Thursday, February 2, 2012

France Telecom to Step Up Fiber to Home Investment

France Telecom will double its investment in fiber to home networks in 2012 to 300 million to 350 million euros, Reuters reports. There’s both good and bad news in that announcement.

The good news is that the heavy spending is likely crucial for the survival of France Telecom’s fixed network business. The bad news is the huge risk.

France Telecom CEO Stephane Richard said fiber to home investments were key to the firm’s future competitiveness as a fixed line provider.

France Telecom has pledged to spend two billion euros by 2015 on rolling out a national fiber network.

Keep in mind that France Telecom expects a payback time of 30 years to 40 years, far exceeding the three-year to five-year payback expected of application investments. 

Analysts at the Yankee Group have argued that penetration rather than average revenue per user has the strongest effect on the FTTH business case. 

A business plan with a payback of five years or less has to assume retail penetration of at least 30 percent, and ih many cases also with triple-play service offerings. 

Any payback analysis is of course highly dependent on the assumptions, ranging from capital cost per location passed, as well as service revenue per location, among other things. 

That indicates the risk France Telecom and other providers are facing. Those time frames are so long they typically only can be considered by very capital intensive utility firms that operate in monopoly style markets, as fixed network providers used to assume was the case.

These days, the fixed network business faces competition from other facilities-based suppliers, mobile and satellite networks.

Globally, there already are more mobile broadband subscribers than fixed network subscribers. Mobile broadband subscribers surpassed wireline broadband subscribers in 2010 (558 million compared to 500 million).

Infonetics forecasts the number of mobile phone subscribers to grow to 6.4 billion in 2015 (the current global population is 6.9 billion).

While that is a big help for large service providers owning both mobile and fixed assets, the strategic context is different for fixed network operators who do not own mobile assets, and cannot acquire the scale to compete in what clearly has become a national scale business.

In such cases, though the classic investment case might not suggest spending on fiber to the home will generate as great a financial return as some alternative investments, that isn’t the issue.

Unless many smaller networks can upgrade to the fastest-possible fixed network, the entire business arguably is at risk. The investment, in other words, is strategic, rather than based on classic return on investment considerations.

But the decision to invest might also require a very long payback period that is beyond the working life of any single CEO.

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