The Promise of Fiber (II): To the Network/Service Provider

Continuiing the series of reflexions to try and figure out who gets what out of FTTH deployments, I now examine things from the point of view of the service provider. What do they get (or think they will get) from residential Fiber deployments?

The most visible reason for deploying fiber is a continuation of the price was that has been devastating broadband margins for the last few years. In many countries (and certainly in France) the price levels for broadband are so low that there is no way to continue an actual price war by lowering prices. And yet there is still a somewhat sizeable market to address. So what do operators do? They increase bandwidth and bundle more services all for the same price. Except once you've deployed ADSL2+, you've sort of reached a plateau, and fiber is the next big technological step to continue with bandwidth increase. Furthermore, the explosion of web 2.0 usage results in a higher than ever reliance on upload, something that ADSL is evidently not suited for (A stands for A-symetric).

This is really not a straightforward reason, because at the crux of this price war is actually a non price related element, ie. who gets to innovate, who gets to be the first one to deploy the newer, better service. Being the first mover on fiber is taking a big risk but it's also being the one who's most likely to win big from it. In a way, this reason could be described as the players wanting to stay ahead in the rat race.

Another very important reason for competitive operators and ISPs is not relying on the incumbent's network. All existing bradband deployment (apart from the incumbent's of course) relies either on wholesale from the incumbent or on unbundled copper loops. Which means that a sizeable proportion of these alternative players' revenue goes in the incumbent's pockets. Obviously the investment needed to kill the father, as it were, is sizeable, but the ultimate promise is much higher margins. This argument could best be described as independance from incumbents.

The promises of better QoS and more instantaneous usage that I mentioned for the end-user in part I also hold the promise of a real uptake in consumption of additional services. I was recently discussing these issues with one of my customers who is a CRM specialist and he told me that the churn rate of triple-play was much higher amongst subscribers of premium TV. The reason is simple: the customer's expectations of everything that comes apparently free within the bundle is low. His sensitivity to the quality of anything that he pays in addition to the bundle is high. But the QoS provided by broadband is limited and therefore tends to limit the uptake of these additional services like premium TV, VoD and whatever else the service providers may be cooking up. Also, as mentioned previously, the near instantaneity of digital product purchases, VoD in particular, makes impulse purchases possible whereas they are more difficult to trigger in the current broadband models. This is the promise of increased ARPU from additional services.

The next promise for service providers is odd, in a way, but we're already seeing it in application. Broadband bandwidth is effectively capped with DSL. It's potentially unlimited with fiber. So far, the broadband market has been surprisingly monolithic in all the markets I've seen, mostly because the prices are low and the margins limited. If you look at it closely, within any broadband penetrated market, you'll find roughly the same offers at the same prices to most or all customers. What fiber promises, I believe, is an increased capacity to segment your market both through the diversification of the services portfolio and through the offering of premium bandwidth services to the end customer. This is not entirely new, of course, but certainly not as widespread as it should be and probably will be with fiber.

There are, I believe, strong threats to service providers as well, but I'll keep these for another post!