The broadband-to-the-home ecosystem has enabled communications service providers (CSPs) to support billions of people as they work from home, study from home, and video conference with family, friends, colleagues, teachers, and healthcare providers. More than 1.1 billion households are benefiting from fixed broadband connections, with over 16 million new connections every quarter. Technological innovations and industry-wide standards have significantly lowered the costs of connecting fixed broadband to the home, whether fiber, copper, coax, or wireless-based. However, the strong, innovative, and competitive ecosystem is under threat today because of the geopolitical situation. The consequences could be negative for the CSPs and the residential broadband consumers that depend on fixed connections.
Limiting competition hurts the home broadband consumer
Let us focus on fiber-based broadband to-the-home, also known as FTTH or FTTP (fiber-to-the-premise). FTTH is gaining momentum as the future-proof technology for ensuring adequate bandwidth as consumers adopt high-quality video streaming, gaming, smart home, and video conferencing applications. In parallel, FTTH deployment costs have declined significantly since the early 2000s, when a $5,000 price tag per home was commonly cited. Today, costs have declined to below $500 in high-labor-cost countries and less than $150 in lower-labor-cost countries. Fiber is presently connecting more than 650 million households and is forecast to support over 800 million households in 2024.
Industry standards and policies, along with ever-growing bandwidth demand, have been driving innovation, leading to lower-cost FTTH solutions, enabling CSPs to offer higher value-added services. Three organizations have been longtime promoters of FTTH PON standards and policies, namely the IEEE, ITU FSAN, and Broadband Forum. A key focus of the Broadband Forum has been reducing the barriers to component and vendor equipment interoperability. Its members include optical component and chip vendors, equipment vendors, test and measurement companies, and CSPs.
Two vendors dominate the PON equipment market, Huawei and ZTE. Together, Huawei and ZTE accounted for 77% of global PON OLT port shipments and 58% of global PON ONT/ONU port shipments on a rolling four-quarter basis ending 1Q20. The next largest vendor is Nokia, accounting for 11% of OLT port shipments and 13% ONT/ONU port shipments for the same rolling four-quarter time period. Nokia is followed by Fiberhome. Fiberhome accounted for 8% of OLT port shipments and 9% of ONT/ONU port shipments on a rolling four-quarter basis ending 1Q20. These four vendors make up a total of 96% of global OLT port shipments and 80% of global ONT/ONU port shipments on a rolling four-quarter basis ending 1Q20.
Vendor equipment interoperability is important and most CSPs choose multiple vendors for FTTH PON equipment. This strategy reduces vendor tie-in and supply chain risk, while encouraging vendor competition around pricing and features. It is not uncommon for the large CSPs to choose multiple PON equipment vendors. After all, a large nationwide FTTP network can exceed 500,000 OLT ports.
The Clean Network initiative will impact the PON vendor ecosystem and ultimately, residential broadband consumers. Vendor choices will be limited for some CSPs. The smaller vendors, making up the remaining 4% of global OLT port shipments will be challenged to support large CSPs, as well as CSPs in regions where the smaller vendors have little, if no existing presence.
But the greater risk may be around innovation and costs. Significant progress has been made in many aspects of FTTH networking, equipment, and operations, such as intelligent ODN design tools, flexible fiber, PON optics and ASICs, and automated provisioning and monitoring. Several large vendors adopted vertical integration strategies, leading to even lower costs for FTTH network builds and equipment for CSPs. Lower costs have motivated CSPs to build FTTH networks in countries with relatively low residential ARPUs, such as Belarus, Georgia, Latvia, Lithuania, Romania, and Russia in Eastern Europe and Brunei, China, and Vietnam in Asia. Many residential consumers in Eastern Europe and Southeast Asia can choose among several FTTH operators, providing a wide range of competitive service offerings.
Fixed-mobile convergence (FMC) is a corporate strategy among numerous Western European operators. Fiber access is a key ingredient to providing a future-proof broadband network for homes while supporting nonresidential subscribers and applications. CSPs may be face higher costs as they change or adjust vendor contracts which may lead to higher costs for subscribers.
It is possible that vendors adversely affected by the Clean Network initiative will limit their involvement with international standards organizations, thereby impacting the health of the ecosystem for all vendors. While smaller vendors can be nimble, they may lack the large budgets that support innovation and local support. Ultimately, the financial costs of segregation may be passed along to the broadband residential consumer, particularly where CSPs have limited choices for their FTTH PON equipment suppliers.
Fixed broadband has proven its pivotal role to those at home. Even after the COVID-19 crisis is resolved, many subscribers will continue to work from home, benefiting from the conversion of commute time to family time. Higher broadband tariffs may deepen the digital divide.
We hope that this analysis will help you make informed and imaginative business decisions. If you have further requirements, Omdia’s consulting team may be able to help you. For more information about Omdia’s consulting capabilities, please contact us directly at [email protected].