ILECs beating a path to next fiber inflection point

Impatience among tech-hungry consumers and telecom industry insiders makes it seem the fiber-to-the-home buildout is proceeding at a snail's pace. Not so, said Michael Render, president of telecom market research consultancy RVA. And it is especially not the case in rural markets.

In a report last month sponsored by the Fiber-to-the-Home Council and the Telecommunications Industry Association, Render said the number of U.S. homes receiving video, Internet and voice services over direct fiber-optic connections has doubled over the past year. Today, 1.34 million homes are now connected to the Internet via end-to-end fiber. Another 6.56 million more could connect because fiber is passing their homes as well.

In March of last year, “only” 671,000 customers were connected via fiber, and 4.1 million homes were passed with fiber. In September of 2005, there were just 332,700 homes connected.

To put this growth in perspective, Render said it took 90 years to get copper to 90% of Americans, and it took 50 years to do the same with coaxial cable. “Fiber will till be a long buildout, but it should be quicker than those,” he said.

There is currently a 1.2% penetration rate for fiber into U.S. households. The eyes of the industry are on AT&T and Verizon to push that ratio higher. The RBOCs lead this market segment in the number of homes connected with almost 900,000. Collectively, another 341 service providers nationwide account for the other 436,000.

However, Tier 3 ILECs have three times as many of their customers served by fiber. Their penetration rate is 2.7% compared with the RBOCs' 0.9%. Tier 2 ILECs lag behind with 0.4%.

The lag is intentional. Jeff Gardner, CEO of Windstream, said in the fall of last year it is very unlikely that a FTTH strategy would work in most rural markets because it is tremendously cost prohibitive. His company, and others in that Tier 2 category that say they do not see the business case in FTTH, are focusing on broadband penetration in general. Today, that is at 53%.

Render said a business case for fiber in these markets can be made. In addition to take rates in the rural markets at times reaching 85% for fiber, Render said there are two sides to every business case.

“When you're getting those kinds of take rates and offering [profitable] triple-play services, it can make up for the cost [of deploying fiber,]” Render said. He added that if the numbers don't look great right away, service providers must compare results with where they might be tomorrow having done nothing instead of with where they are today.

“I think it's a good decision and will set service providers up for the future,” Render said. Besides, conversations with service providers that have deployed fiber tell Render that after complaining somewhat about the cost of deploying, most service providers are happy with their return on investment.

Fiber penetration in the U.S. can't yet compare to leading markets such as Japan, which has approximately 7 million people connected. However, the growth rate in the U.S. for fiber is at 99% compared to Japan's 60%. Europe's fiber build is growing at a rate of 13%. This outpaces the overall growth in the telecommunications market.

Grant Seiffert, president of the TIA, said recently that according to TIA's “2007 Telecommunications Market Review and Forecast,” the U.S. telecommunications market grew 9.3% in 2006 — its fastest rate since 2000. Worldwide, the market grew 11.2%.

And in the argument over fiber versus broadband wireless, Render comes down decidedly in favor of fiber. “Without some physics breakthrough no one knows about, wireless is not capable of delivering the huge bandwidths that fiber can, so I see it as a complementary service,” he said.

In his appeal to Congress in March calling for a “100 Megabit nation,” Joe Savage, president of the FTTH Council, said, “If we are to preserve our global leadership in the information age, we must look beyond our current broadband capabilities and begin moving toward next-generation networks with vastly superior capabilities …” Render supports the council's call for universal connectivity by 2015 but said fiber connectivity will take a bit longer.

“Like any goal, that is something to strive for. I think it will take longer than that before the majority of the nation has 100 Mb/s, but some will have it. Some have it already,” Render said.

He added that most fiber connections don't deliver 100 Mb/s to the Internet today, but they're capable. “When it becomes obvious to people that there are services and applications that run on fiber that can't be run over copper, consumer demand kicks in, a nd we'll be at another inflection point,” Render said.