Facilities Based Competition: Fibre to the Home

Oft repeated in the course of the CRTC’s wholesale access proceedings was the virtue of investment in telecommunications facilities. The incumbents and their expert economists argue that resellers of telecommunications capacity are some sort of parasitic beast, who can only become virtuous by becoming owners of telecommunications plant – even where there is sufficient plant existing to supply all existing telecommunications needs.

In particular, the incumbents argue that such creatures as Primus, Teksavvy and Distributel should be madly laying fibre to the premises (FTTP), and assert that one, two or three fibres to the home would be good for competition.

I can’t agree.

The engineering, legal, and social costs of connecting businesses and home to fibre networks will be daunting. The incumbents have the advantages in all respects. The have huge engineering departments supported by experienced technicians and installers. They possess rights of way – a critically scarce resource in urban and suburban areas of our cities. Their prior investments in rights of way reduce their need to dig trenches and hang new wire to poles, lessening the social costs incurred in disrupting the streets, lawns and gardens of the citizenry. The additional social cost is the diversion of investment into fibre to the detriment of other socially useful employment. Were building two or more fibre lines to each urban and suburban premise to be encouraged – what other investments in infrastructure would be foregone?

In any event, there seem to be no instances of two fibre lines connected to a single family home (there may be some apartment and business structures served by two lines, but that is also rare).

The technology seems to be such that any single strand of fibre can, through the application of technical fixes, be enhanced to carry huge data volumes. A school board in the Okanogan region built a fibre network to serve its schools. A 1Gbs single strand was, without replacement, engineered to handle 80Gbs. No one seems to believe that 80Gbs is the end of the potential bandwidth carrying capacity of that single strand. Given that HDTV can be delivered at 20Mps, who can suppose that any house will demand, in any foreseeable future, a second or third competing strand. Indeed, what shareholder or lender will finance a carrier to introduce a second strand? It would appear to be money down the toilet.

In my view, fibre to the home is a mature technology waiting for the big application that will drive users from their current cable and DSL connections to a much greater bandwidth capacity delivery system. 4k, or UHD TV, which demands much greater bandwidth than can be delivered by either cable or DSL may prove to be that driver: when delivered without compression, it will provide a tremendous boost to the viewer experience of sports and action programming. It may be that it will be 8k or 16k TV that will create the demand. Nor should we forget computer gaming. 4k televisions now retail north of $2000. The price curve is following the same trend as that for previous consumer electronics. Soon the products will be ubiquitous, and demand for delivery systems that can optimise these technologies will grow exponentially.

The incumbents have lamented the fact that where fibre passes homes with existing download speeds greater than 15 or 20Mbps, they have trouble signing up subscribers for much higher speed fibre services.

As if puzzled, they express surprise that it is in the small towns and rural communities that they are getting real uptake for fibre delivery. Duh! These are the subscribers who have had poor access to DLS and often decrepit or primitive cable service.

People with no wireline telephone service in old Europe or in Africa adopted wireless telephony immediately as it became available. People will not go through the incrementalism of analogue telephony to digital telephony to analogue cellular to digital cellular to LTE when they can move to the latest technologies that deliver what they need. This is the phenomenon witnessed in the early uptake of fibre in less well served communities, and explains the reluctance of consumers in better served communities to pay more for a service that offers few immediately obvious benefits to them.

The gamble the incumbents are taking in investing in fibre to the home is that the apps that require fibre to deliver a quality experience to consumers will eventually be adopted. I don’t think this to be a very great gamble – though it is an expensive one. Of one thing I am confident, there will be no second strand to the home, and it is madness to think there will be.

I would expect that if both cable and telecos build out residential fibre networks, there will be cableco and telco enclaves spread throughout urban and suburban regions, with small towns served by a single monopoly operator. As always with these things, rural areas will catch up only over time, with either direct or indirect government subsidies providing the impetus for full connectivity.

And what of these enclaves? Well, look at what has happened over the last 150 years with electric, fire, water, sewage and road services, all of which started as competitive private businesses: consolidation into single geographically distinct territorial monopolies. Like the cable industry, which saw hundreds of locally owned cable franchises merged into ever larger organisations (Rogers, Shaw, Videotron), so we will likely see the sorts of mergers and swapping that will result in a few larger players with a regional or national scope. In other words, the days of two competing lines into the house (cable and telco) are limited. The remonopolisation of carriage of the home is emerging, and we need to prepare ourselves for a regrowth of regulation to protect consumer interests. Despite all the literature coming out of the Chicago School of economists, we sorely lack new and effective regulatory tools to protect the interests of consumers, and are ill prepared intellectually for the remonopolisation of communications services to the home.

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