Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
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Communications infrastructure upgrade The need for deep fiber Published July 2017
Communications infrastructure upgrade | The need for deep fiber Executive summary 03 Introduction 07 Fiber is the centerpiece of wireless advancement Section I 09 Deep fiber is at the center Section II 13 Major fiber investment is needed Section III 14 Incentives to deploy fiber are lacking Section IV 17 Carriers and policymakers can share the responsibility for motivating investment in fiber infrastructure Conclusion 22 Fiber investment requires new monetization mechanisms Sources 25 02
Communications infrastructure upgrade | The need for deep fiber
Executive summary
Fifth generation mobile networks (5G) are now poised
for field testing and launch worldwide. The technology
unlocks unprecedented potential to build seamless
digital ecosystems, reshaping the way citizens live,
work, and interact.
Wireless networks were at a similar An equally transformative moment is
inflection point as 4G services launched coming with 5G, but with two important
early in the decade. The United States differences. First, the economic stakes are
took action as government made new potentially much higher, where connected
spectrum available and carriers responded devices, applications and business models
to accommodate radical, twenty-fold could dramatically stimulate economic
growth in global mobile data traffic. The productivity. Second, the United States is
massive investment in wireless network not as well prepared to take full advantage
infrastructure rewarded the US consumer of the potential, lacking needed fiber
with more coverage at affordable prices, and infrastructure close to the end customers
the US economy generated up to 700,000 (deep fiber).
jobs as a result.1
Communications
infrastructure upgrade
The need for deep fiber 03
Communications infrastructure upgrade | The need for deep fiber
Deep fiber is the To meet future The current
next front in the broadband wireline industry
battle to lead the needs, the United construct does
world in Internet States needs an not incent enough
speed and capacity estimated $130– fiber deployment
Unlocking the full potential of 5G in the 150 billion of fiber Some wireline carriers are reluctant or
United States rests on a key assumption:
the extension of fiber deep into the
infrastructure unable to invest in fiber for the consumer
segment despite the potential benefits.
network. Despite the demand and potential
economic benefits of fiber deployment,
investment Expected wireline CAPEX ranges between
14–18 percent of revenue. Wireline OPEX can
the United States lacks the fiber density in A Deloitte Consulting LLP analysis estimates be 80 percent of revenue.9 Fiber deployment
access networks to make the bandwidth that the United States requires between in access networks is only justified today if
advancements necessary to improve the $130 and $150 billion over the next 5–7 a short payback period can be guaranteed,
pace of innovation and economic growth. years to adequately support broadband a new footprint is being built, repairs from
Increased speed and capacity from 5G will competition, rural coverage and wireless rebuilding after a storm or other event
rely on higher frequencies and network densification. Such ambitious infrastructure justifies replacement, or in subsidized
densification.2, 3 Carriers will deploy many investment could derive from a variety of geographies where Universal Service funds
more small cells, homespots, and hotspots sources including communications service can be used.
in higher bands, with a coverage radius providers, financial investors and public-
measured in meters versus kilometers. private partnerships. The largest US wireline carriers spend, on
Without more deep fiber, carriers will be average, five to six times more on operating
unable to support the projected four-fold Our estimates include funding for three expenses than capital expenditures.10
increase in mobile data traffic between broad categories of fiber deployment: Excessive operating expenditures caused,
2016 and 2021.4 fiber for wireless densification, fiber to in part, by legacy TDM network technology
increase consumer and business broadband restrict carriers’ ability to leverage digital
A second motivation for “deep fiber” competition and fiber to serve rural/ technology advancements. Worse, as
deployment is to increase broadband underserved geographies. Moreover, our legacy TDM networks continue to descale,
service choice for residential and models suggest massive synergies between the percentage of fixed costs overwhelms
business customers. Deep fiber is a the build required for wireless densification the cost structure leading to even greater
key tool for the national infrastructure and adding broadband competition in urban margin pressure.
imperative to provide consumers areas. There are also additional benefits
high-speed broadband connections no between densification and underserved In the last five years, wireline carriers
matter where they live at prices they can communities. With more than 60 percent have lost seven points of market share
afford, closing the “digital divide.” of total costs for construction, permits and in broadband access, mainly to cable
design,8 fiber providers may need to share operators. Cable operators, who have the
Wireline broadband access supports as last mile access routes and rights of way advantage of a more modern coax network,
much as 90 percent5 of all Internet traffic where possible to realize such synergies. do not have these legacy constraints and
even though the majority of the traffic have aggressively deployed high-speed
ultimately terminates on a wireless device. broadband access using DOCSIS 3.0 and 3.1
However, twelve years after the first fiber upgrades. Cable operators currently cover
to the home (FTTH) deployments, only 38 more than 85 percent percent of US homes
percent of homes have a choice of two with Internet speeds of 25 Mbps or greater.10
providers offering speeds of at least 25
Mbps.6 In rural communities, only 61 percent
of the population have access to 25 Mbps
wireline broadband, and when they do,
they can pay as much as a three times the
premium over suburban customers.7
04
Communications infrastructure upgrade | The need for deep fiber
Carriers and
Generating sufficient cash flow to motivate Carriers should consider:
fiber upgrades means building a business
•• Establishing deep fiber as a top
model based on simplicity and capital
productivity. This will not happen without
policymakers priority investment for the long term.
completing the migration from TDM to an can share •• Redesigning business models and
all-IP network. The complexity imposed processes based on digital sales
on IP services by legacy product iteration responsibility and care channels.
for motivating
and cumbersome IT systems increases
•• Providing a more limited set of
operational costs, drives up failure rates,
standard IP products to substitute
and leaves customers unhappy.
investment in fiber legacy TDM products.
•• Mobile operators, not required to support
legacy services, require approximately The lack of funding and motivation to US policymakers should consider:
one-eighth the care staff and receive deploy fiber leaves the future of wireless
•• Eliminating regulatory barriers that
half as many inbound calls per customer and wireline connectivity uncertain.
prevent carriers from operating a single
compared to wireline network operators.11 Wireline telecommunications companies
IP network, impede deployment of
are choosing to invest in areas other than
•• A survey by Nemertes Research found a additional fiber assets, or restrict the
fiber deployment including satellite TV,
reduction in average time to repair from types of services that may be offered.
advertising, content and advanced business
21 hours to 5 hours for a single, end-to-
services. Similarly, infrastructure funds •• Avoiding regulation that limits
end IP network.12
and REITs have made few investments in carrier innovation in creating new
•• French wireless and wireline provider, telecommunications assets. Many wireline monetization mechanisms or voluntary
Iliad, operates an all IP network with carriers depreciate 1.2x–1.3x as much sharing of deep fiber and associated
approximately 3 to 4 employees per PPE as they add in a given year, leaving a communications infrastructure such
10,000 customers compared to 12 to 15 declining net asset base to service increased as trenches, conduit, rights of way and
employees per 10,000 customers for US demand.15 cell sites.
providers.13, 14
•• Dispersing Universal Service support
Many countries, including the United
more efficiently to coordinate/
Carriers stand to gain tremendous States, prioritize ubiquitous affordable
encourage deep fiber programs.
efficiency from deploying new IP networking broadband as a policy objective. The United
architectures like Software Defined States ranks tenth in the world for average
Reforms to the Universal Services
Networks (SDN) and Network Function broadband speed and percentage of users
Administrative Company (USAC) to improve
Virtualization (NFV). This technology is also with over 25 Mbps.16 This is remarkable,
operational efficiency is a prerequisite
important to provide the scale and elasticity as the United States has almost six times
to implement a coordinated deep fiber
required to support 5G networks in the the cumulative land area of the nine
program. Recently, USAC has come under
future. However, the requirement to operate countries ranked above it. Removing legacy
growing criticism regarding its operations
and maintain legacy networks and systems regulations that constrain competition and
and the resulting impact to end-users,
(TDM based) limits carriers’ ability to take investment may enable market forces to
such as consumers, schools, libraries and
advantage of the savings and shift capital to solve many of the deep fiber and broadband
companies. Meanwhile, USAC’s internal
deep fiber deployment. coverage challenges in the United States.
expenses are growing approximately
Furthermore, empowering market forces
at 12 percent per year.17 In the past, the
may enable the government to focus on a
Federal Communications Commission
more limited set of geographies that are
(FCC) has considered putting USAC’s
very expensive to serve or have low income/
operations out for competitive contract to
affordability issues.
save costs and improve responsiveness
to organizations seeking funds to close
the digital divide. At minimum, reforming
USAC internal operations seems warranted
to meet broader goals of expanding
fiber infrastructure and addressing rural
Internet access.
05
Communications infrastructure upgrade | The need for deep fiber
New monetization Partnership between carriers and OTT
players to fund deep fiber
mechanisms As limited fiber availability constrains
increased wireless densification and fiber
needed to broadband, over the top players may choose
to fund fiber deployment, including owning
encourage deep assets or forming partnerships with carriers.
fiber investment Deep fiber as a financial investment
Insufficient supply of deep fiber and
Important as they are, IP migration and overwhelming demand growth are strong
regulatory reforms will not be enough to fundamentals for fiber investment. As
create the financial case for deep fiber interest grows from non-traditional fiber
deployment that is needed for broadband investors, we expect shared infrastructure
and densification. Wireless, wireline and models to emerge for last mile fiber access.
cable require creative new ways to monetize Fiber as leased real estate could allow
“last mile” access as an incentive for massive carriers to maximize asset utilization.
fiber deployment. We contemplate three
potential models: Carrier investment and regulatory reform
can provide key ingredients to address
Synergies between deep fiber and the deep fiber shortage. As carriers are
adjacent services in an ‘unlimited’ world already making 5G investment decisions,
Gartner predicts that affluent households fiber investment is top of mind. Lack
will have up to 500 connected devices by of action may lead carriers to commit
2022.18 In some cases, IoT services offer to investments inconsistent with the
the prospect of new revenue, however, goal of better densification, broadband
most connected devices will require competition and closing the digital divide.
low bandwidth or be WiFi enabled and,
therefore, may not provide carriers with
incremental revenue. In such cases,
carriers have an opportunity to increase
revenue by offering integration, network
security, and traffic management services
within the increasingly complex mix of IoT
devices and ecosystems.
Reforming USAC’s internal
operations seems warranted
in order to meet broader
goals of expanding fiber
infrastructure and addressing
rural Internet access.
06Communications infrastructure upgrade | The need for deep fiber
Introduction
Fiber is the centerpiece
of wireless advancement
Wireless networks were at an inflection point as 4G
services launched early in the decade. “More spectrum
and faster networks” became the rallying cries of
consumers, carriers and governments alike in the global
competition to lead in wireless Internet speeds. The world
responded, increasing wireless speeds and capacity to
accommodate an 18-fold increase in global mobile data
traffic and a 21-fold increase in average mobile data speed
since 2011.4, 19
The United States, in particular, took 5G wireless has a wireline pulse
action. Since 2008, the US government Another inflection point is coming with
has made 295MHz of licensed 5G. But this one is different. While 5G
How the US inspires the spectrum20 available. In the past 8 years, standards focus on a new generation
next round of network mobile data usage soared from 0.2 GB of technology and capabilities for speed
per month to 2.5 GB per month21 and in and flexibility to connect the “Internet of
infrastructure investment many cases much higher. During the things,” provide mobile broadband, and
will determine whether it same period, the postpaid ARPUs of supply critical communications, the
major US wireless carriers remained lifeblood of its potential will come from the
continues to lead the world relatively flat, implying price per GB wireline network with the ultimate goal to
in achieving even greater declined by 10–15 percent. 22, 23 As price extend fiber deep into the network near
per GB has declined, carriers have added the customer. Deep fiber also supports the
innovation. spectrum and made cost reductions to national infrastructure imperatives of
help keep pace. increasing choice between providers for
residential and business consumers and
Carriers and the federal government made closing the digital divide.
good on economic contributions Deloitte
postulated in its 2011 and 2014 papers How the United States inspires the
that 4G drove billions of infrastructure next round of network infrastructure
investment between 2012-2016 likely investment will likely determine whether
resulting in the upper bounds of the it continues to lead the world in even
projected ranges of $73–151 billion in GDP greater innovation, getting more people
growth and 371,000–771,000 new jobs.1 connected to faster networks, and
bringing them the content they need
at prices they can afford.
07Deep fiber | The next Internet battleground Extending fiber deeper into communities is a critical economic driver, promoting competition, increasing connectivity for the rural and underserved, and supporting densification for wireless. 08
Communications infrastructure upgrade | The need for deep fiber
Deep fiber is at the center
Network infrastructure plays a prominent role in economic growth and innovation.
Fiber density is critical to support the next Transmission at higher frequencies Homespots and hotspots require
round of innovation and Internet access exhibits more limited propagation high-speed broadband connections to
for America. Deep fiber can facilitate characteristics than transmission at homes and business. Without deeper
high-speed access to more homes, more lower frequencies. The signals cannot fiber deployment, carriers will be unable
businesses and support hundreds of reach as far and have more difficulty to support the projected four-fold in
thousands of new cell sites and hot spots penetrating walls or other barriers. mobile data traffic increase between
for 4G and 5G. Therefore, network densification 2016 and 2021.4
becomes an even greater imperative.
Previous generations of wireless Such densification is challenged, given Exhibit 1 below shows how fiber is a critical
technology (i.e., 3G and 4G) relied on current fiber deployment limitations component to realizing opportunities for
broader blocks of spectrum and improved and the upgrade costs and deployment the economy as it expands into
spectral efficiency to generate higher cycle times associated with traditional communities to promote competition,
speeds and increased capacity. Increased network architecture. Small cells need increases connectivity for the rural and
speed and capacity from 5G will rely more connections to fiber/cable backhaul to underserved, and supports densification
heavily on the use of higher frequencies realize capacity and speed potential. for wireless.
and densification.2, 3 Deploying fiber closer
to the customers (i.e. deep fiber) can
enable efficient transport of increased Exhibit 1
wireless traffic from that densification. Illustrative view of deep fiber deployment
Supports wireless densification,
Carriers are already purchasing and Current lack of deep fiber Deep fiber
broadband competition, and
testing high-frequency spectrum (both rural broadband
licensed and unlicensed) to solve capacity
constraints. Rather than building macro
towers with mid or low band spectrum,
carriers will deploy lower powered small WiFi WiFi
cells and rely on homespots and hotspots
LTE
each with a coverage radius measured in
WiFi WiFi 5G IoT
meters versus kilometers. Densification of Small cells
$130–150 billion
access points with small coverage areas
imply that fewer users share the network
5–7 years
capacity produced by 4G or 5G small cells,
Microwave link
generating enormous performance gains.
Macro cell Macro cell
Copper
Fiber
Fiber
Fiber
Coax
Coax
Fiber Fiber
Fixed line Wireless core Fixed line Wireless core
Internet Internet
09Communications infrastructure upgrade | The need for deep fiber
A second motivation for “deep fiber”
deployment is to increase broadband
service choice for residential and
business customers
Wireline broadband access is the unsung of immersive media such as Augmented
hero of our nation’s communications and Virtual Reality (AR/VR) will contribute
infrastructure. While a majority of Internet to traffic growth estimated at 181 percent
traffic terminates on a wireless device, CAGR through 2020.25 In addition to these
nearly all of that traffic relies on home new use cases, there will also be a massive
WiFi access points, homespots, and increase the number of devices, pressuring
hotspots connected to wireline broadband both WiFi and Cellular networks to support
infrastructure services such as fiber, coax, the massive number of simultaneous
or twisted-pair copper. Wireless networks devices per base station. Without sufficient
only carry 11 percent of traffic, implying fiber networks, innovation in new use cases,
wireline networks support nearly 90 new applications and new devices will likely
percent of total Internet traffic. be stifled. Deep fiber deployment is the crux
of the new capacity required, including fiber
Today the bulk of the traffic carried by to the home/business and fiber backhaul to
these wireline broadband networks is support wireless densification.
video for entertainment and information
purposes. Streaming video and new forms In addition to supporting wireless capacity
growth, wireline bandwidth to individual
homes and businesses will likely become
even more essential over the next half-
Exhibit 2
decade. Fiber to the home and business
US traffic by network type24
CAGR
will be necessary to support the future of
content delivery including video, gaming,
AR/VR, and other yet-to-be-invented new
15% +45%
content and application platforms. Fiber
is anticipated to be the next front in the
battle to lead the world in Internet speed
and capacity, across both wireline and
11% wireless networks.
7% 68% +20%
66%
Fiber is the next front in
60%
the battle to lead the world
in Internet speed and
33% 23% 17% -0.8% capacity, both for wireline
and wireless networks.
2015 2017E 2019E
Wireline
Unlicensed wireless
Licensed wireless
10Communications infrastructure upgrade | The need for deep fiber
Despite the demand and economic
case for deployment, the United States
lacks the fiber density to make the
capacity and bandwidth advancements
necessary to improve the pace of
innovation and economic growth
FTTH deployments in the United States and competitive-choice perspective. Most
began in 2005 with Verizon’s introduction homes in the United States have few options
of its fiber optic TV service in Keller, TX to for broadband Internet access at speeds of
9,000 initial customers.26 More than 12 25 Mbps down and 3 Mbps up (25/3 Mbps),
years later, wireline telecom companies as shown on the right-hand side of Exhibit 3
pass approximately 26 million houses with below. Given the limited competition in most
fiber—less than 20 percent of total US of the country and the resulting low pressure
houses.27, 28 Telecom companies serve the on pricing, there has been limited adoption.
Carriers will not be able remaining 70 percent with slower copper
to take advantage of WiFi technologies, including Fiber to the Node Existing FTTH and DOCSIS broadband
(FTTN) or DSL, and in some cases, offer no networks differ from the architecture
offload to decrease wireless broadband services at all. Cable has been needed to support widespread small
traffic without more deep aggressive in deployment of high-speed cell densification. Small cells will require
broadband access using DOCSIS 3.0 and dedicated fiber pairs, and thus necessitate
fiber to transport all that 3.1 upgrades. Cable companies currently a higher fiber count. Conversely, fiber to the
potential new traffic. cover more than 85 percent percent of US home is architected to maximize the amount
homes with Internet speeds of 25 Mbps or of fiber shared between subscribers. Without
greater, the FCC definition for broadband access to additional high-speed broadband
communications services.29, 30, 31 and fiber tailored for small cells, carriers
lack the economic incentive to deploy small
Although a vast majority of US homes cells. Moreover, it is unlikely that carriers will
receive 25 Mbps or faster, many homes are take advantage of WiFi offload to decrease
still left underserved from a speed wireless traffic without more deep fiber to
transport all that potential new traffic.
Exhibit 3
Consumer choice for 25/3 Mbps service6
Low adoption rate
While 90 percent of the US has
More than access to advanced broadband
one provider offerings, limited competition has
One provider likely contributed to a relatively low
adoption rate of only 21 percent.
No
providers
21%
11Communications infrastructure upgrade | The need for deep fiber
The digital divide continues to widen
The lack of fiber and/or competitive broadband worsens in rural
and underserved communities
Access to broadband across different These remaining 15,000 wire centers can Competitive losses to cable and CLEC
geographies is uneven at best. Urban be divided into rural and extremely rural triple play offerings often devastate ILEC
America has better access to broadband geographies. There are approximately economics in these areas, preventing them
and is improving its access at a faster rate 1,100 rural wire centers serving about from providing a competitive broadband
than rural and underserved communities. 28 million households and over 13,000 offering in the town center or addressing
On average, 90 percent of Americans have extremely rural wire centers serving 21 the outlining areas of the wire center.
access to 25/3 fixed broadband; only 61 million households. The typical rural wire Although fiber is not required for wireless
percent of the rural population have access center is 100 sq. miles and serves 6,500 densification, deep fiber is still essential to
to 25/3 fixed broadband.6 The difference in households. The typical extremely rural wire serve these very rural areas with broadband
this broadband access between houses in center serves 200–250 sq. miles and serves speeds that meet the national standard, and
urban and rural communities and those who around 1,600 households. Generally, the have a choice of providers.
are traditionally underserved is what defines layout of these geographies is a small town
the digital divide. containing approximately 80 percent of all In the absence of competition, and given
the households and businesses in an area of the aging, less efficient TDM network,
There are almost 21,000 wire centers in 2–5 sq. miles and a sparse rural population broadband in rural areas is typically far
the United States serving approximately in the remainder of the wire center.32 more expensive than in urban and suburban
133 million households, and a territory of environments. For example, in a sample
almost 3.5 million square miles. Most of In these rural or extremely rural wire Kansas wire center, the CLEC charges
the population live in high-density urban centers, if there is broadband competition, $45 for 15 Mbps, $135-160 for 100 Mbps
and suburban areas served by just over it is usually in the form of a cable company and $28 for voice service. This compares
6,000 wire centers that cover almost 84 or a CLEC offering service in only the town to a suburban wire center served by two
million households but represent less center, effectively ignoring the outlying providers able to offer 25 Mbps or higher in
than 110,000 sq. miles. These wire centers portions of the wire center. Usually this which 60Mbps is $45 and 100 Mbps is $55
typically enjoy faster broadband and more service has an effective monopoly as with voice an additional $10 more. Thus,
competition than the remaining 17,000 wire incumbent telecom carrier (ILEC) has poor rural prices for 100 Mbps Internet and
centers that serve sparsely populated and market share and an aging network. Carrier voice are almost three times as much as
more remote areas. of last resort obligations force ILECs to in the suburban example.33 This pattern of
serve the entire wire centers, while cable higher prices and unserved outlying areas is
companies and CLECs can focus on the repeated across the country.
relatively densely populated town centers
(see Exhibit 5).
Exhibit 4 Exhibit 5
Broadband availability in rural and Wire center visual
urban areas (2016) 6
Typical rural wire centers
consist of a small town
with ~80% of the
population in ~10%
Nationwide
of the territory.
Urban
Rural
ILECS are forced to serve
Level of Availability entire geography.
Competitive connectivity
No provider 10% 4% 39% providers typically serve
only the town center.
One provider 51% 52% 48% Such a scenario challenges
ILEC economics and
More than one provider 39% 44% 13% broadband coverage
outside the town center.
*This is a representative depiction of a rural wire center,
where lighter shades indicate higher population density.
12Communications infrastructure upgrade | The need for deep fiber
Major fiber investment
is needed
To meet future broadband needs, the United States needs an estimated $130–150
billion of fiber infrastructure investment
Deloitte Consulting LLP analysis estimates houses.34 Our cost estimates assume that Regardless, fiber will still play a critical role.
that the United States requires $130–150 75 percent of these 70 million homes receive Whether to supply backhaul to wireless
billion of fiber investment in the next 5–7 fiber to the home, while the remaining towers or to shorten copper distances,
years to support broadband competition, 25 percent receive wireless (5G) or other closing the digital divide requires fiber
rural coverage and wireless densification. technologies that can cost effectively investment in these underserved areas.
Such ambitious infrastructure investment yield broadband speeds greater than the
could derive from a variety of sources minimum federal requirements. As depicted in Exhibit 6, we also account
including traditional communications service for synergies between the three categories
providers, financial investors and public- Rural/underserved geographies of fiber deployment described above. For
private partnerships. Our estimates include Approximately 10 million rural homes and example, there are massive synergies
funding for three broad categories of fiber 3 million urban/suburban homes do not between the build required for wireless
deployment: have broadband of at least 25 Mbps.34 Given densification and adding broadband
the costs associated with deploying high competition in urban areas. Since more
Fiber for wireless densification speed broadband to these geographies, than 60 percent of total costs are for
Estimated fiber costs for wireless we have based our estimates on the use construction, permits and design, it is
densification assume that a majority of of alternative technologies such as fixed imperative that fiber providers can share
densification occurs in the most populated wireless (LTE or 5G) and fiber to the node, last mile access routes and rights of way.
metropolitan areas, covering approximately using advanced modulation and vectoring.
48 percent of the total US population. To
gain efficiencies, we assume that multiple
wireless carriers will share fiber backhaul
or conduit to small cells, rather than each Exhibit 6
carrier building out its own. Our cost models Required fiber infrastructure investment
also take into consideration the significant Broadband competition
differences in construction costs based $60–100 billion
on population density as we approximate
fiber deployment costs for five categories of
Synergies
population concentration.
Fiber to increase $75
broadband competition Rural and
Synergies
Competition between at least two providers underserved
$100 $35–40 billion
that meet federal guidelines for broadband Total estimated costs
of 25 Mbps downlink and 3Mbps uplink Wireless $20 over 5–7 years to support
implies improving broadband speeds to densification wireless densification, broadband
$15–20 billion competition, and expanded coverage
about 55 million urban suburban houses $130–150 billion.
as well as approximately 13 million rural $0 $150
13Communications infrastructure upgrade | The need for deep fiber
Incentives to deploy
fiber are lacking
The current wireline industry construct does not incent sufficient broadband deployment
Strong demand for fiber exists from home.35 However, the lack of homes substitution. Wireline carrier market share
wireless densification for 5G, improved passed by upgraded wireline telco of voice revenue has declined from 79
broadband access and new business broadband (fiber or advanced copper DSL) percent in 2005 to less than 15 percent in
connectivity services. As established in causes declines in voice and broadband 2015, most of which has migrated to
the previous section, such demands market share versus cable competition. wireless only.38
remain either unmet or are unevenly
served across much of the United On average, wireline telecom carriers This dramatic customer attrition may
States. What are the barriers preventing account for about 37 percent of consumer result in challenging financials for the
carriers from making the necessary broadband customers compared to 63 wireline telecom industry. Current and
investments to meet the demand for percent for cable.36 In 2012, telecom forward-looking financials leave little room
the consumer segment? companies enjoyed 44 percent broadband for fiber upgrades. Examining the revenue
market share.37 Cable competition drives waterfall in Exhibit 7 demonstrates that
Wireless substitution and cable the majority of market share loss. post obligations such as debt and interest,
competition have taken a toll on most However, small, but persistent pressure wireline companies generate insufficient
wireline carriers’ customer base, leading to from alternative providers that address cash flow to re-invest in fiber to support
challenging economics and limited funds the most attractive markets where they residential broadband, business services
for fiber deployment. Wireline telecom face low entry barriers also challenge or wireless densification.
carriers have sustainable market share in telecom market share. Wireline carriers
areas in which they offer fiber to the fare far worse in voice because of wireless
Exhibit 7
Average 2016 wireline financials39
(iIn thousands of dollars)
$140
After fulfilling obligations
$120
such as debt and interest,
$100
wireline companies do not
$80
generate sufficient cash
$60
flow to re-invest in fiber
$40
to support residential
$20
broadband, business
$0
services, or wireless
$(20)
densification.
$(40)
Revenue Opex Capex Tax Interest Dividend Cash flow
14Communications infrastructure upgrade | The need for deep fiber
Carriers have a limited business Why
case for fiber deployment broadband
Based on industry interviews, the costs for Re-build
Universal
telecommunications companies to deploy Each year, storms and other natural events Service is
fiber in urban and suburban geographies
has traditionally been between $600
cause damage to wireline networks. If the
required repairs are extensive enough,
challenging
and $1,800 per home passed, excluding carriers opt to totally rebuild the network
customer premise equipment (CPE).40 and replace existing copper with fiber. The concept of universal service for voice
is relatively simple, as customer needs
Carriers incur and additional 20–30 percent do not materially change over time.
to connect and install a customer. Subsidized geographies Broadband is much more complex as it has
Federal Universal Service Fund supports speed, availability, error rate and latency
characteristics. In the past, government
Carriers typically deploy fiber in four select fiber deployment in geographies not has set minimum speed characteristics
situations in which they can generate a covered by broadband and where for broadband. However, these minimum
positive business case. Collectively, these deployment and operational costs are performance expectations have changed
numerous times over the past 15 years,
four reasons account for most of the fiber prohibitive. Through August 2015, ten adding uncertainty to carrier investment
already built that comprises almost the carriers accepted a total of $1.5 billion decisions. Exhibit A below shows the
26 million houses passed.41 Fiber build per year from the Connect America changes to the FCC’s definition of
broadband downlink speeds.
motivations under the current industry Fund (CAF) to serve approximately
construct include: 7.7 million Americans.43 Exhibit A
FCC Broadband Speed Definition61
Short investment payback period Carriers fund as much FTTH as possible
Broadband
Emphasis of deployment to houses and using a combination of the approaches Dates
speed definition
businesses where loop lengths and line described above. However, limiting fiber
1996–2003 200 Kbps downlink
make-up allow for relatively inexpensive deployment to these motivations leaves
2004–2010 Measured broadband in
fiber deployment costs. These include more the United States dramatically short on five speed tiers ranging
densely populated areas and aerial (versus high-speed broadband coverage to service from 200Kpbs to 100Mbps
buried) environments that offer shorter broadband and wireless densification. 2011–2014 4Mbps downlink/1Mbps
payback periods on the initial investment. uplink
2015– 25Mbps downlink/3Mbps
New build Present uplink
Carriers typically deploy fiber, in lieu
of copper, to serve newly constructed In any universal service approach, defining
neighborhoods. Labor costs for burying minimum performance thresholds and
future proofing investments is key to
fiber and installing the electronics
constitute a vast majority of the Carriers today typically providing services. However, government
minimums could potentially risk restricting
deployment costs, implying that the cost deploy fiber in four specific the technologies deployed and how they
evolve to meet the changing needs of
of deploying fiber to a new house is about
equal to deploying copper. New build US situations in which they customers. Market mechanisms that
enable robust broadband competition
houses grow at approximately 1.5 percent can generate a positive are better equipped to help ensure that
performance evolves to meet demand.
per year (average since 1955),42 a rate
insufficient to address the fiber shortage business case, given
or coverage of existing houses. the industry’s current
structure.
15Communications infrastructure upgrade | The need for deep fiber
Excessive operating expenditures
caused by legacy network operations
restrict carriers’ ability to leverage IP
networking advancements
Motivating carriers to fund fiber Wireline carriers have both a capital
infrastructure likely requires a method to intensive and labor-intensive business
improve carrier margins and free up money model. Other labor-intensive industries
for capital investment. As market share such as construction, hospitality and
losses in both voice and broadband access agriculture typically have capital intensities
mount, carriers have been aggressive in below 5 percent compared to a typical
Retirement of legacy TDM slashing costs. However, cost reduction wireline telecom carrier with the expected
networks would greatly opportunities are fundamentally limited capital intensity of 14–18 percent.45 Shifting
without an ability to completely retire OPEX dollars to capital investment in fiber
reduce operating expenses, legacy TDM products and assets. Without deployment requires that carriers operate
freeing up funds for fiber the ability to shutter real estate and one network instead of two. Retirement of
decommission support systems entirely, legacy TDM networks could greatly reduce
investment. cost cutting alone cannot keep pace with the operating expenses to free up funds
customer loss and corresponding revenue for fiber investment. TDM retirement
declines. As legacy TDM wireline networks also frees up capital previously reserved
continue to descale, the percentage of fixed for maintenance of the legacy networks
costs overwhelms the cost structure which and systems.
could lead to even greater margin pressure.
Carriers are willing to invest in, and could
potentially gain tremendous efficiency from
deploying new IP networking architectures Exhibit 8
like Software Defined Networks and 2016 Average OPEX to CAPEX ratios44
Network Function Virtualization (SDN NFV).
However, the requirement to operate and
maintain legacy TDM-based networks
limits carriers’ ability to take advantage
of the savings and shift capital to deep
fiber deployment.
The ratio of cash OPEX to CAPEX in Exhibit
8 depicts the predicament of operating
a legacy network given ongoing market 5.2X
share loss. Operating two networks
(legacy TDM and IP) forces the largest 3.8X
wireline carriers to spend, on average,
five to six times as much on operating 2.7X
expenses as they do capital expenditures.
High operating costs due to maintenance
of legacy products and systems consume
the vast majority of service revenues,
leaving less for capital expenditures. Wireless Cable Wireline
16Communications infrastructure upgrade | The need for deep fiber
Carriers and policymakers
can share the responsibility
for motivating investment in
fiber infrastructure
Carriers and policy makers share The current economic
responsibility for motivating investment in
equation for fiber
fiber infrastructure. It is important to attract
broadband infrastructure investment from deployment is driving
both operators and investors. However,
operators to invest in other
the current economic equation for fiber
deployment is driving operators to invest in areas, or not at all.
other areas, or not at all. Failure to motivate
investment in deep fiber will likely have
three disastrous consequences:
•• No network densification
to support 5G and associated
use cases.
•• Lack of choice on providers
of consumer broadband.
•• Widening of the digital divide.
17Communications infrastructure upgrade | The need for deep fiber
Building a business model based on simplicity and capital
productivity can help motivate wireline carrier fiber upgrades
Migration from TDM to an all IP Network Eliminating the need to accommodate legacy •• Reduction in the average time to repair
improves carrier cost structure by infrastructure and services could also allow from 21 hours to 5 hours.
rationalizing product iterations, simplifying carriers to reap efficiency gains from new
•• Increased availability of replacement parts,
processes and drastically reducing IT networking architectures like SDN and NFV.
as some participants complained that
costs. Moreover, without TDM retirement, Virtualized network functions are already
replacement parts could only be found
IP products must interact with legacy IT being implemented in certain parts of the
using online exchanges due to the age
systems that complicate selling, provisioning network, like the mobile core, or using
of their systems.
and billing processes. This complexity virtualized IP platforms for voice services.
generates high failure rates and order The savings efficiency of these topologies •• Reduced equipment maintenance
fall-out, resulting in increased cost for are limited if workforce processes still are expenses by 34 percent.
the carrier and inadequate customer required to maintain legacy systems when
•• 31 percent lower costs related to moves,
experience. Exhibit 9 shows the difference in highly automated processes could be used
adds and changes.
failure rates and other operational metrics if the services were offered on IP.
between IP wireline services and mobile
French wireless and wireline provider,
services (for example, wireline customers One study showed that there is a 60–80
Iliad, provides another salient example of
call their carriers twice as frequency as a percent reduction in real estate and power
operational and cost structure changes
mobile customer). The ability to retire TDM costs. Migrating to a fiber-based IP network
feasible when operating an all-IP network
services and operate an all-IP network allows carrier to remove equipment,
and adopting a digital customer experience.
would make IP metrics more comparable repurpose floor space and even consolidate
In 2015, Iliad operated a $5 billion dollar
to mobile metrics and yield significant cost central offices.47 A survey conducted by
company with 17.8 million subscribers
savings and margin benefits. Nemertes Research provides indicative
with only approximately 6,000 employees,
savings from a shift to a single, all IP
while the traditional wireless and wireline
Eliminating the dependency on the legacy network:12
carriers operate with approximately 12–15
network can help rectify process failure
employees per 10,000 customers, Iliad
rates. TDM retirement greatly simplifies
operates with efficiencies much more
carrier products, processes and IT.
aligned with large Internet companies at
Operating an all-IP network enables more
approximately 3 to 4 employees per 10,000
efficient sales, service delivery and service
customers.13,14
assurance processes through digital
channels. Order to cash processes are
no longer encumbered by inflexible and
dated systems that render inaccurate or Exhibit 9
inconsistent data, leading to redundant Operational inefficiencies between
data collection, time-consuming order wireline and mobile networks46
reconciliation and inefficient process Number of
inbound calls
hand-offs. These legacy OSS systems
are inherently linked to the TDM network Inbound call center calls per customer 2x Wireline receives twice the
and severely inhibit the opportunities for number of calls as wireless.
wireline carriers to realize the cost savings
and customer service benefits. Moreover,
committing capital to maintain compulsory
legacy TDM networks leave minimal ability
Average inbound call halling time (mins) 1.5X
2x
to fund new IP fiber builds and other access
innovations. Average order entry time(mins) 3X
Care staff per 10,000 customers 8X
18Communications infrastructure upgrade | The need for deep fiber
Carrier actions to motivate
IP migration and fiber deployment
Carriers can enhance their ability to realize Investing in digital Given the long timeframes required to
cost saving by adhering to a transformation sales and care channels reach full fiber deployment, carriers should
program that creates industry standards Digital transformation in an all IP world consider taking advantage of shorter-term
for IP product mapping, invests in digital has the potential to yield the cost and alternatives in select markets. In rural
processes, and re-invests savings into deep revenue synergies that generate cash for areas, fiber to the node, HFC, satellite, or
fiber and/or wireless broadband. fiber investment. By taking a synchronized fixed wireless LTE or 5G may bring the best
approach, carriers can reap benefits alternative for broadband speeds. Many
IP product substitution in the front and back end of the digital of these solutions will require deeper fiber
As addressed in previous sections, transformation. Specifically, carriers can deployments to allow access points located
discontinuing legacy products is a better serve customers by improving within range of the subscriber. However, the
prerequisite for increased fiber investment. service metrics and customer experience. case for network investment becomes more
However, legacy product retirement also Moreover, carriers can generate IT savings difficult as wireline carriers lose broadband
creates inconvenience for customers. To by rationalizing applications and test market share. Payback periods vary greatly
ease the transition for customers, carriers environments, leading to faster product based on a carrier’s position in the market,
can work together to create standard development and provisioning cycle times. and its ability to transition customers from
product substitutes that meet customer copper to fiber (versus winning customers
needs. Coordinating the mapping for legacy Deployment of competitive away from the competition).
products to IP catch products among broadband to 100 percent
wireline carriers can help gain buy-in from of serving area Carriers that act on these principles will
business and residential customers and A profound and impactful action by likely realize the potential benefits of growth
minimize the time and potential hassle of carriers would be reinvesting the and innovation. Carriers that fail to act
switching. Carriers can use various industry cash generated from the IP and digital quickly risk degradation of their subscriber
forums or consortiums to assign a standard transformation to build deep fiber. base to a point that negates the benefits
IP product replacement for each legacy Carrier benefits include subscriber and of transformation.
product and validate their suitability. When revenue growth from broadband as well
determining IP product replacements for as access to wholesale backhaul revenue
TDM, it is important to note that many from wireless densification. Potential
features from older technologies are implications for the nation are nothing
obsolete. Therefore, duplicating prior short of transformational to our nation’s
product capabilities and interfaces should connectivity infrastructure including
not be a requirement. achieving the fiber density required for 5G
wireless services, closing the digital divide
Carriers can also help ease customers’ and inspiring the next round of innovation.
transition to IP by limiting the number of
customer visits or service disruptions. This
is especially important when dealing with
business customers that likely purchase
numerous legacy products from a single Carriers that take these
carrier. Carriers should carefully craft actions quickly will be able
migration plans that transition entire
customers. The alternative of transitioning to realize the benefits of
one product at a time risks numerous growth and innovation
customer touches and service outages for
a customer. This is understandably more
complex with regards to enterprise and
carrier services given the diversity
of services and products and complexity
of contracts.
19Communications infrastructure upgrade | The need for deep fiber
A policy environment more favorable to IP
migration will motivate deep fiber investment
Many countries, including the United
States, prioritize ubiquitous affordable Exhibit 10
broadband as a policy objective. The Regulations that prevent IP migrations
United States ranks tenth in the world
for average broadband speed and the # Name Jurisdiction Description
percentage of users with over 25 Mbps.16 1 Carrier of Last Resort Federal/State •• Carriers designated as COLRs must ensure service
This is a remarkable achievement as the (COLR)48 is available for consumers before they are able to
United States has almost six times the discontinue service, even when there are alternative and
competitive options
land area of the countries ranked above
•• State commissions have the right to waive this
it. In many countries, there has been
requirement, as a result 25+ states have removed COLR
significant government intervention as of 2015
responding to perceived market failure.
2 Copper retirement Federal •• Requires public notice of network changes that would
However, much of the intervention and competing affect a competing carrier’s performance or ability to
has focused on customer segments exchange carriers provide service
180-day petition49
and geographies where the market •• Competing carriers have the right to petition the FCC for
would have likely deployed broadband reconsideration of approval of the changes for 180 days
regardless of government subsidy. •• ILECs must inform customers when copper is being
removed from those customers’ premises
Removing or reducing legacy regulations 3 FCC approval to Federal •• ILECs require a 60-day review by the FCC for
discontinue service50 discontinuance of services
that constrain competition and investment
•• FCC requires ILECs to maintain networks at full capacity
could enable market forces to solve
until retiring
many of the deep fiber and broadband
4 Wholesale services51 Federal •• To discontinue wholesale services, ILECS must file an
coverage challenges in the United States
application under Section 214 of the Communications Act
Furthermore, empowering market forces stating that “reasonably comparable” services exist after
could also allow the government to focus transition
on a more limited set of geographies that 5 Marketing Federal •• Technology transition rules forbid ILECs from promoting/
are very expensive to serve or have low limitations52 marketing to customers to switch to an all-fiber service
that is different from their current service
income / affordability issues.
6 Legacy Compatibility53 Federal •• Requires ILECS maintain service compatibility with a
defined list of legacy service for consumers and small
Exhibit 10 references regulations relevant businesses, including home security systems, medical
to the country’s ability to lead in 5G and monitoring devices, credit card readers and fax machines
bring fast, affordable broadband to more 7 Access to poles and Federal •• In order to add new cables to a utility pole, each company
citizens. Examples include carrier of last conduit54 that owns cables on the pole has to send out technicians
resort obligations, regulations that prevent sequentially to move existing cables (process can take
several months)
carriers from migrating customers to more
•• Utility providers charge rental rates/tariffs that are
cost effective IP or wireless solutions by almost 2x the cost of network construction
mandating the maintenance of legacy
8 Requirements of Select States •• Many states are considering to shift existing
networks and products, and requiring traditional service telephone rules (discontinuance, notification, 911
a lengthy process for access to network requirements on integration, etc.) to the VoIP Service providers—done
support structures. VoIP55 on a state-by-state basis
9 Replacement of public Select States •• Requires telecom providers to conduct education and
switched telephone outreach before seeking withdrawal of circuit switch with
network 56 confirmation from client party
•• Requires that alternative telephone service is available
before switch
•• Cannot remove or transition before Jan 1, 2020
20Communications infrastructure upgrade | The need for deep fiber
Operational efficiencies to disperse
universal service support will likely
drive faster fiber deployment
Encouraging innovation and network Education Week’s May report states
reinvestment in deep fiber by removing “In recent weeks, according to school-
Reforming USAC’s legacy technology and administrative broadband advocates, more than 100
obstacles may assist carriers in their efforts school districts have received letters
internal operations to retain customers and generate the cash questioning their plans to use federal E-Rate
seems warranted flow needed to strengthen their networks. funds to support construction of fiber-optic
To help meet ambitious fiber deployment networks. The new inquiries, however, have
in order to meet goals, it makes sense to evaluate both the prompted more uncertainty to bring high-
the broader goals objectives and operations of the Universal speed Internet to some of the country’s
Service Fund (USF) and its Administrator. hardest-to-reach students.” While these
of expanding fiber Reforms to the Universal Services stakeholders are expressing frustration,
infrastructure and Administrative Company (USAC) to improve it has been particularly galling for some
operational efficiency is a prerequisite to see the USAC’s internal expenses grow
addressing rural to implement a coordinated deep fiber at approximately 12 percent per year on
Internet access. program that can help drive densification average.17 Consequently, it is no surprise
and broadband competition. that USAC’s internal implementation of
some of these programs has also recently
The FCC and Congress set policy objectives received scathing FCC criticism. Chairman
for the USF. Success regarding USF policy Pai criticized cost overruns and failure to
objectives relies on the operational meet FCC deadlinesFN. And as Commissioner
effectiveness of USAC. However, USAC Michael O’Reilly wrote, “The departure of
has come under growing criticism from its CEO presents an opportunity for the
multiple areas regarding its operations and Universal Service Administrative Company
the resulting impact to end-users, such as (USAC) to clean up its actFN.”
schools, libraries and private companies.
In one case, USAC asked for records going In 2005 and again in 2008, the FCC
back 15 years to 1998 before it would fund considered putting USAC’s operations out
infrastructure build. More recently, the FCC for competitive contract to save costs and
reversed USAC’s imposition of late fees and improve responsiveness to organizations
penalties based on contribution amounts seeking funds to close the digital divide.59
that had been reversed; USAC imposed There is, in fact, precedent in government
fees and penalties that were over twice the putting specific operations out to bid or
underlying contribution amount and took 17 prompting competition. For example,
years to resolve.58 the numbering administration has been
successfully run by commercial firms
for over a decade. A dozen years later,
given the critical role of broadband to our
country’s economy and the imperative
that our country lead in 5G, USAC reform
is more important than ever. At minimum,
reforming USAC internal operations
seems warranted to meet broader goals
of expanding fiber infrastructure and
addressing rural Internet access.
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