Open Access FTTH: An Alternative, Attractive Reality

He spent a lot of time talking about what may be their principal case study, MalarNetCity, an open access FTTH deployment sponsored by the municipal utility in Vasteras, Sweden. There, customers have access to 15 different ISPs for broadband service, five telcos for voice, and three video service companies. That's consumer choice.

Wenger put up the MalarNetCity community web portal as a model and highlighted their unique pre-sell technique. Imagine - city leaders addressed the considerable capital requirement of their network by pre-selling the FTTH development to residents, convincing each household to put up $3,500 to have fiber strung to their home.

Imagine. That's a bold enough challenge to take on, even visionary, you might add. But what's incredible is that they had over 22,000 residents do just that. If I do the math correctly, that's something like $77 M in capital to finance construction of their network. They were able to implement such creative approaches as pushing that down payment through the mortgage loans of the residences, which must have been a big help.

I'm still blown away by those numbers and that level of community participation. One great fringe benefit of a FTTH community with a unified set of subscribers is the LAN aspect: each subscriber gets access to 100 Mbs of intraLAN communication - and Wenger said that this local asset leads to a change in network behavior - much greater percentage of traffic is over the LAN than is over the Internet - it's more efficient.

Four Key Lessons

Wenger talked about four key lessons he's learned as he's built networks around the world:
1) Commoditization of the Triple Play services (voice, video, and data) is a realistic threat - it's happening already;
2) Open Access networks present not only lower prices for consumers, but also new revenue possibilities for providers and operators;
3) Connection Fees alter the FTTH economic model; and
4) New marketing techniques are coming on line.

Triple Play Commoditization

The "Goods & Services Life Cycle in a Free Market" graphic is fairly simple - a modified hump, with Average Gross Margin on the Y Axis and Time on the X Axis. Every business tries to extend Phase One Optimization, where margins rise with production levels, and Phase Two Maximization, where market dominance sees the cash roll in. But inevitably, over time Phase Three kicks in, as Competition and Commoditization take their toll and cause margins to drop.

Inevitably, that is, except in many of the major US markets, where a "free market" cannot really be said to exist. Consequently, these incumbents postpone the inevitable downturn in margins that commoditization brings. With regard to profit maximization n the US, a strong argument can be made that monopoly / duopoly conditions have enabled broadband providers (telcos and cable cos) to extend their Phase Two Margin Maximization via regional dominance in voice/video, and more recently broadband services.

However, now and in the future, all three of these services are coming under increasing competition as the markets mature. Wenger's experience in network building at PacketFront shows that Open Access models accelerate this trend of shrinking margins, presenting a challenge to service providers, but a boon of lower prices for consumers.

Open Access Model

Wenger explored the Open Access model, which is evolving into three commercial forms.

1. The Original model features retail customers who pay Internet Service Fees to Retail Service Providers, who in turn pay Wholesale Access Charges to a Network Owner/Operator.
2. The Twist on the Original occurs when retail customers pay Elevated Rent that includes broadband infrastructure costs to Multi Dwelling Unit (MDU) owners or Home Owner Associations (HOAs), who in turn pay a Connection Fee to the network owner/operator, creating a new source of revenue to support the infrastructure.
3. A Further Twist occurs when customers pay a Network Service Fee or a Connection Fee directly to the Network Owner/Operator.

Other Case Studies

In Denmark, a local energy company sponsored a network and used babies and the future in their marketing campaign. In The Netherlands, a community of 8,000 homes used a price promotion (free 10 Mbs for the first year) to sign up subscribers, who were then willing to pay $50/month, which included a $26/month connection fee. They managed a measly 98% take rate.

The Bottom Line / Final Conclusions

1. All take rates are over 60%
2. Open Access networks lead to lower borrowing costs, as well as dramatically lower churn
3. These networks provide an attractive ROI for private partners.

I'll be chewing on this idea for a while ...