North American fiber-to-thehome

Best Year for Since 2008 Fiber-to-the-home vendors and providers enjoyed a great year in 2012, according to new research by RVA LLC. RVA forecasts a stable market over the next few years, followed by a new upturn in 2016. By Steven S. Ross Broadband Communities North American fiber-to-thehome deployers forged ahead in 2012, passing 2.7 million homes with fiber between September 2011 and September 2012, marketing fiber services to 3 million more homes and connecting 1.5 million new customers. This growth the industry s best showing since 2008 occurred as stimulus projects advanced in the United States and as the leading Canadian telcos ramped up their construction. Revenue kept pace as well, with customers paying, on average, more than $57 a month for data by far the most profitable offering a network provider can sell. Customer satisfaction soared, and average take rates continued an unbroken, decade-long rise. The good news about 2012 comes from market researcher Michael Render of RVA LLC. To gather the information, he conducted interviews with 350 service providers and multiple vendors and industry experts. In June, his firm surveyed 2,000 broadband users. Mexican deployer data came from IDATE, the international market research firm. Render also noted that three of five current deployers say they are likely to continue building. Of the remainder, many have built out their entire footprints already, and others, especially in rural areas, are worried about changes to Universal Service Fund disbursements. Financing Challenges Financing builds in today s financial environment is challenging. The ability of deployers to sell stock to finance is zero. The bond market is uncertain. Stimulus funds have been exhausted. To move forward, deployers and prospective deployers of need either free cash flow or something to mortgage. In fact, they have an incentive to do so: Money in the bank earns no interest, and carrying charges are low if they borrow. Among the entities that have access to financing in this environment are municipalities that can mortgage their water or electrical plant and multipledwelling-unit (MDU) communities. Owners and sometimes operators of large brownfield MDUs and multi tenant commercial buildings can often secure bank financing for fiber networks, as these systems are generally considered liquid (easily sold by a mortgagor that has to take over from a failed operator). Greenfield projects can typically be financed by developers as part of construction mortgages. (See the Bandwidth Hawk column from the May-June 2012 issue of this magazine, bbcmag. epubxp.com/i/71834/12.) Render notes that in 2013 and 2014, Verizon is committed to building out FiOS within its existing footprint to meet its franchise obligations, which will help keep the market on an RVA LLC s Michael Render will report on his next survey about MDU residents and at the Broadband Communities Summit in Dallas, April 16 18. even keel for the next two years. In addition, greenfield projects both MDU and single-family are finally growing. According to Render, The huge inventory of old copper-fed lots [is] finally being worked down, new developments are starting again (fiber-fed this time) and housing starts appear to finally be on an upward trend. In addition, he says, growth in Canada and Mexico should help carry the North American market. Thus, from a low in 2011, Render forecasts a slow continued increase in homes marketed in 2013 and 2014, followed by a slight dip in 2015 and then by more rapid growth in 2016 and 2017, assuming that greenfield developments continue to grow. He estimates that direct investment in North American deployment will total $18 billion during the next five years and grow to $4.7 billion annually by 2017. The revenue potential is there: Render predicts that annual revenues derived by providers from ultrahigh-bandwidth applications and services beyond the triple play will reach $4 billion by 2017, or $9 billion cumulatively over the next five years. About the Author Corporate editor Steve Ross can be reached at steve@bbcmag.com. 30 BROADBAND COMMUNITIES www.broadbandcommunities.com January/February 2013

ECONOMIC IMPACTS adds value to homes. Owners of fiber-connected homes say fiber increases home value by 2.1 percent, and non- users in Render s 2,000- person sample estimated 1.7 percent. These figures were derived by asking respondents how low a price they d require for a non-fiber-connected home. Non- users believe that a home that doesn t already have a very highspeed Internet connection from a direct fiber optic line and advanced inside wiring would have to be discounted an average of $5,337 to be considered for purchase. Those already using believe an average discount of $6,451 would be required. Availability of a fiber connection is among the most important amenities to buyers shopping for new homes. Among current users, it is the most important amenity. also lowers community costs. users work an average of 1.2 additional days per month from home compared with non- users. Assuming 50 percent take rates, drives a 3 percent communitywide increase in work from home and A fiber connection adds between $5,300 and $6,450 to the value of a home, according to respondents in RVA LLC s most recent survey. thus a 1.8 percent reduction in total vehicle traffic and related public costs. Carriers, especially municipal network providers, notice a substantial economic impact from fiber to the home. users are more likely to participate in every online activity than users of other broadband technologies; 67 percent of users who are employed sometimes work at home, and 11 percent of users have home-based businesses, which average $55,000 in annual revenue ($14,500 in additional income, after expenses). Again assuming 50 percent take rates, community revenue increases by an average $500,000 and 25 new traditional jobs per 1,000 homes passed with fiber. The secondary job impact could mean as much as $1.1 million in new annual salaries to the community per 1,000 passings. Although people often assure me that fiber to the home is unnecessary because everyone accesses the Internet through handheld devices, Render s study does not bear out this theory. His research finds that users spend 88 percent of their online time on laptop or desktop computers. Even the most avid mobile users people under 35 use computers 82 percent of the time. Users of all ages spend 5 percent of their online time on tablets, and other handheld devices, typically cellphones, account for 14 percent of online time among those 35 and under and 7 percent of time among those older than 35. CANADA AND MEXICO Of the 9 million customers in North America, about 8.3 million are in the United States. In the last few years, however, growth in Canada and Percentage of customers in each state. Due mainly to Verizon FiOS deployments, the Northeast has the highest penetration. Not shown: Hawaii, 1% and Alaska, 0.3%. Data from RVA LLC, September 2012. January/February 2013 www.broadbandcommunities.com BROADBAND COMMUNITIES 31

Homes Passed, September 2012 (Cumulative, North America) 25 24.30 20 19.90 20.80 21.60 22.60 17.22 18.25 Millions 15 10 9.55 11.76 15.50 13.82 8.00 5 4.09 6.10 0 Between March and September 2012, an additional 1.7 million North American homes were passed with fiber as stimulus projects advanced in the United States and Canadian construction ramped up. That s well above the previous six months and the fastest growth since 2008. Mexico occurred faster than some are aware of. Canada, with more than 1 million homes marketed and close to 2 million homes passed by fiber, is catching up to the United States in percentage of homes passed about 20 percent (the United States has about 22 percent). Providers in Mexico include Telmex, Axtel and TotalPlay. In Canada, Bell Aliant leads the way. There are 700,000 homes passed by fiber in the Caribbean, more than 10 percent of all homes outside Cuba. Mexico s low 17 percent take rate ( is just getting started there despite almost 1.5 million homes passed and marketed) depressed the North American average, however. For the United States only, take rate was 44.2 percent, but when the 2.5 million homes being marketed in Canada and Mexico are added in, the combined North American take rate (homes connected divided by homes marketed) is 42.2 percent. the 50 Mbps to 100 Mbps range. There, growth in the past four years has been startling. Render s surveys show that in just four years, the number of 100 Mbps users in the United States grew from 7,200 to well over 500,000. 100 Mbps Subscribers 2009 7,200 2010 69,700 2011 170,300 2012 516,500 50 Mbps Subscribers 2009 39,800 2010 162,500 2011 347,650 2012 803,461 U.S. broadband users are moving from slower technologies such as DSL and fixed wireless to and cable. has increased its market share to about 8 percent of all U.S. households, up from almost zero in 2006. Cable service increased from 40 to 50 percent market share in that same period. The growth of and cable came primarily at the expense of DSL (which dropped from about 40 percent to 32 percent despite widespread deployment of U-verse by AT&T) and of fixed wireless, which dropped slightly to 10 percent. As demand for faster service increases, looks better and better. Median tested download speeds for connections now top 20 Mbps, up from 5 Mbps in 2007. Cable upload speeds increased more slowly, from 7 Mbps in 2009 ( was at 12 Mbps that year) to 14 Mbps. Fiber s advantage for upload speeds is, of course, even better. Median tested THE BANDWIDTH IMPERATIVE Although gigabit networks have received widespread news coverage and about two dozen providers offer 1 Gbps service, the number of gigabit customers is still quite low. The real action is in U.S. broadband households are migrating from DSL and wireless service to fiber and cable service, which offer higher speeds. 32 BROADBAND COMMUNITIES www.broadbandcommunities.com January/February 2013

Homes Marketed, September 2012 (Cumulative, North America) Millions 22 20 18 16 14 12 10 8 6 4 2 0 3.22 5.08 6.64 21.30 19.20 18.30 16.50 17.60 15.40 13.30 14.40 12.36 10.08 8.00 The increase in homes marketed for rose by a healthy 2.1 million for the March-September period, the largest increase since 2008. upload speeds are now about 10 Mbps, compared with 1 Mbps in 2007. Cable upload speeds went from less than 1 Mbps in 2009 (at which point speeds were above 2 Mbps) to a median of 3 Mbps in 2012. In addition, carriers have bandwidth to spare; few of them set limits on the volume of customer uploads and downloads. Gigabit speeds are the next plateau. Incumbent local exchange carriers (ILECs) that deploy fiber tend to be rural and have lower demand for speed, less competition and higher costs for connections to the national telecommunications grid. However, middle-mile networks funded by the stimulus program put them into the gigabit game. More than three-quarters of all connections are by RBOCs mainly Verizon. Small ILECs and their competitive (CLEC) subsidiaries account for more than half the remainder. CLECs and municipal providers are best at taking advantage of fiber s ability to provide symmetrical or near-symmetrical bandwidth. Then there is Google. Render reports that Google had more than 30,000 registrants in Kansas City in September and had approved fiber construction in 180 of the 202 fiberhoods it had identified there. Rumors Millions 9 8 7 6 5 4 3 2 1 0.67 1.01 1.48 Homes Connected, September 2012 (Cumulative, North America) 2.14 2.91 3.76 4.42 5.28 5.80 6.45 7.09 8.00 7.50 9.00 - connections rose at a record pace 1 million in the six months ending last September. That s double the previous six months and a record for any six-month period. January/February 2013 www.broadbandcommunities.com BROADBAND COMMUNITIES 33

Take Rates, US vs. North America 50% 45% 40% 35% 30% US Only North America 28.8% 30.4% 26.8% 33.4% 33.3% 37.0% 37.8% 38.8% 36.7% 37.4% 37.7% 44.2% 43.3% 42.3% 41.0% 41.7% 42.2% 39.5% 39.9% 25% 22.3% 20% The U.S. take rate for fiber has now reached 44.2 percent. Mexico s low 17 percent take rate ( is just getting started there) depressed the North American average, however. are strong that Google will eventually expand into at least a few other municipalities and perhaps be a source of capital for others gigabit builds. Do users need the bandwidth? Apparently, yes. Median peak download demand for users who have unconstrained access now tops 40 Mbps about half from data downloads and about half from HD video. Growth in the number of of HD screens in typical households could push this to 100 Mbps in just the next two years. The 30 Mbps mark was passed in 2009. TAKE RATES ARE HIGH Most new builds are in rural areas, which historically have high take rates typically because customers have few or no alternatives. Render tallied 880 existing or planned providers. Of those, all but 25 have fewer than 10,000 subscribers. One carrier in seven enjoys take rates above 90 percent. One in four has a take rate higher than 80 percent. In general, real estate developers who install enjoy the highest take rates. Verizon, which has about 78 percent of all homes passed in the United States, has a take rate close to 40 percent. Most of its footprint puts it into direct competition with cable carriers. v US Connections by Provider Type RBOC 78.2% ILEC 11.3% Electric Co-op 0.1% Cable TV Provider 1.0% CLEC Division of ILEC 1.1% Real Estate Developer 1.5% Competitive Provider 2.6% Municipal Utility 4.2% More than three-quarters of U.S. connections are provided by RBOCs mainly Verizon. Small ILECs and their CLEC subsidiaries account for more than half the remainder. Has the Fewest Usage Limitations: Percent of Respondents Aware of Volume Caps DSL Cable Modem Wireless 3% 6% 12% 17% carriers have bandwidth to spare; few set limits on the volume of customer uploads and downloads. 34 BROADBAND COMMUNITIES www.broadbandcommunities.com January/February 2013

The North American Fiber to the Home and Advanced Broadband Review and Forecast to 2017 report is a detailed review and forecast of both deployment and consumer desires for advanced broadband applications and services. Information is available at www.rvallc.com. Has the Lowest Cost per Mbps And the Highest Monthly Data ARPU $57.35 Cost per Mbps $49.38 $44.30 $49.60 $50.80 Households connected to enjoy the lowest prices per Mbps (great for customers) and yield the highest revenue (great for carriers). Monthly Revenue per User for Data Services $17.60 $15.30 $6.40 $3.68 $2.64 Percent Saying They Are Very Satisfied With Aspects of Service Wireless DSL FTTN Cable Other Broadband Service Uptime Download Speed Upload Speed 35% 34% 44% 61% 60% 65% customers are significantly happier with their service than are customers who use other broadband technologies. Consistency of Speed 32% 55% Streaming Quality 24% 47% Laptop 40% Percent of Time Spent Online by Device Type (Average for All Ages) Handheld device 7% Broadband users still spend most of their online time in front of computers, not with tablets. Tablet device 5% Desktop 48% January/February 2013 www.broadbandcommunities.com BROADBAND COMMUNITIES 35

Take Rates by Provider Type Real Estate Developer Cable TV 66% ILEC 63% CLEC Division of ILEC 55% Electric Co-op 53% Competitive Provider 49% Municipal Retail 46% RBOC 40% Municipal Wholesale 29% 81% Real estate developers who install enjoy the highest take rates. Non Users: Importance of Area Amenities if Shopping for New Home Green Space for Walking, Jogging 83% 78% 24-Hour Neighborhood Patrol 61% Current Users: Importance of Area Amenities if Shopping for New Home Fitness Center/Clubhouse Community Pool/Park 55% 53% Green Space for Walking, Jogging 81% 89% Availability of a fiber connection is among the most important amenities for buyers shopping for new homes. Among current users, it is the most important amenity. Community Pool/Park 54% 24-Hour Neighborhood Patrol 54% Fitness Center/Clubhouse 53% Providers Noticing Economic Impact (all providers) Home-Based Business Expansion 51% Providers Noticing Economic Impact (municipal providers only) Employer Attraction Employer Expansion 26% Employer Attraction 66% Employer Retention Home-Based Business Expansion Employer Expansion 51% Any Economic Development 58% Employer Retention Carriers, especially municipal network providers, notice substantial economic impact from. Any Economic Development 87% See the digital edition of Broadband Communities online at www.bbcmag.com for another 14 charts showing additional findings from the RVA report. 36 BROADBAND COMMUNITIES www.broadbandcommunities.com January/February 2013