Will fiber pay the bills?

Fiber optics have long been the cornerstone of telecom networks, and fiber-to-the-home has long been the holy grail of network operators. Countries that have made major fiber commitments — including Japan, Taiwan, Sweden and South Korea — expect financial rewards beyond mere service revenues, and companies such as Verizon in the U.S. that have made their own private commitments expect their networks to be future-proofed.

But after all is said and done, will FTTH pay for itself? Some skeptics are saying it may not.

Here in the U.S., a longtime financial analyst named Craig Moffett of Sanford C. Bernstein & Co. looks at Verizon's costs — $900 per home passed — for its FiOS network and its stated goal of getting 25% of homes passed onto its video services plan and sees a problem. At that pace of acceptance, Verizon is actually paying $3600 per customer, before the cost of installation, customer premises equipment and video programming is factored in. And the cost of video programming will continue to eat up its profits thereafter, making the video business a fairly low-margin operation and pushing the fiber network payback well off into the future.

In Europe, the WIK research and analysis firm looked at what it would cost to build FTTH networks there and concluded that it would not be profitable for competitive service providers to do so. Only incumbents, who have already deployed a fair amount of infrastructure, could build an FTTH network profitably, the WIK study concluded, based on its study of six countries: Germany, France, Spain, Italy, Portugal and Sweden.

The study is being interpreted by its sponsor, the pro-competitive European Competitive Telecommunications Association, as proof that the only financially viable ways of building FTTH networks is by government subsidy or requirements for incumbents to build out the networks and then open them up to competition.

"The three key reasons are that incumbents already own ducts on a nationwide basis; they can make substantial efficiency savings compare with their current network structure; and they already have the number of required subscribers that would pay for investments simply by switching customers from their existing lines," the research report concluded.

Against this backdrop, copper technologies continue to improve, and compression makes it possible for more bits to be shoved down the existing pipes. All of which should lead to some reassessment as to whether FTTH is all it's cracked up to be.

That assessment has to include a realistic look at the benefits of FTTH beyond actual service revenues, and whether economic development or potential offsets require government incentives, if not direct funding, for this kind of investment. In a privately funded model, requiring unbundling or structural separation is likely to dry up funding sources for the multibillion requirement that FTTH represents.

Because even if fiber is all we've cracked it up to be, somebody still has to pay for that deployment and earn a return on their investment.