Lately the word "fiber" has started to become ubiquitous in advertisements for broadband. It’s a synonym for the future, for speed and quality. Everybody tries to connect that synonym to their brand, regardless of their actual network design. In the trade press, acronyms like FttX (which stands for Fiber-to-the-X, where X is your favorite letter or word) are used as if all last mile network architectures with optical fiber are more or less equal.

But they're not. Let’s take a look under the hood and analyze the reasons why fiber is chosen as a medium, then look at the topologies, the architectures, the trade-offs, and the inherent path dependencies of a particular deployment method. Fiber-to-the-curb, fiber-to-the-basement, fiber-to-the-home—truly, not all fiber is created equal.

Getting fiber closer to the home

In 1965, Charles K. Kao and George A. Hockham of the British company Standard Telephones and Cables realized that optical fiber could be of practical use for telecommunications, and since that date fiber has become the medium of choice. First it was used for the core networks over long distances; as time progressed, it was laid deeper and wider in all networks up to last-mile access networks.

The reason for fiber's popularity is simple: fiber is very reliable and many orders of magnitude better than anything else for the same price. What makes it a winner is its combination of low attenuation of very high frequencies and very low noise—the key factors that determine how much and how fast information can be transmitted over a distance. Scientists use the formula of bandwidth multiplied by distance as an indicator of line quality, with the record in 2009 surpassing 19 petabytes (that's 19 million gigabytes or 152 million gigabits) per second per kilometer, over one fiber. And yes, Moore’s law has an analogue in fiber optics transmission equipment: every 18 months, you get roughly double the capacity for the same price.

Coaxial cable was a great improvement over copper wires in the 19th century, but fiber beats both of them handily. The more information you want to transmit, the more pronounced fiber's advantage. As the appetite for communication capacity to each home grew in the last decade, the limitations of the existing access networks became visible. This happened first of all in the copper wires originally deployed for telephony, then in the shared coax networks deployed for cable TV. Clever engineering is used to squeeze out all available capacity of such systems, but the writing is on the wall: we need fiber closer to the home.

Ninety-nine percent of the Internet's physical distance has been strung with fiber already; just a minor hop, and home and business users can have a fully fiber connection. The obvious question is, why has fiber been rolled out in globe-spanning networks without any public discussion whatsoever, while deploying fiber in the last mile is a huge deal? The answer is two-fold: money, and natural monopolies.

Utility infrastructure law: "it's the backhoe, stupid"

A Utility Infrastructure Law commonly quoted by engineers says, "The closer you get to the home, the more investment is needed, averaged per home connected." This law applies to all parts of the physical network, like water pipes, sewage pipes, and electricity cables. What are the applicable numbers for telecom cables?

A useful division of communication networks is between core networks (deep sea intercontinental, international, or core networks countrywide between exchanges), backhaul and middle-mile networks (from exchanges to local aggregation points), and access networks (from homes to local aggregation points). A quick, back-of-the-envelope calculation based on expert estimates indicates a relative investment level of 1:3:10 for core:middle:access networks, proving the Utility Infrastructure Law.

There are roughly 500 million broadband connections in the world right now, and they rely on core networks with an estimated aggregate investment level of €40-50 billion (US$54-67 billion), or approximately €100 ($134) per connection.

The numbers for middle-mile and backhaul networks are not public, but some reference points can be inferred. In the Netherlands, 6 million connections are served with an estimated investment of approximately 1.5 billion euro ($2 billion), an average of less than 300 euro ($403) per connection. In the US, there currently are 85 million broadband connections. An average of 300 euro per connection would mean an aggregated investment of 25 billion euro ($34 billion). At $40 per meter, you could deploy approximately 1 million kilometers of backhaul, the combined length of all state highways in the USA. So 300 euro or less per connection seems like a good estimate.

The investment per connection of a full fiber access line to the home replacing all copper or coax is between 850 and 1100 Euro (1,143-1,479 USD) in the Netherlands, all-included. The equivalent number in the USA as quoted by Verizon is in the same ballpark per home connected.

But wouldn’t the investment level of the access line be elevated by the fact that fiber cabling is used? That appears to be not the case. The investment in access infrastructure, i.e., stringing or digging new cables, consists mainly of labor, not materials (exceptional conditions excluded). In dense cities, the bill of materials is as low as 20 percent. The cost of labor per meter exceeds by far the cost of a fiber cable or a coaxial cable per meter. Deploying fiber or coax or copper wires would not make much of a difference. The phrase “it’s the backhoe, stupid” even applies in areas like Uganda. The equivalent normalized costs of laying the existing copper or coax network in current purchasing power substantiate the Utility Infrastructure Law. The fact that 90 percent of the population lives in relatively dense areas (cities, suburbs, towns) helps.

Incremental versus sunk costs

The last mile access line is the biggest part of the per-home average investment in the network. On a per-home basis the absolute level of investment isn’t that impressive relative to other investments (two iPhones? A 50-inch HDTV? A front door?) The useful life of a fiber access line probably exceeds 40 years, but the multiplier of the total number of homes makes it a sizable overall investment—much larger than investments in other parts of the network. To make matters worse, there is a major difference between core/middle-mile and access networks.

Middle-mile and core networks are generally shared between many customers, so capacity can be reallocated. These shared networks can be incrementally extended and increased in capacity as demand grows. Moore’s law helps as well; the fact that the increase in capacity per dollar invested in transmission electronics doubles every 18 months already covers a large part of the yearly increase in traffic for middle-mile and core networks.

But for a last-mile access line, in contrast, there is only one potential customer: the occupant of the home. The majority of the cash outlay goes to laying the access line, and it's all sunk costs. The investment can only be recovered for a minor part of the project (the last drop), and then only the first time out—you don’t remove the last drop even if the customer quits paying you for services. It is not possible to reallocate that access line investment to another potential customer, so that line either pays for itself or it doesn't. (Note: electronics are excluded in this analysis, because the gear can be deployed and reallocated as penetration grows).

The maintenance costs of a fiber line are very low. Verizon estimates that the difference in maintenance costs between a copper line and a fiber line, expressed in a Net Present Value of all future gains, exceeds $200 per connection.

Utilization is key

The investment in access infrastructure, i.e., stringing or digging new cables, consists mainly of labor, not materials.

The net effect of the dynamic outlined above is that penetration levels in access networks are critical to making money with fiber, as Benoît Felten repeatedly demonstrates in his presentations. The level of penetration has such a financial impact on the cost price per active connection that an ISP can't really offset that impact by having a more efficient operation in the rest of the value chain. A 20 percent relative variation in penetration can lead to a difference in cost price per connection of $10 or more per month.

Given the fact that almost all costs in the access network are sunk, it is hard to envision two or more new fiber access networks being deployed in parallel to each home, leading to a stable competitive environment over time. (Unless the ISP’s or network's owners are allowed to divide the market and raise prices to compensate for the underutilization of the networks). If the medium is no longer limited and the access network is the expensive part of the investment, why duplicate the cables? We not do duplicate cables for electricity or other utilities either, for the same reasons.

Note that the current competition between the two wired communication infrastructures to the home—cable and telephone—is a historical accident. Both networks were built for and financed by services that were originally mutually exclusive (telephony and TV). Providers of each these services financed each access network, with relatively high utilization rates. The much later discovery that each network type could unexpectedly deliver packets of information to the home for some new newfangled thing called the Internet, and that users were willing to pay for that new service, was a stroke of luck. But now, with VoIP and IPTV, utilization is a major factor, and the sell-off of older, underutilized parts of the access network and investment in new networks has started.

It remains to be seen what models will emerge where. The European trend is to strive for unbundling and sharing of at least pieces of the new access network (France, Portugal), if not the complete access network (Netherlands, Switzerland). This gets utilization ratios up and average costs down. The US, in contrast, has chosen up to now a competition between networks.

So if fiber-to-the-home is a relatively large investment, most of it up-front with an expected lifetime of many decades, and if utilization ratios are the key to fiber's financial success, then it makes sense to look hard at architectures and path dependencies. The risk of premature technical obsolescence or a lock-in that would require new investments should be reduced, or at least weighed in the decisions.