When Glen Lang looks over his equipment budget these days, he likes what he sees. The optical network terminals Lang’s company uses to connect homes to a blazing-fast optical-fiber network now cost less than $400 apiece — a little over half of what Lang paid a year ago.
Lang, founder and CEO of fiber-optic network provider Connexion Technologies of Cary, N.C., has a one-word explanation for the plunge in prices: Verizon. The big telecommunications company’s massive effort to rewire nearly half of its decades-old copper phone network with optical fiber has stirred up manufacturing volume with such velocity that entrepreneurs like Lang believe they can now make money from fiber-to-the-home networks once dismissed as expensive folly.
“Verizon is the savior in the United States of the fiber-to-the-home business,” Lang said. “They’re my idol. Until someone places an order for 1 million [terminals], there is not a business.”
Long thought to involve untenable capital demands that would stymie any thought of a return on investment, fiber-to-the-home (FTTH) networks are starting to make sense to believers as equipment and labor costs steadily plummet.
In a presentation it made to financial analysts in September, Verizon Communications disclosed with surprisingly granular detail the cost-curve trends propelling the company’s FiOS fiber network that now passes roughly 4.5 million U.S. homes in places ranging from East Rockaway, N.Y., to Beaumont, Calif. Among the highlights: The cost to build its network past an individual home has dropped to $873 from $1,021 at the end of 2005. Costs associated with connecting a home to the network — the physical tasks of pulling optical fiber to the premises, rigging it up to side-of-the-home terminals and hooking it up to TV sets, telephones and personal computer networks — have fallen to an average of $933, vs. $1,220 in January.
“Based on our experience deploying fiber, we see declining cost-trends to pass and connect homes, and we see significant ongoing operating expense savings,” said Verizon executive vice president and chief financial officer Doreen Toben in a September news announcement.
Those numbers could have a ripple effect that goes beyond just Verizon’s own FiOS project, and could inspire other big telecommunications companies to invest more aggressively in FTTH networks.
MORE CAUTIOUS
To date, other incumbent local exchange carriers have been much more cautious than Verizon about making capital commitments for do-it-all fiber networks that can shuttle voice, video and super-fast Internet connections to households:
- AT&T, which intends to provide a bundled suite of telecommunications services to many of its customers, is pursuing a less expensive delivery model that makes use of existing copper-wire access lines rather than new fiber lines.
- BellSouth (which has agreed to merge with AT&T) has proclaimed an interest in extending fiber lines deeper into its network, but hasn’t made specific capital commitments for an FTTH-style buildout.
- Qwest Communications International chairman and CEO Richard Notebaert has expressed skepticism about a Verizon-esque fiber network that would deliver the full complement of telecommunications services, except in so-called “greenfield” housing developments with new network construction.
But FTTH proponents say the investments Verizon is making in fiber infrastructure are bound to provoke copycat efforts. “All of a sudden there’s this curve in acceptance of the technology,” said Bernhard Deutsch, director of marketing and market development for Corning Inc., which supplies optical fiber and related connection products to Verizon.
Deutsch recalled a time when it was widely assumed that building the sort of fiber-fed passive optical network [PON] Verizon is constructing would cost more than $4,000 per home. Now, he says industry experts believe a price point of around $1,200 per home is realistic. That sort of investment scenario could spark more activity. “I can’t predict the future,” Deutsch said. “But I think it’s beginning. And as the cost comes down, more and more carriers will use it.”
Behind the cost declines are the intertwined forces of manufacturing volume, rigorous negotiations with suppliers and new product innovations that make it easier and faster for technicians to get the network up and running.
Together, they’ve helped convince Verizon executives that the FiOS network can generate positive cash flow, or earnings before interest, taxes, depreciation and amortization, by 2008, and operating income by 2009. Verizon also expects to realize savings of approximately $1 billion in annual, ongoing operating expenses by 2010 as a result of efficiencies gained from its fiber network facilities.
NIMBLER APPROACH
One reason for the optimism — and the lower cost projections — is a steady evolution in some of FiOS’s underlying technologies. One example: a new fiber-connection approach developed by Corning, which supplies the hair-thin optical fiber strands Verizon is stringing across utility poles or burying in underground conduits. Corning’s “OptiTap” connector makes it possible for technicians to connect the drop portion of a fiber line — the length of fiber that extends from a neighborhood terminal to the side of a home — by snapping two pre-formed connections together. It obviates a time-consuming procedure that used to require a highly skilled technician to fuse the two sections of fiber together in a delicate splicing process conducted within the interior of a specially outfitted service van.
Similarly, Verizon now buys from Corning a new variation to the fiber lines used in the distribution segment of the FiOS network, or the part of the network that shuttles signals through underground conduits and between utility poles. By buying fiber lines that have network access terminals attached at the factory, rather than spliced manually at the job site, Verizon saves on labor costs. Using the prebuilt lines requires more front-end engineering work to determine the necessary lengths of distribution lines, but network providers can accommodate the engineering demands easily using predesigned engineering templates. “It’s not rocket science,” Deutsch said.
The product innovations are contributing to more efficiency in the way technicians accomplish FiOS installations.
Chris Creager, senior vice president for Verizon’s mid-Atlantic region, said a number of homegrown provisioning processes have helped to reduce the amount of time technicians spend getting customers connected and assuring that their service works properly.
For example, as soon as a Verizon technician mounts an optical network terminal (ONT) on the side of a customer’s house, the worker types in the ONT’s serial number on a notebook computer that connects to Verizon’s service center over a wireless network.
A provisioning system built into the FiOS network then authorizes and provisions for that specific address whatever services — any combination of video, high-speed Internet access and telephone — the customer has ordered. That reduces the amount of time the technician has to spend at the site.
Creager said the auto-provisioning system is one of close to 40 software applications Verizon has authored to support installation and field operations. “We’re building this from the ground up,” said Creager, who began his telephone industry career as a dispatch supervisor in Baltimore. “We’re building all new systems, new technologies. Everything is completely new.”
So is the scope and scale of the project Verizon is attempting to pull off. “I’ve been in this business for 20 years, and this is by far the most exciting thing I’ve ever participated in,” Creager said. By the time its FiOS network passes a projected 18 million homes in 2010, the network will have consumed about $18 billion in capital over the four-year period, according to Verizon. As a point of comparison, that’s about $3 billion more than the $15.3 billion of capital Comcast said it will have spent between 2003 and 2006.
On a given day, there are 4,500 to 5,000 Verizon employees working on the FiOS network, not including hired contractors Verizon engages to dig trenches and handle other construction tasks. With a target of 3 million new homes passed by the FiOS network this year, Verizon is adding about 9,000 homes per day to the network’s reach.
BAD PRESS
Doing the dirty work of trenching new lines, lashing fiber to utility poles and connecting customers one home at a time isn’t always a smooth process. Newspaper stories abound about miffed homeowners complaining of severed utility lines and compromised gardens.
In Hillsborough County, Fla., officials ordered a temporary halt in Verizon construction work in late 2004 after the company’s contractors ruptured water and sewer pipes, leaving neighborhoods without water and creating gaping holes on some streets. (The ban has since been lifted.)
Last June, workers who mistakenly crossed two wires started a fire that melted a chain-link fence in a Richmond, Va., neighborhood. Earlier this month, a resident in the Dallas suburb of Flower Mound claimed his driveway and sidewalk sunk nearly a foot after Verizon contractors plowed underneath. Verizon, which is investigating the Dallas claim, has said the number of incidents tied to FiOS are diminishing.
FIVE OUT OF SIX
Some construction incidents are all but inevitable given the range of the FiOS construction effort. Whether the company’s ambitious gamble sparks an uprising in FTTH construction activity, though, isn’t as certain. For now, Verizon is almost single-handedly propelling the category. Industry association the Fiber to the Home Council estimates that about 6 million U.S. homes are now passed by FTTH networks. Verizon alone accounts for more than 5 million of those.
But there are some signs that other providers will take up the cause.
Lang, of Connexion Technologies, said his company has contracts to get more than 65 new housing developments wired for FTTH — an increase from 40 in service today and enough to make Connexion the nation’s second-largest FTTH provider based on markets served.
Rather than consider Verizon a competitor, Lang said the telco deserves credit for making it possible for Connexion to make money on its projects, by reducing the cost of components. Lang also believes the network architecture and engineering approach Verizon has devised for its FiOS project will set the standard for future FTTH networks built by other companies. “They create a hell of a draft,” said Lang.
Verizon seems determined to continue leading the FTTH parade regardless of whether other telcos or independent providers follow. When the idea of the all-fiber network was first presented to Creager and about 40 colleagues by Verizon Network Services Group president Paul Lacouture in 2003, skepticism was in the air.
“Paul told us, 'We’re going to do something that everybody else in the world is going to say can’t be done,’” recalled Creager. “He said we would be told by our people that this can’t be done. By our suppliers. By the outside world. But he said, 'Get it in your mind: This can be done.’”
