Winning the battle for the broadband telecom customer

In the 20th century, twisted copper pairs were for plain old telephone service (POTS) and coaxial cable was for cable TV (CATV). Households received their voice signals over phone lines and their video signals over cable, and that—as they say—was that. Today, you can say goodbye to all that.

The once-clear distinction between POTS customers and CATV subscribers is blurring. All households are now prospects for “telecommunications services.” And telecom services—including voice, high-speed data and video—can be delivered over twisted copper pairs or coaxial cable. Customers don’t care whether phone companies or cable operators deliver their services, as long as they can get all the voice, data and video services they can handle at a competitive price.

Consequently, telecom carriers and CATV operators are increasingly eyeing each other’s once-inviolate territories, knowing that each other’s respective customers are ripe for poaching. The question for telecom executives and managers is: When all the dust settles, will they be the poachers or the “poachees”?

The first skirmish between carriers and CATV operators in the battle for telecom services market share is the fight for broadband service customers.

The winner of this skirmish will have an edge going forward, because a customer captured for commoditized broadband services today is a customer retained for higher-value services tomorrow. Conversely, from a telecom-carrier manager’s perspective, a customer lost to a CATV operator for broadband today may also be a customer lost to cable for voice services tomorrow.

If today’s cable vs. carrier broadband-access market share foretells tomorrow’s telecommunications services market, the future doesn’t look bright for carriers. According to the Pew Internet & American Life Project, 21 million people currently use cable modems to access the Web, compared to about 9 million that rely on DSL service.

But this snapshot isn’t by any means predictive. Carriers have a hidden asset: nearly 70 million customers access the Internet with dial-up modems. If carriers can convert these customers to DSL broadband service before CATV operators get to them, the outlook changes dramatically.

Carriers face several challenges as they try to convert dial-up customers to DSL. First, they must be price-competitive. Major carriers have already responded to this challenge by slashing their prices for asymmetric DSL (ADSL) service by $15 to $20 a month. But competitive pricing alone isn’t the answer. Carriers’ biggest problem today, and going forward, is that too many of their potential ADSL broadband customers are either out of cost-effective reach or out of reach, period. Carriers must find a way to extend services to these customers at a cost that is low enough to make price-competitive services profitable.

Copper, Copper Everywhere

Ironically, the twisted copper pairs that deliver carriers’ traffic into virtually every home in the U.S. present the biggest obstacle to DSL service extension. Copper may go everywhere, but copper-based broadband won’t work over loops longer than 12,000 feet. Thus, only about 40% of households with phone service—customers on “short loops” within 12,000 feet of a central office (CO)-based DSL access multiplexer (DSLAM)—are within easy reach of copper-based ADSL services.

Of the remaining 60%, about half are behind digital loop carriers (DLCs) and about half are on so-called “long loops,” extending to 50,000 feet from the nearest CO.  After carriers have picked most of the low-hanging fruit near their COs, they must still find a way to reach the other 60% of households to secure their place in the telecom services market of the future.

In the long run, carriers may be able to resolve this problem by replacing copper pairs with optical fiber, including last-mile fiber to the home. But replacing copper with fiber will take time, not to mention bank vaults full of money, and in the short run CATV operators stand ready to eat carriers’ for lunch.

Clearly, carriers can’t wait for fiber. To stop CATV operators from encroaching on their turf and poaching their customers, they need to maximize ADSL broadband service penetration by fully leveraging their existing copper plant now. Carriers have three ways to extend copper-based ADSL service to customers currently out of reach: Remote DSLAMs (R-DSLAMs); Broadband DLCs (BB-DLCs); and Line-powered DSLAMs (LP-DSLAMs). Each solution has its pros and cons.

Remote DSLAMs

Remote DSLAMs (R-DSLAMs) are environmentally “hardened” versions of CO DSLAMs. They’re housed in their own cabinets and installed in the field, usually near an existing DLC cabinet. On the plus side, R-DSLAMs are easy to scale and manage. Agnostic, they can be deployed in conjunction with any DLC system, with no impact on “POTS” service. On the downside, R-DSLAMs can be slow to deploy and costly to install. Carriers may have to acquire rights-of-way before they can deploy them.

Installation requires a pad, a cabinet, a commercial power source for the electronics and wiring between the R-DSLAM cabinet and the existing DLC. In addition, R-DSLAMs can strain the capacity of cross-connect boxes. Finally, in the event remote DSLAMs require multiple cross-connects, carriers may end up “over building,” since there is no way to predict how many and which subscribers will actually take ADSL service.

Broadband DLCs

Carriers can extend the reach of ADSL broadband services by replacing legacy DLCs with next-generation broadband DLCs (BB-DLCs), which are designed to support voice, video and data services off of a common platform.  Carriers can install BB-DLCs in existing DLC cabinets, although they may need to be significantly rewired.  ADSL line cards are integrated components of BB-DLCs, enabling ADSL traffic and voice traffic to share the same backplane, system aggregation capabilities and transport facilities back to the CO. 

And carriers can add more line cards to expand the system in response to demand or to offer different types of DSL services down the road. But BB-DLCs are an expensive alternative, with high upfront equipment costs for the system itself (and its power sources), as well as significant cost of fiber trenching for the backhaul.  Carriers need significant subscriber uptake of value-added services to justify the customer acquisition costs. 

Line-powered, Pre-provisioned DSLAMs

Line-powered DSLAMs (LP-DSLAMs) solve DSL’s distance problems and lower the cost of DSL deployment. They are typically deployed at the distribution network’s edge, where feeder or main pairs from the CO cross connect with neighborhood distribution pairs, normally within a mile of most households. Without disrupting existing service, carriers connect subscribers’ POTS lines to the LP-DSLAMs, which deliver standards-compliant ADSL services along with POTS voice.  With an LP-DSLAM, carriers can pre-provision up to 50 homes for DSL service, and activate new service automatically upon subscriber request, without rolling a truck to jumper the connection.

Traffic from all subscribers is aggregated within the LP-DSLAMs and then backhauled to the CO network using industry-standard IMA (inverse multiplexing over ATM) technology over one or more HDSL2 or HDSL4 uplink circuits. Fully standards-compliant, LP-DSLAMs can interoperate with other complementary systems, including industry-standard ADSL CPE and HDSL2 and HDSL4 transport systems.

LP-DSLAMs can deliver standard ADSL services to areas currently beyond the reach of DSL, including to customers behind load coils and legacy DLCs, up to 50,000 feet from a CO. Because they’re line-powered, carriers can deploy LP-DSLAMs without incurring additional expenses for power sources and battery-backup systems.

Environmentally hardened, LP-DSLAMs do not need the protection of expensive cabinets. Finally, they enable pre-provisioning and pre-qualification of all connected POTS lines, automating new-subscriber activation and eliminating truck rolls.

Another strategic advantage of the LP-DSLAMs is the fact it is deployed at the serving area interface (SAI) with majority of subscribers within less than 6,000 feet, enabling a seamless software upgrade to offer bundled (voice, data, and video) services over a single copper pair. It offers the most cost effective complementary solution to the ILEC PON architecture.

Table 1 Business Case Common Assumptions
Average Revenue Per User (ARPU)	$29
Subscriber Acquisition Cost (SAC)	$50
Churn Per Month	2.0%
ISP Monthly OpEx	$5
ILEC Resale Price to ISP	$0
Maximum Penetration	40%
Year of Maximum Penetration	4
Homes	150
ISP Investment Per Subscriber	$50
Discount Rate for NPV Calculations	8%

Choosing a solution: The net present value test

It’s clear that carriers must extend the reach of ADSL broadband services today to keep the CATV poachers out of their POTS hen houses tomorrow. How best to do this depends on which solution proves the least expensive and offers the best rate of return. Before making a decision on which way to jump, carriers need to ask how much it will cost, on a per-household basis, to extend ADSL service with each solution, and which is the most viable, in terms of return on investment.

The ultimate test is a dry nugget of business finance called net present value, or NPV. NPV is the minimum annual rate of return that a decision-maker demands for any commitment of his or her company’s capital, whether it’s invested in financial paper or widgets. If an investment in widgets won’t yield a higher rate of return than paper (the “hurdle rate”), then paper it is.

When R-DSLAMs, BB-DLCs and LP-DSLAMs are put to the NPV hurdle test, LP-DSLAMs beat paper—and the other two solutions—hands down. In Sparks’ business model, which accounts for all cost components, the hurdle rate is 8%, and carriers (ILECs) share ADSL broadband revenues with Internet service providers (ISPs).

Numbers speaking louder than words in this model, so here they are:

Based on the assumptions in Table 1 above, ILECs and ISPs can expect to receive annual revenues as shown in Table 2.

Against these revenues, ILECs and ISPs can anticipate the capital and operating expenses shown in Table 3 and Table 4.

Based on the business case assumptions in Table 1 and the revenue projections in Table 2, and “cap-ex” and “op-ex” projections in Tables 3 and 4, ILECs and ISPs can expect the bottom-line results in Table 5.

As Table 5 indicates, line-powered DSLAMs yield profits for both ILECs and ISPs by the second year of operation. Remote DSLAMs do not yield profits until the third and fifth years of operation for ILECs and ISPs, respectively. Broadband DLCs begin to show a profit for ISPs in the fifth year of operation, while continuing to lose money for ILECs.

And, finally, as Table 6 shows, LP-DSLAMs clear the initial 8% NPV “hurdle test” with plenty of room to spare. R-DSLAMs and BB-DLCs stumble badly.

Table 6 Comparative NPV
	ILEC + ISP
via LP-DSLAMs	$60,645
via RDSLAM	$27,351
via BB-DLC	($10,754)

LP-DSLAMs: Down payment on the future

Carriers can beat CATV operators in the battle for the high ground of the 21st century telecommunications services marketplace. After all, they enter this marketplace with a massive footprint.

Together, the nation’s regional Bell operating companies, independent operating companies and national local exchange carriers have 218 million access lines. But currently, it’s often cost-prohibitive to deliver copper-based broadband to the roughly 30% of lines that are behind DLCs. Another 30% are simply beyond carriers’ reach.

Line-powered DSLAMs enable carriers to reach all of these customers virtually overnight, at a rate of return that makes economic sense. Furthermore, LP-DSLAMs are future-friendly. Residing close to subscribers at the network’s edge and “firmware-upgradeable,” LP-DSLAMs can support bandwidths in excess of 20 Mb/s as newer DSL technologies emerge and as carriers extend their fiber networks.

LP-DSLAMs are thus a highly cost-effective, minimal-risk down payment on the future. Carriers that deploy LP-DSLAMs to capture voice customers for commoditized, copper-based broadband services today will retain those customers for higher-bandwidth, higher-value broadband services¾and voice services¾tomorrow.

As “X-Files” creator/producer Chris Carter might say, “The solution is out there.” Carriers should seize it, because in the new telecommunications services marketplace, it’s poach or be poached.

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Gary L. Sparks is a Consultant to Pedestal Networks, Fremont, CA, and Former GTE Planner. He can be reached at gsparks@indy.rr.com.

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