Japan is by far the worlds largest FTTH deployment and is the best proxy for predicting future of traffic growth as a result of faster broadband speeds. It also doesn’t hurt that Japanese statistics are both plentiful and as unbiased as one can find. The Japanese Ministry of Internal Affairs and Communications (MIC) is tasked with tracking statistics for all things telecom in Japan. It great data and it is all free.

The MICS data illustrates Japanese FTTH growth and a DSL subscriber downtrend for the past 2 years.

The important takeaway here is that all broadband growth in Japan for the last two years has been high speed FTTH subscribers. One would think that growth in the availability of fiber based broadband would drive traffic growth, but the data doesn’t show this.

In September 2007 we observed that while subscriber growth was on a tear in Japan, traffic growth was not growing at the rates commonly referred to in the media (see “The Bandwidth Explosion Myth”). We arrived at this conclusion by combining traffic growth data and subscriber growth data from the MIC. Our conclusion was per-user bandwidth growth in Japan was only 18% per annum. We presented this conclusion at OFC in 2008.

The MIC released a new study that examines traffic growth in Japan with detailed statistics on per-user traffic growth. They reached the same conclusion we reached over a year ago. The below chart illustrates traffic growth as aggregated from various peering points in Japan, and for the first time includes estimates (right scale) of per-user upload and download usage.

The MIC results show per user growth in line with our estimates though they use different Y-axis units. From 2004 through 2007 we estimated per-user download bandwidth grew at 18% per year. The MIC data, which includes 2008, shows download usage roughly doubled between 2004 and 2008, a growth rate of 18-19%.

More importantly, the additional data through 2008 shows that no significant trend change in bandwidth usage is underway. Given Japan has the largest installed base of FTTH in the world we feel it is premature to conclude that the deployment of high-speed broadband upgrades result in any significant change in bandwidth usage.

I blogged my original install here. I’ve linked to a few of the original photos in the narrative below.

Voice, Video, and Data were all humming away Saturday morning. I phoned my parents, checked the Best Buy website for LCD pricing, and the kids watched some TV. After late morning family excursion to the park, supermarket, and a failed quest for Estes rocket engines for my son, we returned home to a home not unlike one circa 1900 (Not necessarily a bad thing). Sometime between 9AM and 1PM, we lost optical connectivity.

I went down to the basement, disconnected the backup battery, and power cycled the Tellabs (TLAB) ONU terminal. Nothing. Opened the ONU – aha – red lights where there had been none. Not good. Looks like an optical RX failure. Visual inspection of the fiber from where it emerged from the conduit all the way to the pole mounted connecterized service interface showed nothing out of the ordinary. I call Verizon on my cell phone. They run a remote loop test and confirm I’m down. They file a ticket and commit to fix the issue by November 28th (3 Days?!!?!??). It is 2 PM on the 25th.

Nothing happens for 4 hours. Cell phone rings. It’s Verizon. They’re working on the problem. Guy on phone tells me it’s a wide issue and crews are working on the issue now. Hmmm.

10PM Saturday night. Watching Downfall from Netflix (the whole circa 1900 lost it’s appeal quickly) and the doorbell rings. My wife and I jump – who rings your doorbell at 10PM? It’s two Verizon techs and they are walking around my front yard. I explain the buried conduit and show how it’s wired. They want to see my ONU, and I invite them in. They see the lights they expect to see on the ONU and leave.

Movie is over at 11PM. Verizon truck still outside. They’ve got the connecterized splitter inside the truck and are checking it out as I spy through the windows. I leave them alone and go to bed with their trucks yellow warning light flashing through the bedroom windows as it spins.

Kids wake up at 6AM. Dark outside. Verizon truck still there. At 8AM I decide to offer the guys some coffee and I run into the Verizon guy as I exit… he’s smiling. They found the problem. He walks me 200m down the street and points to a pair of work gloves duct taped to the fiber stretched along the pole.

They had quickly figured out that some of the fibers from the local splitter cabinet had been cut, but only a few. Considering they are all bundled, this was a bit odd. Verizon hooked up a high power laser (Neon/Argon? Man that must be one hell of a laser…) that emitted visible light and visually inspected the fiber looking up from the ground. They did this three times. Nothing. The fourth time they used the bucket truck to look at the fiber from above, and they spotted some small pinholes of light leaking out.

Turns out the fiber had chew marks on it, most likely from a squirrel. The tech had never seen anything like it. They swapped my house onto another fiber drop from the splitter until a crew can come out and replace the entire bundle. The tech duct taped his gloved to the fiber to mark the failure.

Overall, I thought Verizon handled the failure very well. I’m not sure Comcast (CMCSA) would spend the night troubleshooting their coax for voice issues. There are upsides to the old-school Telco mentality, though as a Verizon shareholder I shudder to think what this repair will cost them overall.

Closing note: my wife asked – did the squirrel get electrocuted?

Author is long Verizon and Tellabs and holds Comcast puts.

Here are the highlights:

1. 375k broadband subscribers today. 725k by year end.
2. 70% of subscribers are new Verizon broadband customers. 30% are cannibalized DSL customers.
3. On track to offer services to 5M homes by end of 2006, 18M by 2010, which is over 50% Verizon current subscriber penetration.
4. 1.8M potential FiOS TV subscribers by end of 2006, 170k subscribers. 2/3 are Cable defectors. (Are the others satellite? This seems low.)
5. Targeting 6-7M Broadband subscribers and 3-4M video subscribers by 2010.
6. $1BB in annual Opex savings by 2010 when compared to copper. That’s $110 per subscriber. Field failure rate is 1/5th that of copper.
7. 15% broadband market penetration achieved within one year of install.
8. $850 target cost to pass a home, $880 to connect it when service is ordered. Expect this to drop to $700 and $650 by 2010. In 2004 it was $1400 and $1200. Verizon has cut deployment costs by 1/3 in two years. MOCA is a key technology (see ‘Verizon Uses MOCA to Reduce FiOS costs‘).
9. Financial models target 27% operating income margins assuming 37% broadband penetration and 24% video penetration after 5 years of serving a community.

Verizon has now put a solid stake in the ground by which investors can judge ROI and market success. While much of the above news is not new, I expect Verizon will provide updates with this granularity on a quarter by quarter basis.

It’s clear to me that Verizon is totally committed to cannibalizing it’s copper plant and DSL customers. It is refreshing to see such a large company aggressively deploying new technology, particularly going against the grain of short-term oriented Wall St. thinking. I use the FiOS service at home, and it is remarkable. (See my install notes here)

Verizon, more than any other company in the world (with the exception of NTT), has evolved the corporate DNA to deploy last mile fiber cheaply and make it work. It will be interesting to see the impact if (when?) they decide to apply this expertise to business customers. This could have a stunning effect on competitive telecommunication providers, as Verizon would not be forced to lease their new optical right-of-way, and competitors would be forced to use a deteriorating plant, maintained by Verizon, and all additional costs passed on to the lessee.

A full copy of the presentation can be found here. The Wall St. Journal also has an overview here.

Optical Components – Competitive environment still sucks. Too many suppliers trying to kill each other. Market divided into two sectors, low-end (1/2/4G SFP modules, including FTTH) and high-end (DWDM, Long Reach, Amps, ROADMs, exotic stuff). Cisco (CSCO) buys 70% of the low end and effectively plays the suppliers against each other. Suppliers need to stop playing their game. High-End fundamentally has a better business environment but I do not understand why those vendors haven’t finished their cost cutting. JDSU (JDSU) engaging in schitzophentic business plan pursuing both test equipment and optics. They need to decide what their mission is. Bookham (BKHM) talks the right game about consolidation but can’t seem to generate positive cash flow. Avanex (AVNX) is off my radar, last sighted with bloated French (legacy Alcatel division) opex and descending fast through 10k feet. Best investments here are the companies that own the technical high ground, the lasers, detectors, fabs etc. and have the unit volume to leverage those investments. That’s Finisar (FNSR), Bookham, and Avago (Owned by KKR/Silverlake). Still unclear what impact China will have.

Comm Silicon – Everyone I speak with indicates semiconductors for optical equipment are on FIRE. Forward Error Correction, SONET/SDH framers, PDH framers, PHYs, all going gangbusters. The problem is these businesses are buried in large companies (Vitesse (VTSS), Agere (AGR), Mindspeed (MSPD), Maxim (MXIM)) and it is difficult to get investing leverage on this trend. PMC-Sierra (PMCS) represents the best such opportunity. VDSL2, not optics, is the best way to play FTTH as millions of lines are retrofit – Centillium (CTLM) and Ikanos (IKAN) are the best plays here. Keep an eye out for Intel’s upcoming sale of their Telecom semi division.

PON – More heat than light. Problem is the market just isn’t as big as everyone thinks. Silicon is controlled by Broadlight (Private) and PMC-Sierra. Optics are pure commodiites – the number one supplier of PON hardware, Mitsubish Electric, doesn’t even buy modules. They make the optical sub-assembly themselves. There are around 5M PON modules sold a year, compared with 15M 1/2/4G SFPs. Gross profit on each is around $4. Big Effin Deal. Investors who hitch their hopes on FTTH pulling the optical wagon aren’t going to roll far until someone other that Verizon and NTT let loose, someone like China Telecom. GE-PON beats G-PON in volume 5:1 in 5 years.

Optical Equipment – Infinera is the real deal and represents the best example of innovation in the business. Unfortunately, this is not ‘unseen‘. Everybody know this and it will be hard for this equity (when it finally is one) to exceed high expectaions. Second best innovator is Huawei and represents the long term threat to Ciena (CIEN). Ciena has concentrated all firepower on being a transport company after sinking huge diversification investments that failed to hockey-stick. Only exception is Internet Photonics, which mothered the CN4200 product, a simple but effective Ethernet transport platform. It’s a great box, much like the revolutionary Cambrian box Nortel acquired (now called the 5200), but hardly the basis to support a $2B company. Ciena needs more technical innovation to survive and beat back Huawei, the ultimate commodity player. Lucent (LU) employees better learn French and Italian because Alcatel (ALA) plays better politics and is going to own them – 5 years from now very little of today’s Lucent will survive. The Nortel OM6500 is a hidden gem that could reverse the optical fortunes of that company. Cisco (CSCO) is still not a player. Adtran (ADTN) is a good way to play multiple trends we see in optical.

Carriers – The real estate boom is over, but the dark fiber real estate boom is underway. The consolidation in this business is finally underway and will result in improved margins for all. Dark Fiber in the ground is undervalued and future operators of that fiber will extract better margins. Abovenet (ABVT.PK) is our favorite. Companies with high-replacement cost fiber in metro areas are best positioned. Long Haul fiber is less attractive. The Bellcos have all the opportunity to dominate the next century but have not exhibited a will to adopt revolutionary business models. Either they will be the next airline industy, undercut by a telecom Southwest, or evolve into massive cash-flow organizations with huge infrastructure competitive advantages, like Big Oil. The sequel to Syriana might be about the big Bellcos. Too early to tell but they look good to me in the short term and we’ve been long telco and short cable (yes, ouch). Cable was created by Telecoms failure to act. They evolved (Cable Modems). They rebelled (VoIP). And they have a plan.

WHEW! Total working time for this post – 32 minutes. Extra points for whomever discovers the allegory used at the end of ‘Carriers’.

READ THE DISCLAIMER. These are opinions, NOT investment advice.

And discuss, discuss, discuss!

In a research note issued this morning, UBS analyst Nikos Theodosopoulos said Verizon (VZ) is likely to pick Alcatel (ALA), Motorola (MOT) and Tellabs (TLAB) as its GPON suppliers in a twist on the carrier’s traditional dual-sourcing practices.

Typically the Bells would select two vendors, with a 70:30 deployment split between the two over the life of the contract. Who got the 70 was usually determined by technology and pricing in the early stages of the contract, establishing relative incumbency for one supplier.

Example: Once AT&T (T ) starts deploying a SONET ring with Fujitsu equipment, the risks of switching to Lucent (LU) (or God help us a Cisco 15454 (CSCO)) are higher than costs associated with sticking with Fujitsu. People who fence sit or run Enterprise networks that fail 4 times a year call this “Fear of Innovation“, the Bell’s call it “reliability”. I digress.

This time it’s three. Why?

GPON equipment is not ready for prime time. The lack of interoperability testing on any large scale makes the risk of deploying at this point very high. It’s in Verizon’s (VZ) best interest as the biggest player in the FTTH deployment game to keep multiple vendors in the running to ensure that these issues get worked out. It’s also in their best interest to keep more vendors on a string to drive down the cost of this equipment.

Verizon is the GPON market. They are the only carrier in the world deploying GPON in any quantity over the next 3-5 years.

The real issue here is whether Verizon will deploy GPON at all, at least in the near future. I strongly suspect that until the economics work out such that the per user cost of GPON in the real world (i.e. what do I need to pay to deploy today, not those fancy GPON white papers vendors like to trot out) is cheaper than BPON we will see no GPON deployment whatsoever, period, end of story.

Analysts have long said the Bell GPON contest will be much more competitive than the PON contest was, with pricing expected to dip below even current prices for much lower-speed PON equipment. But a three-way supplier structure could make it even more competitive. Over time, Theodosopoulos wrote, only two of the three vendors would likely retain long-term positions with Verizon.

The decision to move to GPON will be driven exclusively by cost. All the discussion about the speeds and feeds of G-PON are useless because users (myself included, 15mbs and nothing on) cannot begin to saturate the bandwidth they have at their disposal with BPON. So why would Verizon pay more for G-PON if it provides no competitve advantage from a user standpoint.

This is where Tellabs has a big advantage. The BPON equipment is fully baked, tested, the R&D is sunk, and the supply chain participants are killing each other for action on the volume. Tellabs has plenty of cost leverage in their pocket to drive Verizon to delay a decision to move to GPON.

Tellabs has been criticized for being late to the GPON game. It would appear to me that they understand the lack of urgency in the matter, and stand to benefit as BPON continues to ship.

We already knew who the three GPON vendors would be 6 months ago. Verizon needs to incite a price war in order beat the low cost equipment from incumbent BPON. Once the carnage is over, one vendor will take 70% of the contract. In the meantime, Tellabs keeps the BPON business.

1. Part One – A radical change in demographics is creating an optimal situation for a fiber build out in China
2. Part Two – GE-PON has taken hold in other countries with similar demographics
3. Part Three – The economic and market conditions appear to favor GE-PON
4. Part Four -The activities by the largest Chinese Telecom actor reinforces this choice

In this fifth and final installment we will examine what questions remain that prevent accurate forecasting of PON deployments in China.

We feel the greatest question is whether the apartments, the overwhelming bulk of new construction in China, will have fiber connections to each unit. This has a dramatic impact on the amount and type of equipment that is deployed, and therefore an essential element in determining who will benefit.

FTTN vs. FTTH

Fiber to the Home (FTTH) is a grossly abused term when used in reference to multi-tenant dwellings. Many would classify all the following scenarios as being FTTH, when many are clearly Fiber to the Node (FTTN).

1. Each apartment is served by an individual fiber and has an ONU installed.
2. Each apartment is served by a copper based VDSL connection terminated in a wiring closet on that floor of the building. A PON network may or may not be used to serve this closet node.
3. Each apartment is served by a copper based VDSL connection terminated in the basement. A PON network could be used to serve the basement node, though it is unlikely if more than 4-8 subscribers are served.
4. The entire apartment complex is wired for Ethernet using off-the-shelf hardware typically used in an Enterprise environment. The WAN uplink in the basement could be anything from state-of-the-art Metro Ethernet to bonded T-1’s using ML-PPP.

Scenario one requires an ONU chipset for each customer. Scenario two requires per-customer VDSL silicon and less PON silicon. Scenario three doesn’t even use fiber to serve individual customers, and those FTTH subscribers are really using DSL SLICs instead. It’s clear that not only are some FTTH customers really Fiber to the Node, but that there is not a 1:1 relationship in subscribers to components consumed. Existing market research reports do a horrible job of clarifying this.

Considering the vast majority of Chinese customers will be in apartments, determining the impact of multi-tenant dwellings on FTTH deployment is of crucial importance.

In Japan, roughly two in five of the NTT FTTH subscribers are apartment dwellers. NTT runs fiber to some, and uses VDSL to serve others. Landlords or Apartment Associations sometimes refuse to allow NTT to install the fiber, though such resistance is slackening as fiber connections in Japan have become the new ‘Cool Thing’ to have, and property owners don’t wish to be left behind their peers. While exact numbers are difficult to obtain, it does not appear VDSL has been used in substantial numbers.

However, China is a whole new ballgame with a different set of economic constraints. It is very unclear which of the above five scenarios will dominate.

Regardless of this uncertainty, we must have a model for forecasting FTTH in China. It is a straightforward model build on the fact that most new construction in China will have fiber installed, and that the rate of new construction will be proportional to long-term migration trends. Adjacent to this, we expect overall (including FTTH) penetration to follow historical adoption trends among the urban population of China.

Therefore:

• PON deployments should track linearly with the urban migration trends now dominating Chinese demographics. New construction is used to expand the capacity of a city due to migration, with existing residents trading their worn low end residences for newer, nicer dwellings.
• VDSL deployment will track linearly with the growth of broadband penetration in China, derated by a co-efficient related to urban migration.

Conclusions

This report is a high level summary of our thoughts on China’s impact on broadband deployment and the resulting impact on component and equipment suppliers. Please contact us directly for more in-depth analysis and actionable investment conclusions.

Enter the Dragon

China Telecom (CHA) recently assembled a very quiet, closed door session of suppliers in order to orchestrate implementation of several extensions to the IEEE 803.3ah GE-PON standard. This event has gone totally unreported in the press. Obviously, knowing which companies attended would be valuable- this is what I have been able to conclude.

Chip Vendors:

• Passave – Well known, recently acquired by PMC-Sierra (PMCS)
• Teknovus – Another well known chipset vendor.
• Centillium (CTLM) – Invited, but no-showed. Has had poor success in Japan. Email from Nyquist to the company on this issue has gone unanswered.
• Conexant – Dark horse with significant complementary technology
• Immenstar – Startup. Recently profiled in Lightreading.
• GW Technologies – Chinese PON chip vendor. Interoperability agreement with Teknovus.

Equipment Vendors:

• Huawei
• ZTE
• UT Starcom (UTSI)
• Fiberhome
• One Additional Chinese Vendor

Note the total absence of any Western or Japanese equipment suppliers. China Telecom is clearly motivated to source the supply of FTTH equipment domestically. UT Starcom, with all of it’s financial warts, is the most experienced of the group, as it was a GE-PON supplier in Japan as well as a supplier of IP DSLAM equipment.

Most notably absent among western vendors were Alcatel (ALA) and Siemens (SI). Alcatel has invested significant resources in its Shanghai Bell group to develop a low cost R&D center for global products as well as a means to better secure domestic business. Siemens recently acquired Photonic Bridges with the same intent, and has been outsourcing the development of their PON products to Korea. Both appear to have come up short not only because of geopolitics, but also because of their heavy focus on ITU standardization, and G-PON.

China Telecom initiated the meeting seeking to extend 802.3ah to include the following features.

• Remote Code Management – The ability to remotely download new code into an installed ONU. This is not spelled out in the IEEE spec and a standard interface among ONU vendors is desired to ensure transparent ONU interoperability
• TDM Circuit Emulation – Contrary to the wishes of IP/Ethernet Zealots everywhere, the vaunted T1/E1 refuses to die. China wants to ensure there is a standard way to provide legacy circuit services over the new optical infrastructure. Several IEE standards exist and their implementation will be specified as a 802.3ah addendum. Circuit Emulation is one of the greatest strengths of the ITU G-PON solution, and it looks like that will disappear. This explains the recent announcements by Passave (Zarlink (ZL) partnership) and Teknovus (in house silicon).
• VOIP Management – Ability to remotely provision and control voice over IP services offered in the ONU, eliminating the need for an external broadband VoIP adapter.
• Encryption – It simply wouldn’t be China if they accepted a western encryption scheme. Rather than use the globally accepted AES-128 they want their own, unique encryption. Preferably something not developed by NIST and something they know the racks of computers at the NSA haven’t had a shot at cracking.
• Dynamic Bandwidth Allocation (DBA) – This is the ability allocate varying amounts of bandwidth to a single subscriber on the fly. NTT (NTT) implemented these features by partnering directly with vendors and conducting limited interoperability testing. It appears that China Telecom wants to ensure a wider base of suppliers from the outset and is orchestrating a standard DBA implementation.
• Optics – The original 10-20 km reach specification is out of date. GE-PON optics suppliers can now easily beat this spec and China Telecom wants to take advantage of that.

China Telecom is clearly leading an effort to organize a supply chain around a modified version of the 802.3ah specification in an effort to prepare for a rollout of FTTH services.

The last remaining question, one we will address in the fifth and final installment of this series, is what role active ethernet will play in China and how this will impact the amount of components and equipment consumed.

Continue reading part V (Link inactive until June 27th)

Companies Mentioned:
China Telecom Corp Ltd (NYSE CHA [ADR])
Nippon Telegraph and Telephone Corp (NYSE NTT [ADR])
Alcatel (NYSE ALA [ADR])
Siemens AG (NYSE SI [ADR])
Zarlink Semiconductor Inc (ZL)
PMC-Sierra (PMCS)
Teknovus – Private
Centillium (NASDAQ CLTM)
Conexant Systems (CNXT)
Immenstar – Private
GW Technologies – Private
Huawei – Private
ZTE – Private
UTStarcom Inc – (UTSI)
Fiberhome – Private(?)

We believe China Telecom (CHA), as well as other Chinese actors, will choose GE-PON. They are motivated by factors that transcend technical specifications, factors that matter most to the selection process.

The Chinese Tao

Contrary to popular belief, both government and business in China do not function through rigid top-down execution of initiatives. China is a confederation of provinces and townships with varying amount of influence, and each is slowly coerced into following a high level dictum through social engineering mechanisms foreign to most western businesses.

There is an excellent chapter in the book One Billion Customers (Wall St. Journal Press) that provides the story behind the PHS ‘Handyphone’ system and how it gained popularity contrary to the desires and dictations of Beijing. With PHS, there were striking technical and economic advantages that overwhelmed the states desire for central planning.

Aside from the reams of marketing material available, the G-PON protocol has no dramatic technical or economic advantages over GE-PON. There are indeed some rogue states within China that have deployed G-PON in limited amounts, these are well highlighted in Flexlight press releases.

This is why GE-PON will win in China.

1. Component Availability – There are at least seven silicon vendors who have announced GE-PON chipsets but only four for G-PON chipsets. More importantly, there is only one G-PON chipset that is perceived as market available.

   This is incredibly important as Chinese vendors are well known for not entering a particular market until a robust supply chain exists. Multiple sources for components allow them to use their large volumes to play vendors against each other and drive radical cost reduction. Huawei is particularly good at this, and since no secrets exist in China, the Huawei price becomes the China price.

   Optical component vendors have already endured this pricing bloodbath, and the relatively few optical specification differences between the two technologies should not affect China’s standard selection. ADVANTAGE: GE-PON

2. Cost – Contrary to the marketing materials pushed by G-PON vendors, a GE-PON system is cheaper than a G-PON system. You will see charts showing that at a certain bandwidth per user and certain number of subscribers per link G-PON gets cheaper, but in reality none of these matters – the startup costs for GE-PON are cheaper today. This is due to the fact that there will be several million GE-PON nodes deployed this year, and virtually zero G-PON nodes deployed.

   The relative low cost of labor in China, and the resulting high percentage of costs assigned to equipment makes hardware pricing a greater issue than in the west. The lower startup costs of GE-PON make it a clear winner in China as a result.

   Also, in the components business, volume is as important a cost lever as technology. Fixed costs (R&D, Qualification, Fab Capex) tend to dominate therefore the incremental cost of another component decreases as volumes increase. GE-PON will have much higher volumes for the forseeable future, and therefore lower structural costs. ADVANTAGE: GE-PON

3. Maturity – NTT has deployed millions of GE-PON nodes and trailblazed through innumerable technical challenges. Verizon is only now beginning a similar effort with B-PON. G-PON has yet to encounter any problems because it hasn’t been deployed yet at all.

   This is compounded by the lack of proven G-PON interoperability among vendors. Telcordia is holding its very first G-PON interoperability event in 2006, while GE-PON has underwent informal interoperability testing in NTT labs for several years. The presence of a single large customer, NTT, introduced an informal interoperability requirement that forced the marketplace to quickly converge GE-PON requirements. ADVANTAGE: GE-PON

4. Flexibility – The IEEE 802.3ah spec is relatively lightweight, with many of the features written as optional add-ons. GE-PON equipment initializes communication by negotiating with the known standard, then begins to query connected devices on their capability to support addendum requirements. GE-PON chipset vendors are accustomed to making modifications and in many cases have designed their architectures around such flexibility. Implementations can be custom but still meet the specification. The ITU spec does not allow for such flexibility, and it turns out that flexibility is something China Telecom is looking for. ADVANTAGE: GE-PON

These four factors could apply to the decision of any telecom actor, not just a Chinese one. At this time it is unlikely that the large American and European telcos will use anything but the ITU B-PON and G-PON standard. It also appears virtually certain that China will chose GE-PON based on the structural economic advantages it brings to the table.

However, the most compelling evidence that China will select GE-PON is based on the actions of it’s largest carrier. There is a quiet and coordinated effort by China Telecom to enhance the IEEE GE-PON specification to meet the needs of their network, something informally referred to as C-PON. This effort and the companies involved will be examined in Part IV of the series.

Continue reading part IV (Link inactive until June 20th)

Companies Mentioned
China Telecom Corp Ltd (NYSE CHA [ADR])
Flexlight Networks – Private
Nippon Telegraph and Telephone Corp (NYSE NTT [ADR])

I am a FiOS customer and follow FTTH issues from a financial and technical basis pretty closely.

THESE ARE RAW NOTES. I reserve right to change them if I get my hands on a transcript from the meeting.

Analysis to follow in a later post.

—————————————–

Guy from Comcast sitting next to me taking notes. Keeping tabs on the competition. Very friendly, do I detect even some sympathy for what Verizon is about to endure?

Lots of people here… they all know each other. They are all Verizon employees who live in Winchester. A little grass roots corporate push.

Board kicks off Meeting

Verizon Application Timeline:
March 2005 – License initiated. Expression of interest.
May – Verizon submitted initial application
Aug – Town issued response
Sep 2005 – Complete Application submitted. Multiple meetings and negotiations follow
May 24th 2006 – Posted notice for June 7th public meeting. 1st public meeting.

7 Months of active negotiations. At least 30 hours of meetings with Verizon. A lot of work.

Verizon speaks first, then a report from cable advisory committee.

Audience can then ask questions. Try to limit question to 5 min.

At end, selectmen may or may not vote. They will ask questions after VZ presentation and cable committee

Peter Hollman. Verizon VP External affairs

He is backed up by others, including a lawyer who is not a Verizon employee.

Thanks. Thanks. Thanks. Thanks to the Academy, my mom, etc. A lot of this goes on all night for 2.5 hours.

(Reading from notes)
Head end infrastructure all in place from local CO, only waiting for approval from board. Ready to go in 30 days with TV service. $500M invested in MA last year alone.
We support local events, 120 VZ employees or ex-employees live in Winchester (My guess is 10 of them are here tonight). Talks about how great FiOS TV is. Must have a level playing field negotiation. Town will not grant a license that is more favorable than the incumbent. Verizon recognizes this.

Cable Advisory Committee – Volunteer Citizens

Ashley Stevens. Bill August. Ashley prepared remarks but left them at home. Guy is good speaker, he doesn’t need them.

Thanks everyone for everything. 7 Meetings since September. 30 Hours of meetings (ugh). 5-6 townies, 2 VZ reps. A challenging process. Challenging regulatory environment.

VZ deployed fiber network based on non-TV services. Unique situation than when Mediaone (Comcast)/RCN originally applied. While meeting, Lots of ongoing discussions in Federal government to eliminate the need for franchising really complicated the negotiation.

Cable committee excited about competition. RCN came in a while back, but they withdrew years ago (during bubble I think). They are very excited about FTTH. Cue fiber love-fest discussion. “VZ proved FTTH naysayers wrong.” Good point Ashley.

Financial aspects. 14 year license. 15 years is the max. License will be re-negotiated when Comcast’s expires – both expire at same time. VZ has an option to pull out early in some MA franchises, but not Winchester. Must provide free service to public buildings. Access fee is 5% of revenues, the max allowed in the state. Public Educational Grant (PEG) of $210k, $100k up front, $50k 3 years, $60k 6 years from now. All goes to WinCAM. They also get 2 channels, a third if they need it. Holy cow, $210k to the local cable channel!

VZ has requested that their license can be superseded by any new federal laws that are passed. This is written into the agreement.

Cable Committee strongly recommends approval. Should be done quickly in case new federal legislation is passed that would dilute terms and/or complicate agreement. Feel that agreement is very favorable to town and that dynamic regulatory environment may eliminate the financial advantages unless signed now.

I like this guy Ashley a lot. Didn’t get a chance to meet him.

I think a hell of a lot of credit rightfully goes to the citizen committee that negotiated the franchise agreement on a VOLUNTEER basis. Nice job guys.

Town Board – Questions to Verizon

Chairman expressed profligate thanks for the work of the cable committee. VZ continues the process of thanking.

Board Question – What expenses has cable committee incurred?
Answer: $20k in legal expenses. Board may want compensation for this?

Board Question – What if Verizon contract is found to not comply with “Level Playing Field provisions”. This is written into Comcast contract.
Answer: Comcast then requires “good faith negotiations” of Comcast license. Cable committee does not think this will be an issue in the near term.

Board Question – Are PEG grants pulled from customers bills?
Answer: 5.4MM revenue annually for Comcast in Winchester. Some potential decrease in 5% franchise revenue if competition drives pricing lower.

Board Question – Does contract include any sort of rate controls?
Answer: No. Some lower court actions that would allow this have been reversed on appeal.

Ashley makes this point – If a federal franchise override is passed, this contract would still be valid. This was the biggest area of negotiation in the contract. Pending Fed legislation makes negotiating these contracts a challenge (Read – Major pain in the ass)

Board Question – What is WinCam (Local Cable Access Channel) subscriber base? Answer: Representative there was asked how many citizens watch. He says he does not know. Unbelievable.

Board Question – Can the infrastructure be shared with other providers?
Answer: No.

Board Question – Universal service within 3 years- Any known areas where it is known this is not possible?
Answer: 80% can be served by end-of-month. Three stage process. Aerial component completed. Underground component is second stage. This has begun. Final is Multiple Dwelling Units (MDU), this effort has begun. VZ has six years by MA law to reach universal service. This franchise agreement stipulates three. Verizon is OK with these terms. (I think they are glossing over the MDU challenge)

Now things get interesting-

Board Question – Prop 2 ½ creates great fiscal stress. (Prop 2 ½ is State Law indicating towns cannot increase property taxes more than 2 1/2 % a year, and as a result every town is in a tight fiscal situation) Depth of staff with technical expertise is short. Towns ask developers, etc. to bear the burden of investigative costs. Asks VZ to accept this burden. Answer: VZ already paying 1.4% more than Comcast.
Response from board- budget blah blah blah they want $20k “Whenever we can find that legal fees could be covered externally we try to do that”.

Board Member Speaking – We need to act in interest of citizens. Having two providers clearly does this. Thinks arguing over $20k is silly when town budget is 4000x that. Savings to citizens will be huge.

Board Proposal – drop PEG grant by $25k and allocate to paying legal fees? VZ says ‘does not know’ this is a new wrinkle. Turns out later this is not a legal move according to franchise law.

Questions to Board from Citizens

Citizen (VZ employee) – Satellite doesn’t pay fees. Conversion of those customers will generate more revenue.

Citizen (VZ employee) – Comcast has dropped cost of triple play by $40 based on threat of competition. Need to follow through to guarantee price breaks for town residents.

I ask some questions-

1. Thanked Verizon for bringing state of the art infrastructure into our community. Made mistake of using terms such as Japan, NTT, E-PON, and B-PON which brought meeting to halt as stenographer freaked out.
2. Asked for a clear summary of the material financial differences between the existing Comcast franchise agreement and the proposed Verizon agreement.

   Financial comparison of VZ and CMCSA. Comcast makes fixed dollar payments – $116k year, inflation adjusted. Not related to subscriber revenue. Verizon will pay 5% of all revenue received. Comcast % will climb as subscribers goes down. This was put into place based on the assumption that RCN would come online but never did. 6200 Comcast subs in town today. My analysis – town cannot lose with this deal. The more subscribers that shift to Verizon, the more money they take in.

3. How is it that Wincam, the recipient of what is basically a $210k windfall does not know how many people consume their product? How do they benchmark their success? This is a disaster. I become immediately unpopular with several folks in the audience.
4. When FiOS TV customers are installed that are not broadband subscribers, will their phone lines be migrated to the fiber? Will the copper be cut? No, MA regulations prohibit this.

——- Break ——-

Board Discussion-

The $20k is an issue that impacts the board’s decision. Board will take this issue under advisement. Oh crap, they are not going to vote because of $20k in legal fees they want VZ to pay.

One board member said holding deal up for $25k was ridiculous. VZ indicates legally that their money cannot legally be allocated to general town funding. Winchester contract is far better than what other communities have negotiated. No other communities have asked for legal fee compensation.

OK, now things are getting good and heated.

Board guy is bringing up the fact that legal budget is high and that budget is tight, everything counts. We are asking the public for more usage fees, more for town dump licenses, etc. Can’t just spend money here without recovering it.

Now the town is asking for VZ to get creative. Cue municipal extortion speech. Suggests sponsoring “Verizon Library Day” to keep Library open on Sunday. Spend the 20k somewhere in the town. “You are a good corporate neighbor, we are just asking you to demonstrate it.” That’s a classic one. This guy should do business in China.

VZ states that the law clearly states franchise fees cannot be used for any general funding in a franchise agreement, period. They must be used for cable services in the town. Incumbent (Comcast) was not asked to pay legal fees when they were granted the agreement and neither will they. VZ guys getting pissed, they thought they had a deal.

Other board member will vote no. Wants $25k more for legal fees. Indicates process can be extended 60 days and they plan to negotiate for the 25k. Verizon indicates they will not change their mind. Verizon makes the point that ultimately, all of these costs are passed on to the consumer.

One board guy motioned for 2 min private meeting with board, try to work things out.

—-Break—-

10 min later, they emerge.

Agree to delay vote until June 19th – Gives committee time to ‘evaluate’ agreement and make sure it represents the interests of the community. Will be at 6:30 and will not be a public forum.

What?

I took the opportunity to quiz the Verizon rep on how deployment was going. The rapidity and completeness of his answers was either the result of rehearsal or intense pride.

He indicated that the surrounding towns, where FiOS TV was available, FiOS penetration was at 20%. I asked him what 20% meant and he said “One in every Five Homes”. I asked – “No tricky accounting?”. He said no, and that things were going very, very well. I asked about my town, where FiOS TV is not available and he said that penetration was about 10%, and that the lack of video impacted penetration in a big way. Towns with Video service see much higher subscriber take rates.

I was in disbelief – 20% penetration after six months of service was astounding. I pressed him for a few more minutes and he stood firm on his answers.

I then asked him when they would be getting the franchise approval in my town and he said – the Town Meeting is this Wed. Today.

Should be interesting to see what machinations are required to secure a video franchise. I’m going to go.