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Open Broadband Infrastructure… And Why There’s No Business Case for FttH to Sell TV

Those advocates of a free market approach to fiber to the home (FttH), rather than a utilities-based one, often point to entertainment as the way to make that happen. And they then immediately point to the USA, where FttH rollouts have indeed been driven by competition between the cable TV companies—who, of course, for the last 50 years have been successfully selling entertainment and who, over the last decade or so, have been able to combine this product with their broadband offerings.

The telcos who were initially less enthusiastic about broadband (because it required them to abandon their lucrative ISDN services and replace them with the simpler and cheaper DSL technology) suddenly found themselves bested in the broadband market by the cable TV companies—a trend we also saw in some of the European markets—for instance, the Netherlands.

Telcos, not renowned for sophisticated marketing and business models, rolled out the big guns and started to offer TV services over their telecoms networks. Obviously that can only be done over very expensive FttH networks. But, in customary telco fashion, that was no issue. Under the slogan ‘my cable is bigger than yours’ they rolled out fibre, led by Verizon’s FiOS service.

As I had written at the beginning of the FiOS rollout, I didn’t see the business model for such a project, for two simple reasons:

  • using FttH to roll out entertainment services is a damned expensive thing to do; and
  • customers are not prepared to pay a premium simply to get TV over fibre rather than over a coax cable or satellite.

Of course, such arguments would never dampen the telco ego and the FiOS network was duly rolled out—and amid lots of praise, as it delivered fantastic speeds and great quality for those who were prepared to spend the $125+ for the service. As we estimated at that time, at that price penetration levels would be between 5% and 15%. Based on advice from FttH experts we also knew that to make an FttH rollout economically feasible you need penetration levels above 50%.

Now, a decade later, it is very clear that at those exorbitant prices the required penetration levels will never be reached. If even the United States, the most advanced entertainment market in the world, cannot get this TV-based FttH business model to work what hope is there for similar models in other countries? FiOS has concluded its initial roll out and has indicated that it has no intention to expand the service; a clear indication of the limitations of its current business model for the service.

So this should be a clear lesson for those who still believe that this is the way to move forward.

On top of that we haven’t even mentioned the fact that over the last ten years the entertainment market has been changed forever, thanks to the Internet; with more and more high-quality content flowing over the Internet, mostly at no charge, TV models will need to be dramatically altered.

This brings us back to the business model that I’ve been advocating for the last three years. We need an open infrastructure model that can be used by the various sectors, on a utilities basis, to distribute their services. This is known as a trans-sector approach or, as the FCC in the United States calls it, national purpose. If it is shared with other sectors such as healthcare, education, public safety, smart grids, etc. the basic infrastructure will come down to levels where it will also be feasible to deliver other commercial services—including entertainment—at competitive prices.

It is very hard to inject any sense into the American telco market; it is the most messed up and complex telecoms market in the world. In that country the Internet is seen, not as a telecoms access service, but as an information service, and thanks to this a complex net neutrality issue has arisen around it—and very few people understand what that is all about.

The American people are truly unique in the world in making their (free) markets so complex. This is largely thanks to a political system that facilitates, through lobbying, the bestowal of enormous powers upon the incumbents. The companies thrive on complexity as it allows them to run their businesses the way they want to—as a monopoly machine, to print money for them.

However, the US industry is becoming increasing trapped in its own complexity and it will be interesting to see if the telecoms and cable TV market will learn from the FiOS experiment.

It will be extremely difficult to transform the US telecoms market. The dysfunctional political system in that country makes policy and/or regulatory intervention almost impossible. In the meantime the rest of the world has concluded that intervention is needed to reap the benefits of the gigantic opportunity to move towards a digital economy. The benefits of the digital economy are nationwide—they are not just collected by the company that rolls out the infrastructure. So it will be impossible for a private company to take such risks (as can be seen in the case of FiOS).

Also, as is clear in the National Broadband Plan, President Obama and the FCC support a different approach and subscribe to open networks and a trans-sector approach. But an obstructive Congress will make sure that very few, if any, of these reforms are actually implemented.

The telco and cable TV lobby—who, combined, are spending close to $100 million per year to very successfully lobby politicians to protect their vested interests—are holding the country at ransom.

Without political leadership we will have to wait for the vested telco and cable TV interests to more or less voluntarily give up their monopolistic revenues.

We have already seen a massive devaluation of telco assets over the last few decades and this trend is set to continue. Perhaps these companies will simply collapse under the weight of their own complexity and their inability to embrace the inevitable changes ahead. Perhaps closer to that point of collapse we will see them making the changes necessary to embrace the future.

Let’s hope that the situation does not deteriorate to such an extent that we will have to face a GTC (Great Telecoms Crisis) in the USA.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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