Perspective on Fiber-to-the-Home

2

National Broadband Plan Perspective

National Broadband Plan should encourage FTTH deployments

18 million homes have been passed in just 6 years-we must be doing something right

Over 400 service providers are deploying FTTH in the United States today-how do we maintain the momentum?

FTTH is the only architecture that can meet the broadband needs of American citizens over the next decade and beyond (100 Mbps+)

The cost to deploy fiber is dropping rapidly

The Federal government can accelerate deployment and help lower costs through policies that encourage deployment-particularly in rural areas

FCC September 29th Meeting on the National Broadband Plan

Report clearly indicates that the FCC understands the value and importance of a fiber infrastructure

The industry needs to work with the FCC staff to provide better information on costs for fiber and how to accelerate deployment

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Consumer Driven Broadband

Where is the US broadband market going?

The rapid emergence of video dominated content Internet stages: textual graphical video Video = Rich, interactive content shared across devices

Today=5 Mbps 5 yrs=100 Mbps 10+ yrs=1 Gbps

Last 6 months Video streaming doubled

Ubiquitous Video Entertainment, Education, Communication

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FTTP Technology by Number of Companies

U.S. FTTP Service Providers

Source: Broadband Properties, November 2009

Nov. 2009

Nov. 2008

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FCC Estimates on Broadband

Capability of Estimated Commercial Deployments

Housing Units Requiring Upgrade to Reach Each Tier

Incremental Cost to Universal Availability of These Advertised Speeds (Best Estimate)

.768-3 Mbps 3-6 Million $20 Billion

3-10 Mbps 7-10 Million $35 Billion

10-30 Mbps 33-37 Million $50 Billion

100+ Mbps 111-116 Million $350 Billion

Table from FCC September Commission Meeting, September 29, 2009

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Backbone / Central Office Passing Homes Serving Homes

FTTH Costs: Passing & Serving Homes

Sources: CSMG, Hiawatha Broadband, Jaguar, Finley Engineering

Factors that increase the FTTH investment required include: lower household density, greater linear distance between households, fewer homes per CO, higher service uptake, more buried plant

Passive Optical Splitters

Central Office (CO)

Data

Ethernet Switch

Internet

OLT

EDFA

IT / OSS / BSS

Drop

Set-top Box

Phone

ONT Data

RF Video Only

Service Provider Cost to Pass Per HU

Incremental Cost per HU

HU Density

Verizon $700 $650 >100’s /sq. mile

Jaguar (Rural Minnesota) $1438 $693 28.53 /sq. mile

Finley Engineering CaseStudies (w/Hiawatha BB)

$1871 $750 14.33 /route mile

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Verizon’s Cost Per Home Served

30% Take Rate 50% Take Rate 100% Take Rate

Cost per Home Passed

$700 $700 $700

Incremental Cost per Home Served $650 $650 $650

Actual Cost per Home Served $2983 $2050 $1350

Actual cost per home served at a 30% take rate for 1000 homes:

$700 X 1,000 = $700,000 to pass 1,000 homes$650 X 300 = $195,000 to serve 300 homes$895,000/300=$2,983 per home served

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Rural FTTH Cost Per Home Passed

30% Take Rate 50% Take Rate 100% Take Rate

Cost per Home Passed

$1655 $1655 $1655

Incremental Cost per Home Served $722 $722 $722

Actual Cost per Home Served $6238 $4032 $2377

Costs based on average of nine FTTH projects in the midwest. Verizon’s incremental cost per home served is $100 per home less. But Verizon’s take rates are much less. Higher costs in rural areas are partly offset by rural operators’ higher penetration rates

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Within rural towns Hiawatha

Broadband and Jaguar

achieve costs close to those of

Verizon because densities in

towns are equivalent to Verizon’s

By serving towns and the

surrounding rural areas, Hiawatha

and Jaguar are able to make

their business case work

y = -467.24Ln(x) + 3658.9

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

1 10 100 1,000 10,000

HHs per Square Mile

FT

TH

Co

st

To

Pa

ss

pe

r H

H

Cost to Deploy Fiber

• We observe a 5X difference in FTTH costs per HH passed over the range of HH densities with publicly reported data

• This range of densities represents a wide spectrum of HH densities from rural (5 HHs per sq. mile) to urban (1,375 HHs per sq. mile)

Source: FCC Filings, SNL Kagan, CSMG Analysis

Hiawatha Broadband (MN – 6 urban markets)

Verizon FiOS

Footprint

2009 FTTH Costs to Pass per HH

Jaguar Comm. Blooming Prairie City

MN

Jaguar Comm. All markets

average

Jaguar Comm. Somerset MN

Jaguar Comm. Blooming Prairie MN

Jaguar Comm. Summit MN

Jaguar Comm. Aurora MN

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Working the FCC Estimate Backwards

100% Take Rate

Cost per Home Passed $2434

Incremental Cost per Home Served $650

Actual Cost per Home Served $3084

The FCC $350 Billion equates to $2434 per home passed

Using the CSMG model this would equate to only 14 homes per square mile

y = -467.24 Ln(x) + 3658.9

y = -467.24 Ln(14) + 3658.9

y = -1233.1 + 3658.9

y = 2425.8

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The Cost To Fiber The U.S.

129 Million housing units on 3.5 million sq. land miles

On average there are 34 housing units per square mile

Fiber already passes 18 million homes, leaving 111 million HU’s

Using the model to calculate the cost to fiber the U.S.34 HU’s per square mile requires $2011 per home passed + $650 per home served $2661 X 111 M = $295 Billion

But this assumes housing is distributed evenly and no land is uninhabited

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Is the U.S. Population Clustered?

Source: US Census Bureau

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Adjusting for Low Population Areas

Adjusting for largely uninhabited areas

200 of around 3200 counties in the U.S. average less than 1 house per square mile

These counties cover 27% of the U.S. land area (968,290 square miles)

We estimate these areas have approximately 345 thousand housing units. This is .3% of U.S. housing units

Adjustments for areas that may not make sense to fiber

Another 463 counties in the U.S. average between 1 to 5 houses per square mile

These counties cover another 23% of the U.S. land area (800,727 square miles)

We estimate these areas have approximately 2.25 million housing units. This is 1.7% of U.S. households

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Revised Fiber Build Out Estimates

@50 HU/sq mile

Cost per Home Passed

$1831

Incremental Cost per Home

$650

Actual Cost per Home Served

$2481

Eliminating the areas with less than one house per square mile increases U.S. average density to approximately 50 HU per square mile and lowers calculated build out cost to $275 Billion

Eliminating the areas between one and five houses per square mile increases U.S. average density to approximately 72 HU per square mile and lowers calculated build out cost to $252 Billion

@72 HU/sq mile

Cost per Home Passed

$1661

Incremental Cost per Home

$650

Actual Cost per Home Served

$2311

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Housing is Concentrated

County Name

County HH Density

Burwell, NEBurwell, NE Lancaster, NHLancaster, NH Jamestown, TNJamestown, TN

Garfield County, Nebraska

1.4 HHs per sq. mi.

Coos County, New Hampshire

7.8 HHs per sq. mi.

Fentress County, Tennessee

13.4 HHs per sq. mi.

Example Example LocalityLocality

Example Rural Localities & Household Density

• Broad classifications of locality type (rural vs. urban) and density metrics may be poor indicators of the investment required to deploy FTTH to a community, as population and households can exhibit differing levels of clustering

Source: Google Earth, US Census Bureau, CSMG Analysis

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Jaguar Cost Per Home Passed

Housing Units per Square Mile

$1438

Over half of the housing units are located in town, lowering the average cost to service the area by over $664 per home (28 HU per sq. mile=$2102)

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$206 Billion to Fiber U.S.

LargelyUnoccupied<1 HU/sq. m

Very LowDensity1-5 HU

Rural Non-Metro

RuralMetro

UrbanNon-MetroPop. 2500+

Urban Metro

Non-Metro Total

22,543,000 345,000 2,256,000 10,691,000 n/a 9,251,000 n/a

Metro Total

106,467,000n/a n/a n/a 13,779,000 n/a 92,688,000

Fiber Passed Today

0 0 500,000 Included in rural non-

metro

500,000 17,000,000

Future FTTH Homes

0 0 10,191,000 13,779,000 8,751,000 75,688,000

Cost Model n/a n/a Worst Case6 HU/sq m

$3840

Worst Case6 HU/sq m

$3840

Verizon Costs

Verizon Costs

Cost n/a n/a $39.1 B $52.9 B $11.8 B $102.1 B

Sources: US Census Bureau Data, Render Vanderslice, CSMG cost model

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Summary and Recommendations

$206 Billion could complete the build out of fiber to 98% of U.S. housing units

Estimate is conservative and assumes limited cost improvements

The estimate does not include areas already passed by FTTH

Recommendations to help deploy fiber throughout the U.S.Two portions of the U.S. network are successfully being fibered: Verizon urban areas and rural areas controlled by Independent Telcos. Its important to understand what policies and assistance made that possible

Federal assistance to help get projects through initial start up phase, enabling private capital to invest in entities with proven EBITA

Triple play drives FTTH, costs for video content are destroying business case

Establishing more reasonable transport/backhaul pricing in rural areas

A rural POP program that enables service providers and communities to gain access to fibers traversing through their communities

Public/private partnership to establish an FTTH training program to ensure sufficiently skilled workers for building out the fiber optic infrastructure

Thank you