Thursday, November 11, 2010

The economics of last mile fiber

[ The following excerpts are from Bill St Arnaud's blog, which draws on Herbert Wagter's (Amsterdam FTTH network) Fiber-to-the-X: the economics of last-mile fiber:


(...) Ninety-nine percent of the Internet's physical distance has been strung with fiber already; just a minor hop, and home and business users can have a fully fiber connection. The obvious question is, why has fiber been rolled out in globe-spanning networks without any public discussion whatsoever, while deploying fiber in the last mile is a huge deal? The answer is two-fold: money, and natural monopolies.

A Utility Infrastructure Law commonly quoted by engineers says, "The closer you get to the home, the more investment is needed, averaged per home connected." This law applies to all parts of the physical network, like water pipes, sewage pipes, and electricity cables. What are the applicable numbers for telecom cables?

A useful division of communication networks is between core networks (deep sea intercontinental, international, or core networks countrywide between exchanges), backhaul and middle-mile networks (from exchanges to local aggregation points), and access networks (from homes to local aggregation points). A quick, back-of-the-envelope calculation based on expert estimates indicates a relative investment level of 1:3:10 for core:middle:access networks, proving the Utility Infrastructure Law.


Given the fact that almost all costs in the access network are sunk, it is hard to envision two or more new fiber access networks being deployed in parallel to each home, leading to a stable competitive environment over time. (Unless the ISP’s or network's owners are allowed to divide the market and raise prices to compensate for the underutilization of the networks). If the medium is no longer limited and the access network is the expensive part of the investment, why duplicate the cables? We not do duplicate cables for electricity or other utilities either, for the same reasons.

Note that the current competition between the two wired communication infrastructures to the home—cable and telephone—is a historical accident. Both networks were built for and financed by services that were originally mutually exclusive (telephony and TV). Providers of each these services financed each access network, with relatively high utilization rates. The much later discovery that each network type could unexpectedly deliver packets of information to the home for some new newfangled thing called the Internet, and that users were willing to pay for that new service, was a stroke of luck. But now, with VoIP and IPTV, utilization is a major factor, and the sell-off of older, underutilized parts of the access network and investment in new networks has started.
It remains to be seen what models will emerge where. The European trend is to strive for unbundling and sharing of at least pieces of the new access network (France, Portugal), if not the complete access network (Netherlands, Switzerland). This gets utilization ratios up and average costs down. The US, in contrast, has chosen up to now a competition between networks.


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