DSL Prime: DSL (or Fiber) On Every Line

Most of the telcos of the world are finally ready to join the age of the internet.

by Dave Burstein of DSL Prime and Future of TV [November 30, 2005]

DSL (or Fiber) On Every Line
Major carriers say the time is here
I called for DSL on every phone line at a DSL Forum meeting over a year ago. Almost everyone thought me a fiery radical. One friend at Verizon, however, amazed me with the comment, "You sound like Larry Babbio, my boss." Babbio had decided the savings from rebuilding the entire network would more than cover the costs. No one believed them back then, but Verizon had already started the complete rebuild, FIOS, which will reach 6 million homes in 2006. BT points out equipment prices are now so low they can do the rebuild without raising capex.

There's a small cost ($3 to $6) to turn Internet data as well, for Internet transit, customer support, and perhaps portal services including e-mail, but the new network pays for itself on voice alone. Chris Rice, SBC CTO, saw a longer switchover for an existing network, but agreed the savings from IP will be huge and the transformation logical.

That the PSTN (other than the lines) is over is a major story whose implications I'm just beginning to understand, including:

• DSL providers are rapidly being replaced with voice + DSL providers. Masayoshi Son began this trend in Japan in 2002, followed by Free.fr in 2004. Last issue, I reported nearly every modem shipping in Europe will have a voice port. VoIP takeoff is underway.
  
  
• Few will survive selling DSL only. With makes line-sharing, but not loop unbundling, a much less significant issue today. Covad and DSL.net in the U.S. have already switched their emphasis away from data only customers to VoIP. From Paris, an extremely informed reader notes, "In 2003 and 2004, a price war was engaged on 'data only' DSL accesses, with fares as low as 14,95 € for ADSL2+. Now, those offers are not available anymore, and you almost can not subscribe to a 'data only' DSL access.
  
  
• For Wall Street, this confirms John Hodulik's analysis that the telcos have seriously overvalued their assets and need to take major write-offs. Older switches and related gear have a real value rapidly tending toward zero. Wegleitner of Verizon noted last year you can buy a new softswitch for less than the maintenance cost on the old class 5's. At the Bells alone, this amounts to billions. Few noticed when Verizon announced they would raise depreciation periods. Most of the other telcos are also depreciating assets too slowly. The resulting underinvestment of course raises costs.
  
  
• Companies not investing in new networks will have a major cost disadvantage in just a few years. A carrier not moving as quickly as British Telecom, BellSouth, Verizon, or Deutsche Telecom now will almost surely re-examine their plans. Most CTOs will be telling their CEOs that capex should go up, with returns of 25 percent to 40 percent. The new gear—softswitches, MSANs/DSLAMs, GigE rather than SONET ATM—has become so cheap it's time to buy in. Huawei and other Asians are winning contracts at remarkable prices, including Vodafone and British Telecom.
  
  
• Companies like Free.fr and Smart in Ireland with new networks have major cost advantages that will keep pressure on the incumbent.
  
  
• Alltel and Sprint landline spin-offs claim inflated values of their equipment. Hawaii required more capital investment in the spin-off of Verizon to Carlyle, and other states should require similar from Sprint and Alltel. Otherwise, they will face perpetual demands for price hikes.
  
  
• Wall Street's current fad is to favor companies that pay higher dividends and buy back stock, rather than investing. That may be the right pick today, as long as there are greater fools who underestimate the future costs of the very low capex of several carriers.
  
  
• Because moving to IP more than pays for itself, there is no need to subsidize DSL anywhere fiber reaches, except for the cost of repeaters/remotes for very long loops. Areas without fiber need backhaul, but they are few in the developed world. This has major consequences in the U.S., where the "high cost" of DSL buildouts is often used to justify billions in subsidies buried in USF and ICC. The Europeans have been reducing wireless connection charges, again as a way to allow competition.
  
  
• The majority of telephone exchanges are unnecessary, because local switches are now obsolete. A cabinet sized remote terminal can serve a city of 1,000 people, and three or four cabinets an even higher population. Lacouture of Verizon expects each softswitch to serve ten central offices. Bill Smith of BellSouth is ready to take this to a logical conclusion on the Gulf Coast, using remote terminals to replace destroyed office.
  
  
• Once you only need one switch for 20,000 or 100,000 people, and it can be located anywhere in the country, the smaller telcos have an enormous disadvantage in overhead costs. Operationally, the cost to manage 1,000 lines is little different than the cost to manage 100,000, except for the (diminishing) field service.
  
  
• Once you have a data line, IPTV is a natural extension. Again, France is leading the West "All offers include triple play as a 'mandatory' option," my Parisian friend writes. Single channel, standard definition IPTV is working fine, with PCCW in Hong Kong now over 500,000 customers. Essentially every operator in the world is moving towards volume deployment. Multi-channel HD, including Lightspeed, still needs debugging.
  
  
• Incumbents will fight harder to maintain the subsidy of intercarrier compensation, as NTT did in Japan. That leads to price signals with increasingly severe inefficiencies, with consequences amounting to billions of dollars. Legendary Stanford Professor Martin Hellman calculates the actual cost of switching a call has gone down by a factor of over 100.

My best guess is that companies choosing to lag behind will become increasingly dependent on government favors, a dangerous position.

Copyright 2005 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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