Fixed broadband usage in mature markets strengthen FTTx investment case in emerging markets

BOSTON, USA: Last month, AT&T rather quietly launched AT&T Wireless Home Phone and Internet - an LTE-based landline and broadband replacement service in the USA. The service is very similar to Verizon's HomeFusion, and pricing for data is more or less the same: 20GB per month costs $90; 30GB costs $120; and overage charges are $10 per gigabyte.

AT&T is initially marketing the service as a direct competitor to the Verizon service in Verizon's wireline operating area, and not in its own area. Unlike HomeFusion, the AT&T service uses LTE to backhaul ‘fixed' voice, which costs an additional $20 per month. Both AT&T and Verizon have indicated that they view LTE as the way forward for static broadband in areas not served by their FTTN and FTTH networks, which represents about 25-30 percent of properties in their operating areas.

Case for LTE as a fixed-line replacement is weakening

The obvious problem with the LTE fixed-replacement approach is the use case. The highest data package available from both operators is 30GB per month, which is already below the mean average level of fixed broadband usage in the USA. Furthermore, AT&T and Verizon estimate that their services will typically deliver access speeds of between 5Mbps and 12Mbps. As a result, their appeal will be restricted in rural parts of the USA to lighter users with poor ADSL services and no access to cable broadband. Nevertheless, additional spectrum and/or infrastructure could help to ease these limitations.

Evidence of a very strong surge in data consumption is emerging in several markets. From data published last year in the UK, we calculate that average usage on FTTC/FTTH exceeded 110GB per month in mid-2012. These subscribers accounted for only 6% - presumably mainly heavy users - of the fixed broadband subscriber-base, so the average could decline slightly as the user base broadens. However, anecdotal evidence suggests that the figure is holding steady.

Current-generation ADSL usage is also surging, according to a growing number of reports. For example, last year, TalkTalk Internet usage was almost certainly well below the UK average of 23GB per month. In May 2013 - six months after the launch of TalkTalk TV - the operator reported peak bandwidth at 706Gbps, which equates to 39GB per month per subscriber, assuming 6.5 percent busy-hour periods.

Even accounting for the 73,000 FTTC customers and assuming that they consume 100GB per month, this growth in ADSL usage will be well ahead of long-term historical Internet traffic growth rates. TalkTalk is currently planning a 50-100-times expansion in the capacity of its aggregation networks during the next 5-10 years.

The primary growth driver for fixed broadband usage appears to be content - particularly boxes that drive online content to TV sets - rather than networks. The move to on-demand viewing is only just starting in most of Europe, but some commentators in the USA are already predicting the death of linear broadcast TV. More end users are giving up their linear cable TV service, and Cablevision CEO James Dolan this month predicted a day when cablecos stop offering an RF service altogether.

Cellular technologies are unlikely to cope with a large number of users with these sorts of demands, and designing a rural wireless network to behave like a fibre network can be a very expensive undertaking, as NBN Co's 4G fixed wireless roll-out in Australia has demonstrated (it has cost AUD1.4 billion ($1.28 billion) to pass 500 000 premises).

A recent report by Analysys Mason, LTE as a next-generation access platform in rural markets: cost-benefit analysis, argues that LTE in developed economies can play only a very limited role in the supply of fixed broadband - confined to particularly hard-to-reach areas and even then with strict data rationing.

The case for investment in fixed broadband in emerging economies is better now than it has ever been

Wireless networks, though, play a larger role in the broadband plans of operators in emerging economies. The case for wireless broadband as a primary means to connect in these countries may be just as weak as it is in developed economies, principally for the following four reasons.

* Fixed broadband users in middle-income economies that already have good NGA availability (like some Central and Eastern European countries) consume on average vastly more Internet data than their counterparts in higher-income economies.

* Demand is propelled by changes in TV content distribution. TV habits are more universal and far less constrained by wealth and urban/rural divides than Internet usage, so demand from rural or poorer users will not be lower.

* If it is connected TVs (or rather devices for connecting TVs) and over-the-top (OTT) content that encourage usage and not NGA, then the drivers of usage are not in themselves priced in ways that pose a great barrier to adoption in price-sensitive markets (for example, Google's Chromecast fob is just $35). A demand-primed user base will not long be satisfied with first-generation ADSL (because of its speed and stability) or LTE (because of its limited capacity and, in the long term, because of its speed).

* The capex differential between 4G and fibre roll-out (whether FTTN or FTTH) is lower in emerging markets than in developed economies.

Emerging economies present real and rapidly improving opportunities for investment in fixed broadband infrastructure - whether upgrades of copper and coax or deployments of pure fibre. The argument is no longer the self-fulfilling one where networks encourage usage, but a more compelling one where usage grows anyway. Operators have an excellent opportunity to monetise these trends, and become significant stakeholders in the video value chain:

* initially by harnessing and stimulating trends in usage, by increasing aggregation-level capacity (including CDNs), selling OTT/catch-up boxes and upselling subscribers to higher or unlimited data caps

* subsequently, by consolidating the subscriber base with faster - and, just as importantly, more-stable - NGA connections for multiple-screen, on-demand consumption, as quickly as construction permits.