Fiber in the ‘Last Mile’: Technology, Economics, and Industry Structure

1. Fiber in the ‘Last Mile’: Technology, Economics, and Industry Structure Anupam Banerjee & Marvin Sirbu Department of Engineering and Policy Carnegie Mellon University Prepared for IEEE-USA Workshop U.S. National Policy for Accelerating Broadband DeploymentJune 17-18, 2002Washington DC

2. FTTH: Summary of the Argument • Future services will require high bandwidth; this bandwidth is most-economically provided by fiber; fiber and electronics costs are falling, thus making FTTH increasingly viable • Competition should not be limited to those who own a fiber into the home • Competition could utilize: • A shared dark fiber network -- Physical layer unbundling or ‘UNE based competition’ • A shared data transport network -- Logical layer unbundling or ‘Open Access based competition’ • Fiber network layout affects: • The Costs and Flexibility of Service Roll-out • The Potential for Competition • Ownership of fiber plant affects the incentives for equitable provisioning to competitors

3. Models of Competition in Telecommunications • Facilities Based Competition Central Offices Home 1 Service Network 1 Provider A Separate Networks Home 2 Service Network 2 Provider B Data Link Layer Equipment -- ATM, Gigabit Ethernet, SONET

4. Models of Competition in Telecommunications • UNE Based Competition (made possible by Physical Plant Unbundling)

5. Models of Competition in Telecommunications • Open Access Based Competition (made possible by Logical Layer Unbundling)

6. Models of Competition in Telecommunications • UNE Based Competition AND Open Access

7. Why Open Access is Not Enough • Physical plant monopoly extended to data-link layer monopoly • All services must run over a common, standardized, data-link layer • Even if some subscribers want ATM and some Gig-E • Limits data-link layer technology evolution • Service possibilities are limited by data-link layer capabilities • It is hard to police QoS provided to open access competitors

8. Four Architectures Home Run Fiber PON Active Star WDM PON Aerial Fiber Five Deployment Scenarios Urban Suburban Small Town Rural Remote Rural Engineering Economics of FTTH

9. FTTH is a decreasing-cost infrastructure … … Facilities based competition is unlikely in FTTH

10. Most Likely Scenario in FTTH will be … • An entire community served by one network • The only way to have competition is to have multiple competitors which share the network • The extent of competition depends on the architecture of the shared network

11. Non-facilities based Competition in Home Run Fiber • Physical plant unbundling is possible • Individual Fibers can be rented out as a UNE Home Run Fiber is compatible with Competition at the Data-Link layer and in Higher Layer services ( i.e., Open Access )

12. Non facilities based Competition in PONs • Physical Layer Unbundling is not possible in curb-sidePON or Active Star Central Office Data Link Layer Equipment Home 1 Service Provider A Network Service Provider C Service Splitter Provider B (Remote Node) Home 2 PON and Active Star do not support Competition at the Data-Link layer or in broadcast video delivery; but they can support Competition in voice, data and switched digital video services.

13. Rethinking PONs • A curb-side PON is not the only type of PON • What happens to costs when fiber layout groups multiple splitters at one location? • Splitters grouped at an Optimal Fiber Aggregation Point (OFAP) • Multiple feeders to the OFAP • Per home distribution fiber from the OFAP

14. OFAP -- Optimal Fiber Aggregation Point Splitter & OLT tobe deployed as needed • Higher utilization of Splitter and OLT ports • Electronics can be deployed by competitive providers

15. OFAP Limiting Case -- the “Home Run PON” Splitter & OLT to be deployed as needed • Preserves PON advantage of shared OLT ports • Deploy splitters & OLTs only as needed • Electronics can be deployed by competitive providers

16. Economics of OFAP Architectures (Urban deployment, 100% penetration)

17. What happens when Deployment is phased-in over time? • Economic benefits accrue from delaying equipment deployment until customers sign up • Discounting of future expenditures • Equipment costs decline over time • NPV of Capital Cost per Home Served depends on assumed rate of penetration • OFAP architectures provide greater opportunity for flexible service roll out • Assumptions • High, Medium and Low Rates of Market Penetration • Discount Rate of 12%

18. Economics of OFAP Architectures Low Market Penetration Rate (10% in 2004; 40% in 2008)Equipment Costs decline @ 10% per year

19. FTTH Architecture Ownership and Industry Structure First Mile Costs Community and Market Characteristics Second Mile Costs Competition in FTTH depends on … Competition in FTTH

20. Industry Structure • Experience with the copper network has shown that when a firm provides both facilities and services, there is little incentive to make facilities available to competitors • Have led some to suggest breaking up the ILECs into a “Loop Co” and a services company • What are the alternatives?

21. Conclusions • Optimal Fiber Aggregation Points (OFAP) lead to: • Lower Costs and greater Flexibility of Service Roll-out • Physical Plant unbundling of a PON and UNE based competition, leading to … • Per-subscriber choice of Data-Link Layer Technology (which defines the services opportunity)

22. FTTH and Regulatory Policy • ILECs have been lobbying for legislative/regulatory changes that would relieve them of providing UNEs on new network deployments • … and are also lobbying to be relieved of Open Access requirements • Our work suggests it is unlikely that there will be facilities-based competition among fiber networks • … at best, a duopoly • UNE competition based on dark fiber provides a “cleaner” boundary than does Open Access while facilitating technological innovation at the data link layer

23. Thank you • This document represents Research in Progress*. Please do not distribute or cite without the express approval of the authors. Prof. Marvin Sirbu Dept. of Engineering & Policy Carnegie Mellon University Pittsburgh, PA 15213 <sirbu@cmu.edu> Anupam Banerjee Dept. of Engineering & Policy Carnegie Mellon University Pittsburgh, PA 15213 <anupam_banerjee@cmu.edu> * Research supported in part by the MIT Internet-Telecommunications Convergence Consortium.