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Fiber to the Home Reduces Operating Costs 20 Percent

April 03, 2013

Fiber to the Home Reduces Operating Costs 20 Percent

By Gary Kim
Contributing Editor

Small and medium-sized telephone companies that have upgraded their networks to all-fiber access annually report operational cost savings averaging 20.4 percent, according to a study commissioned by the Fiber to the Home Council Americas (FTTH Council), and conducted by RVA.

The survey asked telecom managers to report any cost savings they are experiencing in maintaining their network infrastructure once they upgraded from copper in the last mile to all-fiber.  

That fiber-to-home operating costs are lower seems logical enough. 

What might not be so clear is the actual return on investment, under present market circumstances where the revenue to be generated by FTTH is challenged.

Verizon (News - Alert) announced in 2010 a freeze on further FiOS investments. That might suggest either a new emphasis on mobile investment, or a new perspective on the payback from FiOS (News - Alert), or both.

Also, after Frontier Communications acquired a number of smaller market Verizon Communications assets, Frontier sought regulatory approval for a 46-percent price increase for new FiOS TV customers or customers with expiring contracts. The proposed price hikes would raise the monthly recurring cost to $95 a month, compared to the $65 a month price Verizon had been charging.

To be sure, a company as big as Verizon might have different content acquisition costs than a smaller firm such as Frontier Communications. In that case, the price hikes might have nothing to do with the cost of the network used to delivery video entertainment.

But Frontier's proposed pricing moves, to Craig Moffett, a telecom analyst with Sanford C. Bernstein, suggest that for Verizon Communications, FiOS might not actually be profitable.

Verizon executives will dispute that notion.

But it is quite possible a change in industry expectations since the time FiOS was proposed and launched could be a new issue.

Moffat has calculated that the older FiOS connections might cost as much as $4,000 per home, even though incremental installations now cost about $700 per home.

But Moffett also calculates the present value of acquired subscribers at $3,200 each. That would give FiOS a negative $800 net present value per customer.

Of course, there might be multiple ways of looking at the value of FTTH. For more than a decade, many executives have had to face the challenge of investing in network upgrades that might not actually have much incremental revenue upside, on a net basis.

Lower operating costs are part of the payback analysis, but the reasons for investing are, in many cases, strategic. In essence, executives invest so they’ll be in position to “trade market share” with a cable competitor. In other words, executives sometimes make a decision to invest to “keep our business,” rather than for clearly quantifiable incremental revenue gains and traditional payback on investment.

The ability to gain 20 percent lower operating costs is helpful. But some might question whether the payback will ultimately be a positive number, not to mention other uses for invested capital.

Edited by Braden Becker
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