FTTH catches on with Independents

The quaint little towns you usually pass through on the way to more cosmopolitan areas are getting a technological leg up on big cities: Fiber-to-the-home and fiber-to-the-building deployments have found a niche in rural America.

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By year-end, about 89,000 homes in America will have direct fiber connections, according to consultancy firm KMI (see figure). The vast majority of those connections will be in small towns.

Projected number of U.S. homes with a direct fiber connection
2001	89,000
2002	218,000
2003	427,000
2004	860,000
2005	1,501,000
2006	2,651,000
Source: KMI

While FTTH has been a topic of discussion for more than a decade, deployment had not been considered economically feasible for any area — be it rural, suburban or urban — until recently. But market conditions have changed. The demand for broadband services is up, accompanied by a significant decrease in the cost of optical equipment and components.

Even with increased demand and lower equipment costs, however, FTTH is not yet economically beneficial enough for the Bell companies or multiple systems operators (MSOs) to undertake widespread deployment. A closer look reveals that FTTH deployments in limited rural areas by large carriers are not practical either. Rather, the nature of rural markets and the companies that serve them have made FTTH deployments most practical for Independent telcos.

One of the negatives of deploying FTTH and FTTB is the long period of time carriers must wait to recoup their investment after a network build. Many of the carriers that serve smaller markets are co-op businesses owned by the people who use their services. They operate on different schedules than publicly traded companies, said David Gross, senior optical networking analyst for Communication Industry Researchers.

“Co-ops can look out and say, ‘Well, it's going to be a 15-year payback’ and make the decision [to deploy] as opposed to an MSO or an ILEC,” he said. “They have shareholders looking at their rate of return.”

One such co-op is Minnesota-based Federated Telephone Cooperative. Through its CLEC subsidiary, Hometown Solutions, Federated is entering Morris, Minn. — population 5600 — with an FTTH and FTTB network using equipment from Optical Solutions.

Upon completion of the network, every residence in town that signs on for service will be equipped with an FTTH connection. The build will run more than $6 million, a cost Federated has offset by partnering with the local electric utility. Running fiber to an individual house costs about $3500.

According to Kevin Beyer, general manager of Federated, the company expects to own 60% of the Morris dial-tone market in five years. The company projects that 50% of those subscribers will take cable TV service and 20% high-speed data. At that growth rate, Federated expects to pay for the Morris network in 10 years.

Given such a time frame, publicly traded companies would probably not be able to undertake such a build, but Beyer said his company is taking a long-term view of its new market.

...rural FTTH and FTTB builds are best left to greenfield environments or markets in which the carrier is entering as a competitor and intends to use its own facilities.

“We're here for the next 50 years,” he said. “That's a whole different spin on how long you have to pay for something.”

Municipal utilities that operate public networks in small towns often encounter similar situations. By equipping rural communities with fiber, these not-for-profit service providers hope to attract new residents and businesses, thereby justifying the cost of such a build.

One incentive of serving rural municipalities is that the carrier often receives benefits in the form of payments from the Universal Service fund. Depending on the carrier and the community being served, the fund can pay anywhere from just a few percentage points to as much as 20% of the cost of the build, Gross said. In addition, these carriers often receive tax breaks from the town or county being served. Those benefits help offset the costs of rural FTTH deployments.

Of course, it doesn't always make economic sense for rural carriers to install fiber in every market. For example, if a provider already has rolled out service in a community, it usually can offer multiple services over its existing infrastructure. It then becomes difficult to justify ripping up copper and replacing it with fiber for just a few extra dollars per month, CIR's Gross said.

Therefore, rural FTTH and FTTB builds are best left to greenfield environments or markets in which the carrier is entering as a competitor and intends to use its own facilities. In such a situation, fiber is the best option, Gross said.

Because labor is the most significant cost in building out a network, it usually makes sense to lay fiber because it is more flexible and forward-looking than other last-mile options, he said.

However, Larry Sevier, CEO and general manager of Rural Telephone, disagrees. Through its CLEC arm, Hex-Tech, Rural Telephone has completed work on an FTTH/FTTB network in Almena, Kan., and is about to finish a network in Norton, Kan. But when first examining these markets, the company didn't have its heart set on a fiber build.

“We looked at other technologies: VDSL and a dual build with dual copper coax,” Sevier said. “Both were about 25% cheaper than fiber to the home. In this particular case, [the] fiber was really driven by the businesses in these communities.”

According to Sevier, Almena and Norton had indicated a strong desire for fiber but had been told by the incumbent, Southwestern Bell, that they would never get it.

The numbers Rural Telephone has posted confirm this unfulfilled demand. The company has received orders to serve all the lines in 400-person Almena except one, which belongs to a former Southwestern Bell operator. In 3000-person Norton, where the build should be completed shortly, Rural Telephone has signed up customers representing 94% of the lines.

Though they are considered rural deployments, FTTH and FTTB networks are being built in small towns with population density roughly that of suburban areas. (As one analyst said, these are not “fiber-to-the-farm” networks.) Such areas have a significant number of businesses that desire extra bandwidth, as well as sophisticated residents likely to use multiple services over fiber.

Of course, these are factors that can be found in any area, rural or urban. FTTH has simply taken off in rural areas because of the nature of rural markets. For it to pick up in urban areas, there needs to be a killer application that will drive bandwidth demand and hence network builds by the ILECs and MSOs, analysts said.

“When the big boys do it, that's going to be the driver of when [FTTH] becomes a big market,” said Geoff Wilbur, an analyst for KMI. “A lot of small projects won't be the driver.”

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Compiled by Toby Weber return to top