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The business plan for fibre: stacking up the building blocks

…a conservative FTTH business planner might choose take-up assumptions in the region of 30%. Could utilities, on the strength of the US municipality figures, assume rates in the vicinity of 50%?

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Achieving a positive Net Present Value from broadband fibre initiatives may take on average well over 15 years. We know this from both our own business case modelling, and indications from existing initiatives from around the world. Although the time horizon for commercial return may be long, it is possible to improve financial prospects by focussing at the business planning stage on strategies for cost minimization and revenue maximization.

Capital investment for fibre networks is dominated by structure costs – that is, the civil works related to installing fibre, including trenches, ducts, manholes and poles. In simple terms, the greater the distances to be fibred, the greater the cost, so clearly a full fibre to the home (FTTH) scenario is a relatively expensive option. Apart from differences in reach, opportunities for squeezing the cost side of the equation may be limited, unless the venture is of a sufficient size to reap economies of scale (for example, in purchasing labour or supplies) or expensive underground cabling can be reduced with cheaper aerial deployment.

Of course, there are circumstances in which some ventures – particularly via established utility companies – may be blessed with a head-start, with existing ducts and infrastructure already available and ready to be utilized. While this will assist the business case with reduced initial capital costs, the venture may still flounder through lack of subscribers.

Realistic retail take-up and ARPU assumptions, given the particular market conditions, are critical inputs to the business plan. Furthermore retail take-up must be considered carefully by the wholesale broadband service provider – ultimately a wholesale enterprise will only succeed if there is sufficient interest at the retail level in services that use the wholesale product.

So, what is the potential market and will retail service providers be able to develop attractive offers for this market? If the main retail offering is high-speed Internet access, the potential market would be any PC-owning customer within network reach. The potential customer may already have a lower speed service, in which case the value proposition will need to be sufficiently attractive to encourage the customer to swap suppliers. This may not be as straightforward as it sounds, as even if the price is affordable for the customer, there may be the complicating factor of a competitive response from the existing service provider. This could involve:

  • aggressive discounting of existing lower-speed services
  • bundling of existing and new offerings
  • upgrading existing networks or deploying alternative networks.

In the face of such competition what would be a realistic take-up assumption? Using recent history as a guide, there is a wide range of observed take-up rates for fibre around the world. Verizon, the largest market participant in the US, is achieving take-up rates of around 28.5%. The FTTH Council North America reported overall take-up in the US to be almost 32% (as at March 2009), and more recently stated that an average take-up rate of 54% was achieved by “retail municipal systems”. Even higher take-up rates are observable – for example, an initial take-up rate of over 90% for OnsNet in the Netherlands – but these tend to be special cases where the network is owned by a co-operative, initial sweeteners are offered, or there are no alternatives in particular localities.

On the basis of these figures a conservative FTTH business planner might choose take-up assumptions in the region of 30%. Could utilities, on the strength of the US municipality figures, assume rates in the vicinity of 50%? We reviewed a number of FTTH deployments by US municipalities, and found mixed results.

An example of one of the more successful ventures is OptiNet, the communications arm of Bristol Virginia Utilities. This venture is deploying a FTTH network using both aerial and underground (directional drilling and direct buried cable). It operates a retail model and was in fact the first public utility in the US to offer FTTH-based triple play services, commencing service in 2002. There is local service competition and OptiNet has triumphed over incumbent telephone and cable companies’ legal challenges on the basis of alleged cross-subsidization and illegal operation (respectively). With a target 45% take-up in the original business plan, the venture has exceeded expectations. In its first year of operation OptiNet achieved 30% take-up, and currently take-up is approximately 60% of homes passed. Key results for the company for 2005 to 2008 are summarized below.

Exhibit 1: OptiNet performance, 2005 to 2008 [Source: company reports, Network Strategies]

Year
Take-up
Revenue
(USD)
Net operating
income (loss)
(USD)
2005
n.a.
7,272,254
(2,928,297)
2006
53%
8,633,285
(2,098,742)
2007
n.a.
10,973,174
241,147
2008
57%
14,525, 312
1,450,232

Certainly there is evidence that take-up of over 50% is achievable but at the same time the business planner considering such an aggressive take-up assumption should consider:

  • the competitive threat, as in the case of some municipalities there is little or no direct competition
  • whether there are anchor tenants prepared to commit to take-up prior to service availability
  • how attractive pricing may be made, given that municipal utilities have some flexibility operating not-for-profit ventures.

December 2009


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