Fiber to the Home (FTTH) and Passive Optical Networks (PON) in particular have received an inordinate amount of attention from the financial community in the last year. Attention has been focused at every level of the value chain, from component companies that make chips and optics to Telecom Equipment and Set-Top box makers to Carriers who are deploying services like IPTV over a new fiber infrastructure. The resurgence in the market performance of optical stocks was (incorrectly we believe) attributed to FTTH and other broadband services.
There is a great deal of information available on FTTH deployments here in the USA, and the story in Japan is well documented. I’ve written extensively on GE-PON deployments in Japan by NTT (NTT) as well as FiOS deployments in the USA by Verizon (VZ), and covered the chipsets used in each.
One area of the world that everyone agrees is an enormous opportunity is China. It has also been a source of my personal frustration as very little information exists on the future of FTTH in China. A smattering of press releases by companies seeking to position themselves as a ‘leader’ in China has not helped clarify the situation. In summary, very little deployment of FTTH has taken place in China- therefore very little history exists upon which to determine the future trajectory of events.
Why China Is Important
Nyquist Capital invests in public companies in the communications vertical, starting with the component suppliers (chips and optics) and working upwards through the distributors, equipment makers, carriers, and service providers. Fundamental change in one area quickly ripples into the others and we seek to capitalize on those disruptions by seeing what is unseen and exploiting the resulting inefficiencies. There is a great deal yet unseen in the FTTH market which is why it is of interest to us.
While NTT and Verizon are playing central roles shaping this future, China will play the greatest role in creating future disruptions in the component and equipment areas. This is simply because of the staggering demographics involved with the ongoing industrial transformation of China. There are currently 200 million broadband subscribers worldwide, 37 million of which are in China. The United States has roughly 50 million subscribers – or 17 subscribers for every 100 people. China has 3 subscribers for every 100 people, and they have four times as many people than the US.
The massive migration of labor to urban areas is creating the biggest greenfield telecom installation opportunity in history. Three hundred million Chinese will migrate to the cities in the next 15 years -the equivalent of creating a Los Angeles/Orange County/San Diego urban each year until 2021.
Korea is the best historical precedent for such an event (though much smaller in scale) as 25% of the population migrated to cities in the last 20 years. The flurry of urban construction allowed buildings to be retrofitted with the latest infrastructure, DSL and ATM at the time, with the result being that Korea now possesses the most advanced residential broadband network in the world. China will be no different, except larger in scale and more weighted towards optical infrastructure.
The size of the Chinese market, the relative low cost of labor (labor costs dominate FTTH installs), the recent reduction in FTTH equipment costs, and the Chinese propensity and enthusiasm for marquee infrastructure projects leads us to believe that China will be the prime mover behind the FTTH marketplace going forward. We’ve written in the past that China will play a very disruptive role in the supply of optical transport equipment in the Metro and long haul areas. The ascendancy of FTTH in China will impact optical access identically – much in the way recent widespread deployment of DSL within China has vaulted Huawei to be the #2 supplier of DSL equipment globally.