Tech Wars Part 1 Ext EI 0128

Economic Insight
Fiber to the Home: Technology Wars
Author Richard Medcalf and Shane Mitchell IBSG Economics and Research Practice Marco Nicosia IBSG Service Provider Practice
January 2008
Cisco Internet Business Solutions Group (IBSG)
Cisco IBSG Copyright 2008 Cisco Systems, Inc. All rights reserved.
Economic Insight
Fiber to the Home: Technology Wars
Traditional copper access networks, designed for basic telephony services, have enjoyed a new lease on life as high-speed Internet links, thanks to technologies such as ADSL2+1 and VDSL.2 These technologies, however, are limiting, and industry experts agree that taking fiber connections to each home is the only mechanism for enabling the next generation of broadband speeds and services in the long term. The move to fiber to the home (FTTH) will be the most significant transition for the industry since the original rollout of copper networks more than 50 years ago. The financial stakes are high: the residential-access service market in Western Europe alone is roughly US$42 billion annually,3 and those players who are successful at delivering FTTH services will capture this revenue. About $120 billion, however, will be needed to roll out fiber across 80 percent of the 167 million households in Western Europe.4 Today, there are two main technologies competing for FTTH. The first is gigabit passive optical network (GPON), in which passive optical splitters are placed at various points in the network to create a tree-like structure that allows up to 64 homes to share a single fiber. Many companies are using GPONs, such as Verizon in its fiber optic service (FiOS) rollout in the United States. Incumbent service providers in Europe, such as France Telecom, are also considering GPON networks. The second technology is Ethernet point-to-point (PTP), which uses a dedicated, single fiber strand for each customer. While this solution costs more up front (more fiber strands deployed, larger points of presence, and so on), its performance is superior to that of GPON. In this Economic Insight, we examine the merits of these two technologies to determine which solution offers service providers the best competitive advantage.
GPON: A Less-Expensive Option?

The cost difference between GPON and Ethernet PTP depends on three factors: the degree of civil works required to lay fiber, the density of the area in which deployment occurs, and the bandwidth required by each customer. The impacts of these factors on deployment costsassuming that both technologies deliver enough bandwidth in the short term, and that the market share for both is identicalare illustrated in Figure 1.
Economic Insight
Figure 1. P roject Costs of Ethernet PTP versus GPON (the data represents the net present value of costs over 10 years for a large European city)
Variable and Hypothesis Being Tested Degree of civil works (when ducts are limited, GPON is favored)
Scenario Plenty of ducts (little civil works needed for both) Limited ducts (more civil works needed for PTP) No ducts (civil works needed for both)
PTP Cost ($M) 137 kkk 163 bbb 210
GPON Cost ($M) 130 kkk 130 bbb 205
PTP Cost as a % of GPON +5% kkk +25% bbb +2%
Customer density (as density falls, GPONs advantage increases) Bandwidth (increased performance favors PTP)
High-density urban areas Low-density urban areas
54 84
53 79
+3% +6%
10 Mbps upstream 100 Mbps upstream
137 137
130 152
+5% 10%
Source: Cisco IBSG Economics Practice, 2007
It is clear that both solutions have their advantages. The right-hand column in Figure 1 shows that GPON is favored when the number of ducts is limited or when customer density is low, whereas PTP is favored when end-user bandwidth is high.
File Transfer: PTP or GPON?

Ethernet PTP networks give each user a dedicated symmetrical link of 100 Mbps or more (1-Gbps PTP cards exist today, although costs generally prohibit residential use); GPON typically offers only 40 Mbps downstream5 and 19 Mbps upstream.6 Proponents of GPON, however, state that both technologies offer plenty of bandwidth for residential requirements, making the case that GPON offers enough bandwidth to support up to three HDTV streams into the home and one HDTV stream out of the home. The sustained bandwidth needed for real-time applications, such HDTV, is only half of the FTTH story. Peak throughput for bursty applications, such as e-mail, is also important. If users want to e-mail a 30-minute, high-definition home movie (about 2.25 GB), they
Economic Insight
would need extremely high throughput for the few seconds required to transfer the file. A GPON user confined to 19 Mbps upstream would have to wait 16 minutes for the upload to complete, whereas a 100-Mbps Ethernet PTP user would have to wait only three minutes (at 1 Gbps, file transfer would take as little as 18 seconds). The need for high-peak bandwidth might occur faster than generally anticipated. A number of European service providers are starting to roll out 100-Mbps services, such as Numericable and Neuf Cegetel, both in France. In September, FTTH player Hong Kong Broadband Network Limited announced the withdrawal of its 10-Mbps service to focus on 100-Mbps, 200-Mbps, and 1-Gbps symmetrical services.
Ethernet PTP Helps Service Providers Differentiate

Ethernet PTP is the superior FTTH technology because it delivers higher peak speeds than GPON, VDSL, or other competing technologies such as DOCSIS 3, a communications interface for a data-over-cable system that enables high-speed data transfer to an existing cable TV. Furthermore, PTP offers a simpler upgrade path to higher speeds in the future, since users can be upgraded independently of one another; with GPON and DOCSIS 3, all users share the same fiber connection and must be upgraded simultaneously. In urban markets where demands for higher density call for shared technologies, PTP networks will help service providers differentiate and innovate more easily than networks based on a shared infrastructure. Service providers are already responding to the advantages of Ethernet PTP over shared technologies. In Paris, for example, both Free Telecom and Neuf Cegetel are deploying PTP networks as alternatives to France Telecoms GPON network. Free Telecom will offer 100 Mbps downstream and 50 Mbps upstream, capabilities that are difficult to replicate with GPON. The competitive advantage of Ethernet PTP over GPON is illustrated in Figure 2. The Cisco Internet Business Solutions Group (IBSG) modeled an example of a challenger in a European city with ducts for rent. We first analyzed the value of deploying GPON and Ethernet PTP technologies, assuming a market-standard offer with little in the way of competitive differentiation. Then we analyzed the impact that PTPs superior performance would have in creating a differentiated offering.
Economic Insight
Figure 2. N et Present Value of FTTH Deployments for Ethernet PTP and GPON in Differentiated and Undifferentiated Scenarios 160 Illustrative European City (NPV EUR Millions) 140 120 100 80 60 40 20 0 Undifferentiated Undifferentiated GPON PTP
Source: Cisco IBSG Economics Practice, 2007
Differentiated PTP
Based on our analysis, IBSG concludes that when PTPs ability to create a differentiated offering is factored in (as represented by the red bar), the net present value of PTP is almost 40 percent higher than undifferentiated GPON.
Conclusion
While the cost differences between Ethernet PTP and GPON are minor, they are overshadowed by PTPs ability to help service providers differentiate their offerings. PTP provides customers with superior peak performance today and a simpler upgrade to even higher speeds tomorrow. Ethernet PTP, by virtue of its simpler topology, should, therefore, be considered the technology of choice for service providers in competitive market situations.
Economic Insight
Endnotes
1. Asymmetric Digital Subscriber Line 2. Very High Speed Digital Subscriber Line (also abbreviated as VHDSL) 3. This figure assumes a line access charge of 15 ($22) per month across 167 million Western European households, and an exchange rate of 1.4. 4. Telecom service providers will need to spend about $900 per home on average (Verizon quotes $800-$1,000; UK Broadband Stakeholders Group quotes about $900). 5. A typical GPON tree offers 2.5-Gbps bandwidth downstream, shared among up to 64 customers; if all customers were downloading simultaneously, each would experience 40 Mbps. If only a fraction of customers were downloading simultaneously, the speeds would rise in proportion. 6. Each user on a GPON tree receives the same allocation of bandwidth based on the maximum number of users. A 64-user tree results in a peak upstream bandwidth of 19 Mbps per user.
More Information The Cisco Internet Business Solutions Group (IBSG), the global strategic consulting arm of Cisco, helps Global Fortune 500 companies and public organizations transform the way they do businessfirst by designing innovative business processes, and then by integrating advanced technologies into visionary roadmaps that improve customer experience and revenue growth. For further information about IBSG, visit http://www.cisco.com/go/ibsg
Americas Headquarters Cisco Systems, Inc. 170 West Tasman Drive San Jose, CA 95134-1706 USA www.cisco.com Tel: 408 526-4000 800 553-NETS (6387) Fax: 408 527-0883
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2007 Cisco Systems, Inc. All rights reserved. Cisco, the Cisco logo, and Cisco Systems are registered trademarks of Cisco Systems, Inc. and/or its affiliates in the United States and certain other countries. All other trademarks mentioned in this document or Website are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company. (0705R) RM/LW14302 0108

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Economic Insight

Fiber to the Home: Technology Wars

Cisco Internet Business Solutions Group (IBSG)

Fiber to the Home: Technology Wars

GPON: A Less-Expensive Option?

PTP Cost ($M) 137 kkk 163 bbb 210

GPON Cost ($M) 130 kkk 130 bbb 205

PTP Cost as a % of GPON +5% kkk +25% bbb +2%

High-density urban areas Low-density urban areas

10 Mbps upstream 100 Mbps upstream

Source: Cisco IBSG Economics Practice, 2007

File Transfer: PTP or GPON?

Ethernet PTP Helps Service Providers Differentiate

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