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FTTH deployments in the US

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					FTTH MARKETS

FTTH: Shovel-Ready!
The industry is buoyed by more than 15 million homes now passed and 4.4 million connected, with almost 700,000 new customers in the past six recession-plagued months. Small telcos have big growth plans, made bigger still by the chance at stimulus funds.
By Steven S. Ross ■ Broadband Properties

TTH deployments in the US slowed in the six months ending in March, but continued to grow impressively. The number of homes passed by fiber stood at almost 15.2 million, up more than 1.3 million since the credit crunch hit in September 2008 and 3.4 million more than in March 2008. That’s a strong growth of almost 30 percent year over year, according to data released by Michael Render of RVA at our Broadband Summit in Dallas April 27. More than 13 percent of all American households are now passed by fiber to the home. As growth in homes passed slowed from pre-recession levels, marketing began to catch up and the take rate continued its steady pace upward. This, and rising revenue per customer, contributed to strong financial results reported by FTTH deployers, most notably Verizon. Although non-RBOC carriers accounted for more than half of the growth in new FTTH customers until spring 2006, Verizon’s share of the total has been expanding and now accounts for about three-quarters of the 4.4 million homes connected. Because deployments slowed far more than did marketing, the marketing began to catch up – 13.9 million homes were being marketed by March. The proportion of homes passed that are actually connected is now almost 30 percent, up from 25 percent a year ago. But take rates (the proportion of homes marketed that actually become customers) continue to rise as well, and now stand at 32 percent for the industry as a whole, up from 29 percent a year ago. Rates differ substantially by circumstance and type of build. The industry apart from Verizon and other RBOCs

F

enjoys a take rate of 52.9 percent, up from 51.9 percent a year ago. This rise is despite the fact that greenfield customers have all but dried up. Historically, take rates in new housing developments have topped 70 percent, with 80 percent not uncommon. Often, greenfield developers opt to provide bulk sales of broadband services – by definition a 100 percent take rate. The fact that overall take rates for the industry have continued to climb in a recession, even without this low-hang-

Verizon insider pointed out, the services are easier to sell because someone is more likely to be home in the first place – to hear the sales pitch and to let the installers inside. Render and Michael Whaling of InfiniSys also note that new services such as videoconferencing have begun to drive home broadband sales. In homes themselves, videoconferencing is often a crude affair driven by “webcam” equipment. But MDUs, MTUs and hospitality op-

Tier 3 ILECs have aggressive expansion plans; those that have already deployed FTTH expect to increase customers by 44 percent and homes passed by 32 percent in 2009.
ing fruit, is remarkable and contrary to investment analysts’ consensus. The analysts note, however, that the recession has forced many talented professionals – accountants, writers, architects, technical specialists, managers and so forth – out of their corporate settings and into home offices. The growth of in-home entertainment, especially wide-screen HD video, at the expense of “nights out” at the restaurant has also been substantial despite continued popularity of movie theater ticket sales. All of this helps increase demand for broadband services at home – and as a erators have begun to join large corporations and academia in installations of high-definition telepresence equipment. Tier 3 LeCs and sTimuLus Funding Interest in fiber has been growing among smaller, more rural telephone companies, especially where the Tier 3 is near a Verizon FiOS build. Thus, parts of the country well served by RBOCs deploying fiber (mainly a large part of the Verizon footprint) are more likely to have FTTH service from other providers as well. The one-third of the country that is close to what Render calls “aggressive

about the author

Steve can be reached at steve@broadbandproperties.com.

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FTTH MARKETS
RBOCs” accounted for about 500,000 non-RBOC FTTH customers as of last September. The other two-thirds of the country accounted for about 630,000. These Tier 3 Incumbent Local Exchange Carriers also have aggressive expansion plans. Tier 3 ILECS that have already deployed FTTH expect to increase customers by 44 percent and homes passed by 32 percent in 2009. More than 60 percent of Tier 3 ILECs that have not yet deployed FTTH say they are likely or very likely to deploy fiber all the way to customer homes in the next three years. Only a quarter of them say they are “very unlikely” to go for FTTH in that timeframe. These plans seem realistic, especially with stimulus funding; customer growth among Tier 3 ILECs was close to 50 percent from 2007 to 2008. Also, telcos have been adding broadband connections at twice the rate of other types of non-wireless carriers (mainly MSOs) in the past three years. Oddly enough, Render’s data suggest that deeply rural areas are not necessarily badly served when it comes to broadband generally and FTTH in particular. But very dense and very rural areas are less well served than suburban and small-city areas. The sweet spot is 250 to 1,000 households per square mile. That corresponds to homes on fairly large lots – a half-acre to perhaps two acres – and 30 to 200 homes passed per mile. About

More than 60 percent of Tier 3 ILECs that have not yet deployed FTTH say they are likely or very likely to deploy fiber all the way to customer homes in the next three years. Only a quarter of them say they are “very unlikely” to go for FTTH in that timeframe.
7 percent of all homes in such areas are connected to FTTH. Slightly denser areas – 1,000 to 5,000 households per square mile, corresponding to as many as 8 households per acre, with some duplexes and small MDUs – also do well, with more than 4 percent connected to fiber. Less than 1 percent of urban core areas are connected – a number that will be changing fast over the next few years as Verizon overbuilds major cities such as New York and Washington, DC. Municipalities, which have lagged a bit in deployments over the past few years, are overwhelmingly looking to the stimulus package for grants and loans to build broadband networks; 86 percent say they are looking at grants (which will come from NTIA) and 54 percent would consider loans (which will come mainly from the USDA’s Rural Utilities Service). They have little interest in “creative” financing such as leasing their network builds to a private entity that can take advantage of depreciation write-offs. Those options were favored by less than 10 percent of municipalities polled by Render. As expected, ILECs are much more likely than municipalities to be interested in tax incentives for deployment; although stimulus grants (58 percent) attract the most attention, tax deductions are favored by many (45 percent). Nevertheless, tax credits are of interest to 37 percent and low-interest loans would gain the attention of 29 percent. Video Video has helped drive FTTH sales, and is likely to be an even bigger driver in the future. Peak bandwidth demand per typical household is expected to continue to grow, due to increased numbers of high-definition video appliances in the home. Data traffic will also grow, but video will still add the lion’s share of new demand. The result: A boom in FTTH video customers, despite the recession. Verizon was just starting to market video services four years ago. Since then, its take rate for video has been improving. The number of FTTH video homes newly connected jumped about 460,000 in the six months ending March 2009, down from 554,000 in the six months ending September 2008. But overall, there were almost 2.7 million video homes connected to FTTH by March. What’s more, much of the video demand requires substantial upstream speed and reliability as well as downstream. Upstream speed becomes especially important as telepresence applications take hold. All in all, the picture for FTTH as a whole appears bright indeed. The recession can’t kill it… and stimulus funds will soon be added to the mix. BBP

FTTH Homes Passed, March 2009
(Cumulative, North America)

16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0
19,400 110,000 35,700 189,000 72,100 180,300 3,625,000 13,825,000 11,763,000 9,552,300 8,003,000 6,099,000 4,089,000

15,170,900

970,000

2,696,846 1,619,500

Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

Source: RVA LLC

The number of homes passed by fiber in March 2009 was 3.4 million more than a year earlier -- almost 30 percent growth. It more than tripled from April 2005 to September 2006, almost doubled again by September 2007, and rose another 45 percent by September 2008. Verizon accounts for about 3 out of 8 homes passed in the last year.

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FTTH MARKETS
FTTH Homes Marketed, March 2009
(Cumulative, North America) 14,000,000 13,000,000 12,000,000 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 12,369,000 10,082,065 7,996,400 6,643,000 5,079,999 3,218,600 13,875,600

Homes marketed increased almost 40 percent in the past year, somewhat faster than homes passed. This suggests that fiber network marketers are catching up to the builds; until 2006, homes marketed had been increasing at a faster rate than did homes passed. Now, more than eight out of ten homes passed are being marketed.

,1 00 11 0, 00 18 0 0, 30 0 18 9, 00 0

00

00

19

41

0
Sep-01

35

Mar-02

Sep-02

72

1,000,000

,4

,7

3,

22

2,000,000

1

1,754,300 829,700

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Source: RVA LLC

FTTH Homes Connected, March 2009
(Cumulative, North America) 5,000,000 4,500,000 4,000,000 3,500,000 3,760,000 2,912,500 2,142,000 1,478,597 4,422,000

The rate of homes connected is now almost 30 percent of those passed, up from 25 percent a year ago. Rates differ substantially by circumstance and type of build.

3,000,000 2,500,000 2,000,000 1,500,000

00

50

00

70

0

1,000,000

0

0

1,011,000 671,000

00

00

,3

64

14

50

78

21

,5

10

-

Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

5,

22

38

500,000

50

00

,7

6,

3,

,0

31
Sep-06 2,010,00 1,861,39 340,000 147,900

,0

0

2,

548,000

Source: RVA LLC

Video Homes Connected, March 2009
(Cumulative, North America) 3,000,000 2,654,300 2,500,000 2,195,000 2,000,000 1,641,000 1,500,000 1,054,000 1,000,000 611,400 500,000 1,925 9,675 37,500 87,900 101,400 110,000 260,900 408,800

The number of FTTH video homes connected jumped about 460,000 in the six months ending March 2009, down from 554,000 in the six months ending September 2008.

Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

Source: RVA LLC

Homes Passed, Marketed, and Connected in Each Six-Month Period Since March 2004
(Calculated by BBP from RVA Data)
2,500,000

North American Homes

2,000,000

About 700,000 fewer homes were passed by fiber in the six months ended March 2009 compared to the previous six months. New homes marketed for FTTH dropped by a similar amount, but new homes connected did not fall as fast, leading to slightly higher take rates.

1,500,000

1,000,000

500,000

0

Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09
Mar-04 Passed Marketed Connected Video Connected 8,700 70,300 13,300 7,750 Sep-04 781,000 8,700 68,500 27,825 Apr-05 649,500 224,221 66,500 50,400 Sep-05 1,077,34 416,479 99,700 13,500 Jan-06 928,154 924,600 235,300 8,600 Apr-06 464,000 1,464,30 123,000 150,900 Mar-07 1,904,00 1,563,00 467,597 202,600 Sep-07 1,549,30 1,353,40 663,403 442,600 Mar-08 2,210,70 2,085,66 770,500 587,000 Sep-08 2,062,00 2,286,93 847,500 554,000 Mar-09 1,345,90 1,506,60 662,000 459,300

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FTTH MARKETS
Growth or decline, half over half
Passed Apr-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 -57% 333% -5% -19% 43% -7% -35% Marketed 252% 27% -16% -13% 54% 10% -34% Connected 23% 176% 38% 42% 16% 10% -22% Video Connected 1018% -2% 37% 118% 33% -6% -17%

The rate of growth slowed as the recession took hold and as the absolute size of the market grew.

Overall FTTH Take Rate, RBOC vs Non-RBOC
(Cumulative, North America, March 2009) 60% 50%
41.3% 47.4% 43.7% 35.4% 35.9% 34.5% 29.0% 26.0% 20.8% 18.4% Overall FTTH Non-RBOC
Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

48.2%

51.0%

52.4% 51.5%

51.8% 51.9%

52.4% 52.9%

Take rates (homes buying services as a percentage of those marketed) have been rising ever since 2006, when Verizon’s marketing began to catch up with its buildout. Non-RBOC take rates are still much higher than RBOC (mainly Verizon) take rates.

40%
28.4%

31.2%

30.4% 26.8% 19.9% 22.3% 28.8% 31.8%

30% 20% 10% 0%
Sep-01

-10%

Source: RVA LLC

Percent of US Households Passed and Connected to FTTH
14% 12% 10% 8% 6% 4% 2% 0% Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Passed Connected

More than 13 percent of all homes in the US are now passed by fiber, making FTTH technology a major player in video services.

Three-Year Percentage Growth in Connections By Type of Carrier through September
Tel - RBOC Tel - ILEC

Telcos have been adding connections at twice the rate of other types of carriers in the past three years.

MSO/Cable Municipality/PUD CLEC DEV/Integrator 0.0 1.0 2.0 3.0 4.0 5.0 6.0

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FTTH MARKETS
FTTH Homes Connected by Segment Cumulative – North America
2008

2007
1/3 of US (Aggressive ILECs) Other 2/3 of US

Areas well served by RBOCs deploying fiber (mainly a large part of the Verizon footprint) are more likely to have FTTH service from other providers as well.

2006

2005
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000

FTTH Connection Penetration by Zip Code Density (Density = Homes per sq mile, March 2009)
Very dense and very rural areas are less well served than suburban and urban fringes.
Under 24 25-74 75-249 250-999 1000-4999 5000 and above 0% 1% 2% 3% 4% 5% 6% 7% 8%

681 Other providers* x 1653 average 25%

The Importance of Non-RBOC Players, March 2009
Non-RBOC deployers, including smaller telcos, cable companies, municipalities and others, now account for only about a quarter of customers served.

Three RBOCs (mostly Verizon) 75%

Likelihood Of Deploying FTTH Within 3 Years, Tier3 ILECs Not Currently Deploying FTTH
Very likely

Two-thirds of Tier 3 ILECs that are not currently deploying FTTH expect to be deploying FTTH within the next three years.

Somewhat likely

Somewhat unlilkely

Very unlikely 0% 10% 20% 30% 40% 50%

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FTTH MARKETS
Additional 2009 Growth Anticipated by Tier 3 ILECs Currently Deploying FTTH

Homes connected

Tier 3 ILECS that have already deployed FTTH expect to increase the number of customers served by 44% and the number of homes passed by 32% in 2009.
Homes passed

0%

10%

20%

30%

40%

50%

Tier 3 ILECs (Percent rating somewhat or much more likely)
Grants

Stimulus: Likelihood of Deploying More with Incentive

As expected, ILECs are much more likely than municipalities to be interested in tax incentives for deployment.

Tax deductions Tax credits Low interest loans 0% 10% 20% 30% 40% 50% 60% 70%

Municipalities (Percent rating somewhat or much more likely)
Grants

Stimulus: Likelihood of Deploying More with Incentive

Low interest loans

Tax deductions

Municipalities are overwhelmingly looking to the stimulus package for grants and loans to build broadband networks. They have little interest in “creative” financing such as leasing their network build to a private entity that can take advantage of depreciation write-offs.

Tax credits 0% 20% 40% 60% 80% 100%

Peak Bandwidth Demand Per Average FTTH User
Including Internet Download And IPTV HD Devices
100 90

Mbps

Peak bandwidth demand per typical household is expected to continue growing, due to increased numbers of HD video appliances in each home and also to increased data traffic.

80 70 60 50 40 30 20 10 0 2007

Download Mbps HD Devices Mbps Total Mbps

2008

2009

2010

2011

2012

2013

For the latest European fiber-to-the-home deployment statistics, go to www.bbpmag.com/bbponline.php
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