large telecommunications companies. It is also one of the technologies essential to meeting the Federal Communications Commission's long-term broadband universal service goal of providing at least 100 million U.S. homes with affordable access to 100 Mbps of download speed and at least 50 Mbps of upload speed.

But what if you don't have Verizon's deep pockets? How will you ever earn a return on investment (ROI) on your network investment? The cost for FTTH deployment continues to be a barrier for most "last mile" service providers and even some municipalities providing broadband service. Why? Insufficient demand has kept fiber and electronics costs from dropping as originally predicted, and labor costs -- which can account for as much as half of the total project -- are increasing.

FTTH deployment models that get some money upfront

FTTH deployment project costs tend to be heavily front-loaded because much of the infrastructure has to be put in place before the first customer can be connected. In a smaller, self-contained FTTH deployment, for example, the entire headend must be built and equipped as one of the first tasks. The bulk of the large-count backbone fiber often needs to be laid early in the project, running from the headend past all of the homes that will be initially served, at the very least.

In newer FTTH deployments, where all utilities may have to be placed underground, the expense of buying and installing equipment like conduit and handholes (the below-ground splicing enclosures for fiber that technicians can reach into but not enter) can increase the overall cost of the FTTH project by 25% or more. These costs are skewed, as well, to the early stages of the project since conduit in each open trench must be placed all at the same time, even if it is for future phases.>

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The most successful business model for FTTH deployment to date has been one that includes the assessment of an initial lot fee or "tap fee" per home to defray some or all of the construction costs of the network. It is easier to become profitable, remain so and earn network ROI under this scenario, since revenue streams primarily have to support only the ongoing cost of goods sold without the additional burden of having to service large amounts of construction debt.

The upfront fees are patterned after water and sewer tap fees levied by most municipalities as one-time connection charges for services. With new construction, the network tap fee ideally is paid up front by the developer or builder and is passed on as part of the lot price or final home price. The last-mile service provider then connects each home as it is built, typically when other utility trenches are open to the home from the street.

Cost recovery and mitigating the FTTH deployment debt load

Cost recovery for the network build is essential, because even though Fiber to the Home networks can deliver substantially more value to the consumer, competitive pressure often precludes providers from charging more for their voice, data, video or other enhanced services. Even in new "greenfield" master-plan communities, which are ideal places for FTTH deployment, developers are often reluctant to include some or all of the cost of the network in the price of their lots or homes.

The major challenge is that a full network tap fee can range from around $1,200 to more than $4,000 per home, depending on the size and scope of the Fiber to the Home network, the technology used, what and how services are deployed and subscriber take-rates. Competition has a big impact on the size of the network tap fee. With competitive overbuilds, subscriber take rates can stay in the 20% to 40% range even with a superior service offering, which effectively spreads the total network cost over many fewer homes.

There are ways, however, to mitigate at least some of these costs and possibly bolster network ROI. Here are some examples:

  • Having an exclusivity agreement or guaranteed services contract in place, for example, can raise take rates to 100%;
  • Sharing trenches with other utilities can cut outside plant costs;
  • Utilizing passive optical network (PON) technology can lower the total cost of fiber and equipment;
  • Similarly, deploying an all IP-based service strategy can simplify the network and further lower costs.
  • Nevertheless, the fact remains that the debt load for a Fiber to the Home network build is often too great for many last-mile service providers to take on and still remain viable.

Finding an acceptable equation to expand FTTH deployment

So what is the answer? The most likely scenario to build out Fiber to the Home on a bigger scale than currently available is some kind of public/private partnership where public investment or other incentives spur the creation of additional private or open access public Fiber to the Home networks, especially in unserved or underserved areas. The federal government, for example, is hoping to stimulate these types of investments in local infrastructure by focusing a good portion of the $7.2 billion for new broadband initiatives contained in the American Recovery and Reinvestment Act of 2009 on middle mile aggregation projects. Depending on the specific project, the money could come in the form of grants or subsidized loans.

The next step is for local developers, businesses and municipalities to work together with last-mile service providers to find creative new ways to fund the costs of extending broadband access from middle mile infrastructure to the end consumer. In many areas, the idea of a publicly owned Fiber to the Home network with open access to multiple service providers is an increasingly attractive alternative. Ultimately, it is only through public/private cooperation that the promise of FTTH deployment can be fully realized.

About the author: David Hashman, president of Knowledge Works LLC, is a networking and IT professional who has focused on the fiber-to-the-home market in the U.S. and Mexico for the past six years. Knowledge Works provides management and technology consulting and telecommunications design, engineering and installation services to corporate clients. Current projects include the triple-play design, engineering and installation of a private Gigabit Passive Optical Network (GPON) solution and a private active Ethernet network with a Digital RF Video Overlay. Hashman teaches network and computer courses at a variety of colleges and universities in Colorado. He earned a master's degree in Engineering-Economic Systems from Stanford University and a master's degree in Business Administration from the University of Northern Colorado. He can be reached at [email protected].

This was last published in May 2010

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