Fiber to the Home- Eventually

SBC commits $6 billion to FTTP

SBC entered the "Fiber To The Home" arena on June 28, 2004 following Verizon's earlier $1billion investment. SBS stirred up the telecommunications investment community last week at Supercomm when it noted that it would commit $6 billion to building out Fiber to the Premises (FTTP) in its network. The announcement could finally bring about the promises of the data network for consumers, but it will only happen after another round of billions in capital investments.

The cable vs. telecommunications battle for the hearts, minds, and most especially, the wallets of America's data services consumers has at this point cost billions of dollars. What we've gotten out of the deal is an environment that a decade ago would have seemed impossible -- the agglomeration of media services into packages that one company can provide.

-----FTTH Switch Products----

Do you want phone, Internet, and cable TV service from the same company? It's possible, thanks to the billions spent by companies like Cox (NYSE: COX) , Comcast (Nasdaq: CMCSA) , and others to upgrade their networks and the wiring going into millions of homes. You can live in Georgia and be a customer of BellSouth (NYSE: BLS) without having it provide you phone service, since BellSouth and the other regional Bell operating companies (RBOCs) have also spent in the billions upgrading their high-speed access capabilities. With voice over Internet protocol (VoIP), the last vestiges of a separation between voice and data are being swept away. And with SBC's (NYSE: SBC) announcement last week that it intends to spend some $6 billion to extend its fiber local loop to customer premises (FTTP), the arms war between cable and telecom companies promises to get even more expensive. What it also most likely is, is a nice pipe dream for investors in these companies, or their equipment providers.

SBC is positioning its network to deliver bandwidth-thirsty services like television and video on demand, high-speed Internet, and voice to consumers and small businesses. SBC is anticipating the integration of IP-enabled products like digital TVs, set-top boxes, and telecommunications devices onto a single network. Clearly, what this signals is a massive buildout for the RBOCs. Again. Upon the announcement, network gear companies such as Ciena (Nasdaq: CIEN) leapt higher, perhaps in anticipation of swelling orders as another spending binge gets under way. The timing, coming on the tail end of a spending spree on fiber and network upgrades that has generated little more than rivers of red ink and bankruptcies among telecommunications companies, may seem puzzling. But it isn't.

Two things are driving the RBOCs to upgrade their networks. First, the aforementioned competition coming from non-traditional telecommunications providers, particularly cable companies, continues to succeed in taking customers from the local telecom companies. Cablevision (NYSE: CVC) recently announced a program in limited markets to provide video, broadband, and voice services for about $90 total per month. The cable companies are using VoIP to steal customers away from the carriers. This points to something obvious: The price that carriers (or any other company) can charge for voice services is likely to continue to plunge.

The second driver for the RBOCs comes from Washington. Last week, as we noted in a story about AT&T's (NYSE: T) intention not to provide further service in seven states, the Federal Communications Commission demurred to appeal a court decision that struck down its rules governing the amount that the RBOCs could charge other companies to access their networks. In multiple occasions over the past several years, the RBOCs (including SBC, Qwest, BellSouth, and Verizon) have elected not to undertake capital spending projects on the basis that these investments would not create any further advantage for them since their competitors automatically had access to these facilities at rates that the RBOCs claimed were in some cases below cost. As I noted in July 2001 in How Regulation Constrains the Internet :

The Baby Bells, against whom the CLECs were to compete, had no incentive whatsoever to improve their copper networks, as the investment to do so is massive, and they had to automatically grant access to their competitors. And with the Baby Bells being barred from participating in high-speed data provision, and with a lock on local provision of cable service, they've got precious little motivation to improve their networks. It's called an uncertain return on investment, and unfortunately, Baby Bells are being responsible to their shareholders by not making these investments.

With last week's decision, the Bells no longer have this excuse. The price to pay for this, naturally, is that those investment dollars the companies have held back over the last several years need to be deployed. The Bells have starved off their telecom-based competitors, but meanwhile have been blitzed on all sides by the cable, satellite, wireless, and VoIP companies; these are not necessarily separate entities. The Bells have the same problem that bedeviled AT&T -- their core business is losing any semblance of economic profitability. To recapture profitable growth, they have to spend. VoIP allows competing companies to add a voice service offering with a small investment: The earnings power of the telecom companies' multibillion-dollar investments in telecom switches and other equipment is being marginalized. These costs are sunk, yet the return on these investments is increasingly at risk. Though the RBOCs don't have much to gain by hastening the commoditization of voice services, that's essentially what is taking place. Their sudden embrace of FTTP isn't a sign of strength: It's a gambit.

What investors, as well as consumers, need to keep in mind is that the benefits to either from FTTP are extremely unclear and likely to be long in coming. It is not that likely that the Bells will come into existing loops, tear out existing infrastructure, and drop in fiber any time soon. More likely will be a scenario where the Bell companies substitute spending that they would have made in traditional phone equipment in new buildouts with FTTP.

As we've noted before, FTTP is an extraordinarily important element for the continued hypergrowth of data services. In the last building binge, companies from the hopelessly decrepit Viatel to the enterprising Level 3 (Nasdaq: LVLT) spend billions on high-speed long-distance fiber networks. These investments by and large have been exercises in massive capital bloodletting, for though demand continues to rise, the lollapalooza growth anticipated hasn't happened for the very reason that the copper-based on-ramps to this supernetwork remain insufficient to do the job. Cable companies have moved rapidly to digital technology to provide such things as high-definition television, with about 30% of all cable customers using digital services at present. FTTP would represent a quantum leap in capacity over these digital services. It would allow, for the first time, that great Rosetta Stone of data services to happen: video on demand.

Were this an immediately realizable goal, companies far and wide would be quaking in their boots, from Intel (Nasdaq: INTC) with its commitment to wireless broadband technology to past Motley Fool Stock Advisor selection Netflix (Nasdaq: NFLX) and its 18,000 entertainment titles available by mail. They aren't, because it isn't.

Let's not lose sight of the fact that FTTP will likely hasten the promise of everything that the data networks were supposed to provide consumers. It likely will also bring about some increased revenues at many of the equipment and service providers for the industry. But quite simply, the buildout is going to be slow, and the greater the pressure on the RBOCs' core business in the meanwhile, the harder it will be for them to commit additional capital budgets to FTTP. The cash flow from their bread-and-butter voice services simply aren't sufficient.

NEW NEWS! The FCC also clarified that incumbent LECs are not obligated to build time division multiplexing (TDM) capability into new packet-based networks or into existing packet-based networks that never had TDM capability.

FCC Chairman Michael Powell said "By limiting the unbundling obligations of incumbents when they roll out deep fiber networks to residential consumers, we restore the marketplace incentives of carriers to invest in new networks. "

In a dissenting statement, FCC Commissioner Michael Copps wrote "Though today’s Order speaks in glowing terms about broadband relief, the reality is far less radiant. I don’t believe competitive telecommunications have been faring very well under our watch and this particular proceeding strikes me as yet another in a series of prescriptions this Commission is willing to write to end competitive access to last mile facilities. It seems every month brings a new onslaught.. The loop represents the prized last mile of communications. Putting it beyond the reach of competitors can only entrench incumbents who already hold sway. Monopoly control of the last mile created all kinds of problems for basic telephone service in the last century, and now we seem bent on replicating that sad story for advanced services in the digital age."
https://www.fcc.gov 14-Oct-04

In its Triennial Review Order released last year, the FCC ruled that the broadband capabilities of fiber loops that extend to a customer’s premises, also known as FTTH loops, would not be subject to unbundling under section 251 of the Act.
In August 2004, the FCC issued an order clarifying fiber-to-the-home (FTTH) rules and relieving the incumbent LECs from certain unbundling obligations that apply to multiple dwelling units (MDUs), or apartment buildings. The FCC said its ruling increases the incentives for incumbent LECs to deploy next generation facilities. The order concludes that determining what constitutes a predominantly residential MDU will be based on the dwelling’s predominant use. For example, a multi-level apartment building that houses retail stores such as a drycleaner or a mini-mart would be predominantly residential, while an office building that contains a floor of residential suites would not. The Order further clarifies that a loop will be considered a FTTH loop if it is deployed to the minimum point of entry of a predominantly residential MDU, regardless of the ownership of the inside wiring.

Verizon and One Economy to Offer Low-Cost Access
Verizon Avenue, a subsidiary of Verizon, and a non-profit called One Economy Corporation, are working together to affordable high-speed Internet access into the homes of many low-income Americans. One Economy's core target market is the approximately 12 million people living in 5 million units of government-subsidized rental housing, approximately 44 percent of the total number of people living in affordable housing in the United States. One Economy and Verizon anticipate impacting a significant share of the 200,000 new low-income apartments built each year. Looking to the future, the partners also are studying the feasibility of expanding this concept to rural and tribal environments as well as to rehabilitated properties.

One Economy and Verizon initially will focus their efforts on new affordable housing projects of at least 100 units. Both are already negotiating with some of the country's largest such developers in New York and along the East Coast.

Under Project Lightspeed, SBC will provide integrated IP-based television, ultra-high-speed broadband, IP voice and wireless bundles of products and services. Through Project Lightspeed, the company will deploy 38,800 miles of fiber - double the amount used to build out the company's DSL network - at a cost of $4 billion to $6 billion.
https://www.sbc.com 14-Oct-04

In June 2004, Ed Whitacre, chairman and CEO of SBC Communications, outlined plans to invest up to $6 billion over the coming five years to push fiber deeper into neighborhoods and fully compete with cable network operators. SBC expects that a FTTN (fiber-to-the-node) architecture will enable it to deliver 15 to 20 Mbps DSL downstream to every home. Under its previous Project Pronto initiative launched in the late 1990s, SBC extended fiber into remote terminals located 12,000 ft from customers. The new plan would push fiber into remote terminals located with 5,000ft of the customer. SBC will also start using FTTP for all new builds in its territory.
SBC is working with Microsoft on IPTV services that would include standard and high-definition programming, customizable channel line-ups, video-on-demand, digital video recording and other advanced features. Field trials are slated for later this year. So far, SBC's partnership with EchoStar is going very well, said Whitacre, indicating "lots of pent-up demand" for cable competition.
In March 2004, SBC Communications and EchoStar Communications launched SBC/ DISH Network satellite TV service across SBC's 13-state service area. SBC's residential service bundles now include a "quadruple play" or TV, wireless, broadband and local/long distance service on a single, monthly bill.

Definition and Overview
1 Introduction
2 Evolution of FTTH
3 Meeting Today's Needs and Anticipating the Future
4 How FTTH Works
5 The Advantages of FTTH
6 Level of Penetration and Acceptance in the Market
7 The Future of FTTH
8 FTTH Suppliers