Today, most US households have access to one or two wireline broadband providers. This suggests owners of last-mile infrastructure enjoy a favorable competitive position other segments of the video value chain. However, there are four potential rival technologies that could upset the status quo: 1) Fiber-to-the-home (Google), 2) Next Generation Satellite (EchoStar/ViaSat), 3) Fixed Wireless (Dish Network) and 4) Next Generation Wireless (Sprint). In this note, we explore FTTH economics. Verizon FiOS has built fiber to about 15% of US households. In these markets a new FTTH builder would likely achieve 33% attach rates (1/3rd to FiOS, 1/3rd to cable, 1/3rd to FTTH).
The economic value in the video ecosystem may migrate from content aggregators (Viacom, Disney) to last mile access providers (Verizon, Charter). Our thesis is based on two observations
First, as web-based video grows in popularity (at the expense of linear TV viewing), the role of content aggregation will likely diminish. That’s because few businesses have a monetization engine that’s as robust as bundled cable networks. Cable network’s monetization engine is propelled by two factors: consumers don’t watch most of what they pay for and ad pricing benefits from the broadcaster’s price umbrella. Web based video potentially disrupts both factors.
Second, today the vast majority of homes are served by only one or two broadband services providers: a cable firm and a telco firm. With limited competition and rising utility – with the advent of web-based video – this monopoly / duopoly industry structure is apt to be very lucrative for the firms that happen to own last mile assets.
So what is the Case for FTTH Build Out ?
About 70% of US homes are in markets that require attach rates of 40- 50% to breakeven. As such, we think those markets are potentially economic for a new FTTH provider. A greenfield FTTH provider that is willing to accept breakeven economics could succeed in about 55% of all US households. That is, the 55% of homes exclude 30% of rural households and 15% that are already passed by FiOS.