Is ATT right about fiber? The CFO says it’s a “three for one” revenue opportunity, which is why the operator says they’re likely to add to their fiber inventory. One clear message you can draw from that is that a one-for-one or two-for-one might not have been enough, which leads us I think to the real reasons why AT&T is looking for more glass in the ground.
Consumer fiber, meaning FTTH, requires a fairly high demand density to justify, because its “pass cost”, or cost just to bring the fiber to the area of the customer to allow for connection when there’s an order, is high. Operators put the FTTH pass cost in the over-five-hundred-dollar range, and at that level, there’s way too much area that residential fiber can’t easily reach.
If you can’t make residential fiber broadly cost-effective, perhaps you can gang it with other fiber applications, notably things like 5G backhaul and multi-tenant applications like the strip malls the article talks about. If you look at everything other than large-site fiber as being an application of passive optical networking, you can see that just getting PON justification in a given area could open that area up to FTTH at a low enough incremental cost to make it profitable.
Of the possible non-residential fiber drivers that could be leveraged, the most interesting could be microcells for 5G and fiber nodes for 5G millimeter wave. The former mission is valuable in both more rural settings and in high-density retail areas, and the latter in suburban locations with highly variable demand density, where pass costs for FTTH could limit how much of the suburb you could cover with high-speed broadband service.
Every restaurant and retail location knows that customers like WiFi, and restaurants in particular almost have to offer it. People often use WiFi in restaurants to watch videos and do pretty much the same things they’d do at home, but in a larger concentration. If you spread a few 5G microcells around a heavily strip-malled area you could feed them with fiber, getting fiber closer to the residential areas they served.
From there, you could then consider the 5G/FTTN hybrid model. By extending strip-mall feeds to a local 5G millimeter-wave node, you could now reach residential and even small business sites up to about a mile away for high-speed broadband delivery. Each decent-sized strip mall could be a multi-purpose fiber node that supported even 5G mobile services and enhanced total capacity and service credibility. In fact, the combination of 5G/FTTH and 5G mobile could be a killer in the suburbs, and of course it facilitates wider-ranged fiber deployment.
Additional cells also improve the chances of open-model networks, and 5G in particular. One of the factors operators cite to justify proprietary 5G RAN is that there’s no support for the “5G massive MIMO” that could improve cell capacity. With more, smaller, cells, there’s less pressure to provide very high-capacity cells. In fact, this may be a major factor in AT&T’s dense-cell strategy; they also have a major commitment to open-model 5G.
A lot of fiber benefit could also enhance the classic capacity-versus-complexity tradeoff in network design. If you have a lot of capacity, you need less traffic management and complexity at Level 3, which is where most opex costs are generated. You can also probably rely more on generic white boxes for your data paths, as long as they can support the capacity you need. The effect of combining open-model IP networking with higher optical capacity and density is to shift your capex toward fiber and reduce your opex.
There’s no question in my mind that AT&T is right about using more fiber, creating more 5G nodes. There is still some question on whether the move can really fully address AT&T’s rather unique issues as a Tier One. To understand why, and what might help, we have to dig a bit into those issues.
Most Tier One operators evolved from wireline carriers who served populous regions. AT&T is fairly unique in that its wireline territory has more widely dispersed populations; rival Verizon has seven times the demand density, meaning much more opportunity per unit of geographic area. In cities and typical suburbs, AT&T and Verizon are comparable, but in more distant suburbs and rural areas, AT&T is far less dense. When Verizon started with its FiOS plans, it shed some of the localities where there was no chance FiOS could be profitable, to eliminate the problem of having some customers who could get great wireline broadband and others who could not.
Wireless is different, of course, and more so if you factor in the 5G/FTTN hybrid. Instead of having a pass cost of about $500 per home/business for FTTH, your pass cost could reduce to less than $100 providing that you had reasonable residential density in a one-mile radius of the node. That would cover about 80% of the thin suburban locations. Add in mobile-model 5G, with a range of 8-20 miles from the tower, and you have the potential to cover your entire territory with acceptable pass costs.
That’s why the decision by AT&T to drop DSL is smart. They have too many thinly populated areas to sell off everything where FTTH won’t work, so they have to find something that does work, and the 5G option is their best answer. In fact, AT&T’s network business salvation lies in focusing on 5G infrastructure for wireless and wireline and using FTTH only where the customer density is very high. If 5G mm wave works out, in fact, they might well be better off not using FTTN anywhere. Going full 5G would improve their demand density problems significantly, to the point where their effective density would triple.
That’s not enough for them to be profitable, in the long run, from delivering broadband alone. Instead of Verizon being ahead by seven times, they’d be only a bit more than double AT&T’s effective density. AT&T would still get some kicker from their Time Warner acquisition, but they’ll still need new revenue streams. If they move totally to a 5G model, meaning a pure packet model, they would be committed to streaming video, which they’ve already failed to capitalize on. Can they do better, in streaming and elsewhere?
Maybe, because the open-model, separate-control-plane, network would also potentially address their new-revenue challenge. 5G has some control-plane cloud-hosting potential (white boxes are still the best approach for the data plane), and future services built on contextual/personalization processing and IoT are all dependent on mobile access. If AT&T did an intelligent network modeling for this combination of a pure 5G future and new contextual/IoT services, they could get pretty well out in front on generating new revenue, credible and significant new revenue, in fact.
Can they do that? AT&T has been, perhaps more than any network operator, a driver of open-model networking. They’ve not always been the most insightful driver, though. There is a risk that their white-box focus will focus them again on boxes rather than on software, that they’ll view software as just a necessary component of white-box networking rather than its real justification. If they can learn the software lesson, or if a vendor can teach it to them, they’ll have a shot at a future.
The Street is mixed on AT&T today. Some love their dividend and see them as a safe play, and some say that beyond the dividend-of-the-moment, there may be bad moments ahead. I think that what AT&T has done so far has not secured their future. I think fiber enhancement and even open-model networking won’t secure it either. But I think that these measures have bought them at least two or three years to do the right thing. It’s just a matter of their identifying it, then executing on it.
There’s not much awareness among operator planners regarding the architecture of a monetizable future service set, or the network/cloud symbiosis needed to create and sustain it. There’s also, apparently, a serious shortage of cloud software architecture skills in operator organizations. Finally, operators still see “services” as being the result of combined device behaviors rather than the creation of software functionality. I think AT&T is working as hard as any operator to deal with all these issues, but they need to get moving; remember their cost management measures will buy them three years at the most.
