Now that Vinci was inside of Tellabs and the software was greatly stabilized, things began to explode in terms of volumes. If you recall, we had a plan at AFC for 16,000 ONTs per year. I knew this was too low, but had no idea that we would reach the volumes we did. By late 04 we were topping 5,000 ONTs a day and that doubled in 05.
Now there were all types of ONT variants that were being discussed and developed. This included units for apartment buildings and business units. The business units had T-1s as well as the other standard interfaces. The Apartment Building units were intended to support many subscribers (between 16 and 32). But the reality turned out that none of these ever got deployed outside of trials. We eventually built an indoor single apartment unit out of the electronics from the Single Family Home ONT. That was a repackaging and the electronics were unmodified.
So, here was the challenge. Access is a business that has relatively low margins on relatively high volumes of specific units. In the days of the DLCs, POTS and DSL blades were the high volume cards. That business was a razor and razorblade business where we took lower margins on the commons to get price the high volume line cards at great margins. For example, our very last POTS design was about $10/line. We sold this same blade for about $50/line on average.
The FTTH business was different. The OLTs were about 70% margin. In the DLC business, the low margin part of the razor business was the cabinet/power/battery part of the business. Since we didn’t have that in OLTs, the blades and chassis were very good margins. The bad margin part of the business was the high volume ONTs. Which sounds very bad, but not as bad as it sounds.
So, why is that? We were producing a high volume of one (eventually 2) products. These did not require selling at all as once an OLT was in place the ONT was required. There was no marketing expense. There was little to no support costs in operations. If Verizon quit asking for more variations that it didn’t deploy, then R&D costs would have been minimal. The only costs that scaled with volume was in customer service. I will talk some about that next time.
One of the challenges is that Tellabs applied the costs to ONTs just like it was a SONET DACS or a Router. That meant that overhead really applied to those products were assigned to ONTs. I used to talk about this but made no headway. This truly skewed the business case with FTTH and that will become a big issue later.
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