Those who hope to find fiber broadband snaking through their neighborhoods will be unhappy when they read a Reuters interview with Verizon’s CFO. Those who have followed my research on the subject of broadband profitability won’t be surprised, though. What Shammo said was that FiOS won’t be as profitable to Verizon as wireline had been, and that’s a perfect picture of the dilemma of the modern service provider.
Copper loop infrastructure is relatively inexpensive to install and maintain. The cost per foot for the media is low, and there are no special techniques needed to make connections. You can deploy copper in support of POTS (plain old telephone service) that you sell for ten bucks a month. Even augmented at the CO end with DSL equipment, the cost of the loop per customer has been hovering about a hundred bucks, and long useful life pays back on that decently. That’s why telcos have been able to stay in business. But fiber to the home is a LOT more expensive. It costs about $700 to pass a home in a high-density territory like Verizon’s, and about $350 more to connect the customer. That’s ten times the cost of copper.
Now, if telco TV and broadband earn operators like Verizon over a hundred bucks on the service per month (ten times POTS) then why isn’t fiber TV and broadband similarly profitable at ten times the cost? The answer is twofold. First, POTS delivered voice calls that consumed, in digital form, only 64 kbps. Fiber delivers broadband Internet at 15 Mbps, and the aggregation network has to be a lot more robust to move that much larger amount of traffic. So where the loop cost including switch termination was the big cost for POTS, the upstream aggregation in the metro network is a formidable added cost for broadband and FTTH. Second, nobody would pay enough for broadband Internet to justify FTTH anywhere in the US. What motivated Verizon to get into the FTTH game wasn’t broadband, it was channelized TV, and in that application you have to pay for the programming. POTS was totally fulfilled internal to the telco world; its costs were their costs. FiOS has a substantial cost component (up to 60%) in licensing fees for programming.
This is why the whole wireline game is so precarious for telcos. If you stay with your copper plant, as AT&T has done, you have fundamental limitations in the quantity of channelized material you can deliver, and anything you do in TV reduces what you can deliver in Internet service. You pay the same programming fees, too, so while your costs are low your hold on the market is threatened by every advance, including HDTV, and by cable competitors whose copper plant is the higher-capacity CATV. But if you move to fiber, you’ll pay an enormous capital cost up front that you’ll have to amortize over decades to afford, and profit per year after fees to pay back on that is shrinking as licensing fees rise. No wonder we have fiber only in very economically dense areas, which is what my models have shown would be the case all along.
If you then look at what the “cut-the-cord” types would like the future to be, you see the problem there too. Right now, only people like AT&T with U-verse deliver channelized TV over IP, and frankly I’ve never believed it was a sound strategy even for them. But if you moved to a true OTT TV model, you’d have an enormous problem of traffic growth. A single TV show might consume about 5 Mbps (average between SD and HD) of bandwidth per channel, so sending all 200 channels to a CO for distribution would consume about a gigabit of capacity. If that CO has 20,000 households, the same material delivered on-demand and OTT would consume ONE HUNDRED TIMES that bandwidth. More significantly, that is nearly 800 times more than the typical per-CO peak Internet traffic level today. There is simply no way something like that is going to work. At what consumers are prepared to pay for broadband (an average of less than $40 per month), what operator is going to expand aggregation bandwidth by nearly a thousand times? And in any case, how are those who are providing low-cost OTT video going to pay programming fees if those fees rise to where they’d have to be for networks to survive the loss of channelized TV?