Last week, I posted about the problem with the current round of incentives and how they have not worked to increase investment in the network for the existing large providers. The question I want to go over this week is what we can do about that.
I see two choices going forward to encourage network investment. The first is to change the market conditions via government intervention to make the poor quality investments meet the Return On Investment (ROI) requirements of the large providers. The second is government intervention to mandate last broadband service is universal. Unless something happens on a front for me to go after, this will be my topic for at least one more week.
What I have said in the past, that large scale network upgrades require 1 of 2 conditions: Government Intervention or Competition. I want to explore the Competition side of the equation and how that has been important in two cases.
The first case is that of NTT. NTT is one of the largest Fiber To The Home (FTTH) companies in the world. Given the incumbent nature of NTT, one would not expect them to be at the forefront of new technologies in Access. But the reason was simple, NTT was getting killed in the DSL market. Japan required Local Loop Unbundling (something we call UNE-L in the US). This spawned several competitors in Japan who were going as far to hand out DSL Modems at Train Stations with self-install kits. NTT was not able to compete in the market quickly enough and was actually the #3 player in the Japanese Broadband Access market because of that.
I give credit to NTT for realizing that fighting the DSL game was not going to be a winner for them. So, they changed the game and began to build an Ethernet Passive Optical Network (EPON). This network was not required to be unbundled. This meant that NTT had just installed a better network than its competitors. That is because the competitors had not built networks, they were using NTT’s network. The US learned that lesson from CLECs. Which is, in general, to be successful you need to own the network. There are still CLECs working the small business communications market, but they are small and have a tiny market share.
The second case is Verizon. One huge difference between Verizon and AT&T is geographic and thus demographic. Verizon had the bulk of their population in the Northeast Corridor. AT&T has the bulk of its population in the Sun Belt. Given what has happened in US migration trends, Verizon does not have population growth as a stimulant for business the way AT&T does. These are general statements as Verizon (at the time) had properties in Texas and California. AT&T had the old rust belt properties of Ameritech. But the general rule still holds. The Cable MSOs were introducing their Cable Voice Services. That offered the consumer a package that had a triple play as they were already the market leaders in broadband and video.
Both AT&T (both SBC and Bell South at the time) and Verizon participated in a 2003 Request For Proposal (RFP) for Broadband Passive Optical Networks (BPON). In the end Verizon deployed this technology in a significant part of their network as what we now as FiOS. What this did was stop line loss on the voice side where there and significantly improve the broadband market share for the company. The standout competitor was Cablevision and to a lesser extent the other MSOs. Since these competitors had their own networks, they were able to respond to FiOS. But the deployment fundamentally altered the competitive landscape. Verizon could offer a triple play on a network with more data bandwidth than the cable companies.
The learning here is in the question of: “Why didn’t AT&T copy FiOS?” Investors hammered Verizon for FiOS at the start of the project. Now AT&T has started to deploy fiber in some quantity – 10 years later. But the reason goes back to population. AT&T wanted to manage its investment because the population growth in its properties gave it breathing room.
My conclusion from these examples is that this large investment only happens when a company has its back to the wall in a competitive environment. But before we think more CLEC behavior is a good idea, take the Japanese experience to heart. Next week I want to talk about the intervention side of the coin.
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