Smithville Telephone is investing $90 million during the next 36 months to completely rebuild its access network using a fiber-to-the-home (FTTH) platform.  The rebuild affects 29,000 customers in 17 counties in southern Indiana.

 

The rebuild is important for the light it sheds on next-generation access strategies. Cable operator executives, for example, tend to argue strenuously that they don't need FTTH networks. So too, many rural telecom company executives will argue they don't need FTTH either.

 

That stance requires parsing. On one level, executives can point to any number of valid business reasons why such an expensive and disruptive step is not required. Cable operators can, with good reason, argue there is no current revenue-creating demand for bandwidth and services that the hybrid fiber coax network cannot meet.

 

Further, to the extent more bandwidth is needed, multiple techniques exist to supply that additional bandwidth, without abandoning the HFC platform. Fiber-served areas can be reduced in size, thus increasing the amount of bandwidth available for those users. Signal compression techniques can be employed. Signal switching is another bandwidth-saving tactic.

 

Rural telecom executives have standard answers for why FTTH is not needed, as well. They sometimes argue that hybrid delivery models are more efficient, such as relying on satellite delivery of entertainment video, use of wireless or digital subscribe line for broadband Internet access. They also can argue, with some reason, that there is no revenue opportunity or demand for bandwidth-intensive new services on a scale that would justify rebuilding the whole access network.

 

All those are valid points. But there is a typically unstated and understandable logic as well. FTTH is hugely expensive. Cable executives know the capital and financial markets would not view such a change favorably, as it would redirect free cash flow away from shareholders.

 

Rural executives know the revenue upside might not match the investment cost, at least as measured in a classic return on investment basis. There are, in short, other investments that arguably would provide a higher return. Rural telephone companies, in fact, have an immensely difficult task: the business justification is more strategic than purely financial.

 

Low-density areas necessarily are more expensive than high-density FTTH deployments. But there's an issue on the revenue side as well. Rural telcos traditionally earn less of their revenue from customers than urban providers do, simply because high-cost and rural providers receive government subsidies to provide service in such high-cost, low-demand areas.

 

So where a company the size of Verizon (News - Alert) might well argue that FTTH makes possible enough new revenue and cost savings to provide a reasonable payback, a rural carrier often cannot hope to create nearly as much new revenue simply because it has fewer customers overall, and generates less actual revenue from each customer, compared to an urban provider.

 

The public argument against FTTH, in other words, is a logical position to take for providers that aren't sure the returns will justify the investments. Ultimately, though, if bandwidth demand continues to grow at its current rate, and that is probably a conservative stance, wired networks at some point will have to move to optical fiber to supply the quantities of bandwidth required.

 

The point is that, though understandable, such views may be wrong. FTTH might not be urgently needed. Where it is possible, service providers might well delay such moves as long as possible. Smithville's decision is illustrative of the challenges.

 

The company probably would have preferred not to embark on such a costly upgrade. But garden variety ROI considerations probably were not strictly the driver, anymore than similar decisions have been made by Verizon. In a very real sense, investments in FTTH must be made so that the basic business is not destroyed.

 

To the extent that broadband is becoming the foundation wired network service, any provider that does not provide broadband likely is doomed to failure. So Smithville, like other contestants, likely are in a "when do we do so" decision, not a "do we make the decision" situation. Well, there is another logical choice: owners can sell out and let the new owners deal with the problem.

 

Smithville does have one advantage: it can borrow money at reasonable terms. Bridge funding for Smithville’s $90 million investment in southern Indiana is made possible in part by a federal loan program from the United States Department of Agriculture (USDA).  The Rural Utilities Services (RUS) Division of USDA is providing long-term loans to a number of communication companies upgrading services to rural areas, including major rural areas of the southeast United States.

 

There are valid business reasons for avoiding a FTTH network for the moment. There are equally compelling reasons for arguing such a course is inevitable.