Thursday, April 14, 2011

FTTH Council: Stimulus Dollars Drive Fiber Project Uptick

Stimulus Spending on All Fiber Access Networks Now in Ramp Up 04/14/2011 San FranciscoIn its semiannual report released today, the Fiber-to-the-Home Council projects that stimulus spending will produce a growth uptick in FTTH new homes passed this year.

The report, prepared by the Council’s retained market analyst firm, RVA LLC, sees federal dollars returning the sector to positive growth following the impacts of recession and the ending of the Verizon Commun-ications (NYSE: VZ) FIOS builds.

We like RVA’s work so much; we’re fully willing to accept a finding formerly considered not only analytical bunk, but pure burn-them-at-the-stake heresy.

A key part of the report that warms the cockles of our heart – or begs for pages of footnotes based on federal project reporting. The Council tells us “Three-quarters of the broadband stimulus-funded projects to create or expand all-fiber networks have now broken ground or are on the verge of doing so.”

“Construction has begun on 38 percent of the fiber to the home projects funded by the American Recovery and Reinvestment Act, while another 36 percent are actively preparing for construction to begin,” summarizes the Council’s release of today.  “Most of the remaining projects are in some stage of engineering or environmental impact evaluation,” the statement concludes.
In this we concur.

Despite the frenzied talk from a boatload of alleged "analysts" who predicted a "broadband stimulus boom" and an upsurge of investment hitting the sector as early as 4Q 2009, neither was ever going to happen.

The federal award cycle, competitive procurements, and compliance issues dictated a different reality. Actual stimulus dollar disbursements are hitting an inflection point now, with increasing spend rates moving out to contractors and vendors.  

21 Million Homes Passed in North America
“Today's report, says the FTTH Council “also revealed that 7.1 million North American homes are now receiving Internet, video and/or voice services and meter reading over end-to-end fiber networks - up from 5.8 million a year ago - as telecom providers continue to upgrade their last-mile connections from copper to fiber.”  “FTTH networks now pass nearly 21 million homes on the continent, up from 18 million a year ago,” according to the report.

U.S. Stimulus & Big Canadian Projects Follow FIOS Drop
RVA President Michael Render said he expected that the recent increase in construction activity by the stimulus-funded projects would mean an overall uptick in FTTH deployments and connections in 2011, with the economic recovery and recent announcements of large FTTH projects in Canada also contributing to the rise.

The increase would come after a moderation in the growth rate of FTTH network deployment over the past two years, with the increase in the annual number of new homes passed dropping to about three million in 2009 and 2010 after reaching more than four million in 2008.  

Render says the combined effects of the recession, and the slowdown in FTTH network construction by Verizon created the decline in FTTH passings.

Who Wins?
The report is good news for the entire fiber access business ecosystem.

In particular, it is great news for those companies that are both FTTH pure plays and smart enough to have positioned themselves to take advantage of stimulus spending.

We agree with the analysts -- real ones, not the "alleged" kind referenced above -- that fiber management component manufacturer Clearfield, Inc. (NASDAQ: CLFD) leads the pack in this category. 

The Census of FTTH Providers
RVA estimates that there are more than 770 entities now providing FTTH services in North America, 61 percent of which are small and mid-sized independent telephone companies.  Another 13 percent are competitive broadband providers, 11 percent are municipalities or public electric utilities, 10 percent are associated with real estate developments and four percent are cable television providers.

RVA also found that 70 percent of FTTH providers said they are "very likely" to continue to build out their FTTH networks to reach more subscribers. 

The RVA report also said that FTTH providers are beginning to more aggressively differentiate their Internet offerings from DSL and cable modem competition with high speed offerings that are often the same upstream and downstream.

Fiber's "Onward March"
The RVA report references "a number of providers that now offer symmetrical 100 megabit service", and the fact that the muni network EPB in Chattanooga, Tennessee, "has become the largest Internet service provider in North America to offer 1 Gigabit symmetrical service." 

RVA also marks the late March selection of Kansas City, Kansas by Google Inc. (NASDAQ: GOOG) for the launch of the company's first "FTTH network providing 1 gigabit connectivity".

"Given the enormous and widespread interest we are seeing in next-generation connectivity, it is not surprising that, as the recession fades, telecommunications providers across North America are resuming their onward march toward all-fiber access," said Daniel O'Connell, the former Verizon FIOS national sales director for the product's MDU business line, and now the FTTH Council's President. 

 "With emerging HD video, 3D video and other applications in areas like tele-health, distance learning and cloud computing, most telecom providers recognize that they will have to upgrade to FTTH in order to keep pace with the ever-increasing consumer demand for more bandwidth."

RVA surveys all types of North American FTTH providers and potential FTTH providers throughout the year, and has conducted more than 360 interviews thus far in 2011, including interviews with more than 50 providers who received an ARRA stimulus grant specifically for FTTH projects. 

A Heresy Forgiven: The Stimulus as “Unintended Consequence”
If truth be told, one of Render’s findings used to make us want to try anyone who spoke of it for heresy.  

They said the broadband stimulus program for a time choked back
CAPEX by service providers.
Early on in the broadband stimulus program voices were heard warning that the program would have myriad unintended consequences. The most feared of these soon to be witnessed horrors would surely be a down draft in capital spending on networks as the industry waited for federal largess.

Most commentators that blathered on about the anticipation of broadband stimulus spending choking back CAPEX in the sector were typically people that never believed in public sector subsidies for telecom or any part of the stimulus to begin with. 

Most were in-house experts at “free market” think tanks. In short, we were predisposed to convict them for their apostasy to begin with, rightfully so.

As knowledgeable and reasonable people who understand our industry increasingly said the same thing; we reconsidered. Render’s research isn’t the stuff of ideological clap trap. He talks to the providers and vendors building some of the most important networks in North America.

"We have found in our surveys over the past two years that quite a number of FTTH builds were put on hold while the stimulus program was sorted out and the network operators got a clearer picture on whether their projects would be funded," said Render.

"But of course that is all behind us now and our latest survey results are indicating that most FTTH projects are now going full speed ahead," concludes Render.

Very regretfully, and only in respect for the extensive interview work of Render and the Council, we are dousing the flames in the village square, freeing the condemned from the stake, and sending the true believers home.

Our Take: The FTTH Council's report of yesterday is more confirmation of what all of us following stimulus spending closely know: The only significant updraft in such disbursements out to vendors has not been seen until now. Q1 and Q2 of 2011 mark the true beginning of the actual stimulus effects of the stimulus on the American telecom sector.

In the report's census of what kinds of service providers are deploying FTTH networks, we see again why a group of them were supporters of the stimulus, and of continued loan funding by USDA's Rural Utilities Service (RUS) of carrier serving low density areas. For those paying attention to recent events, we also see one sub-sector of the industry -- purely coincidentally we're certain -- not attending the FTTH party. 

Rva Ftth Status April 2011 Final Final
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