Sacramento Business Journal | March 1, 2002 print edition | Mark Larson

In what seems like a huge gamble, some companies are pouring hundreds of millions of dollars into providing fiber-optic service to area homes — with no assurance that they’ll attract enough customers to stay alive.
Fiber-optic cable to the home.

It sounds like a telecom solution everybody would want to have.

After all, it offers much wider data bandwidth than cable modems or digital-subscriber-line connections over phone lines. It can handle video entertainment and phone traffic. And eventually it will carry phone calls over the Internet.

But there’s a big question mark still looming. Will residents clamor for it, bringing on a boom to move it ahead of other telecom services via cable or satellites?
Or will it go bust, the way the superior Betamax video format lost out to VHS years ago?

Fiber-optic companies, such as Denver-based WINfirst in Sacramento, Wide Open West in Denver and Grande Communications in San Antonio and Houston, have received a lot of attention, said Tom Reiman, a broadband consultant based in Sacramento. “But they’ve had very little financial success.”

Obstacles to their success abound, he said. They face regulatory hurdles, tight capital markets and tenacious competition from incumbents.

The biggest question is cost.

If the monthly charge for fiber connections is too high, the entrenched cable and satellite service providers could convince the masses to stay with them and keep fiber service from getting off the ground. The companies investing hundreds of millions to install fiber-to-the-home systems would then be left holding a lot of unused fiber and electronics equipment, with a small and unprofitable base of customers.

Hitting the brakes: In Sacramento city and county, WINfirst had planned to spend $500 million “overbuilding” the AT&T Broadband cable system — stringing fiber-optic cables in neighborhoods already served by AT&T. WINfirst’s system uses fiber for high-speed data and phone service, and a separate coaxial cable line for pay-TV programs. It charges customers $100 a month. AT&T currently offers only TV fare and Internet services on its cable.

This week, WINfirst general manager Winston Ashizawa said the company was reducing its local construction plans because of depressed capital markets. He said the financial troubles of Global Crossings and Williams Communications had damaged capital markets in the telecom sector. Bechtel Corp. of San Francisco, a minority equity partner of WINfirst, was hired to manage the construction of the cable company’s infrastructure here and in other markets. Bechtel has cut off its role with the company, said Ashizawa, because there is no construction going on as had been planned for Los Angeles and Dallas. The company also had plans in San Diego, Seattle, Houston, San Antonio and Austin, Texas.

WINfirst is now focusing on construction only in Sacramento, and at a much less ambitious pace than before. It will continue to build out neighborhoods it is in, says Ashizawa, but will delay building in neighborhoods next on its agenda, such as Land Park. The company wouldn’t say how many subscribers it has.

“Our objective is not to overextend ourselves with regard to deployment,” he says. While the complete build-out of Sacramento County was initially pegged for 2004, Ashizawa says it still could happen if capital markets recover. If not, it will take an unknown longer period of time.

Ashizawa says the company now employs 220 in McClellan Business Park, but will evaluate whether any layoffs will be necessary.

One neighborhood at a time: Fiber-optic lines are the fastest connections on the market. They can shoot information up to 10 megabytes per second for either an upload or a download. Compare that to DSL upload speeds of 128 kilobytes per second, and 384 kilobytes per second of download speed. Cable modems have upload speeds of 128 kb per second, with downloads at 1.5 megabytes per second, or about one-seventh the speed of a fiber line.

So far, WINfirst has offered service in neighborhoods in North and South Natomas, Arden Arcade, and parts of Carmichael and Sierra Oaks. But it has put on hold plans to install service in Land Park.

In Roseville, SureWest Communications is installing fiber to the home to customers who can’t get high-speed Internet service via phone lines, or digital subscriber lines, because they live too far from DSL hubs.

Areas targeted for service include about 3,600 homes in Del Webb’s Sun City Roseville, and parts of Highland Reserve and Diamond Oaks. Those areas are part of the territory served by the SureWest subsidiary, Roseville Telephone. The company will offer its flat rate for phone service of $18.90 a month and $50 a month for high-speed data service. TV fare will not be offered, at least initially, says company president and chief executive Brian Strom.

And in other areas around the country, fiber to the home is being built into new communities as the telecom medium of choice. Those projects are essentially experiments by big phone companies, communities and developers to see if they can expand the service from those communities into surrounding regions, Reiman said.

One of Reiman’s projects is in Brambleton, Va. — a new housing development in which Verizon Communications is selling phone, TV and Internet as part of the community-services charge of $187.10 per month.

Different models: Reiman says installing fiber connections as a feature of a newly built development — dubbed a “greenfield” approach — is much less expensive than installing fiber as an overbuild of a cable system. His numbers crunch to four to 10 times less cost.

The higher cost in overbuilds, he says, is in the electronics needed to plug in the services offered. WINfirst’s Ashizawa says his system will initially use coaxial cable to provide pay-TV services. After a critical mass of subscribers is garnered, he said, the system will eliminate the cable and be able to financially support an all-fiber service.

WINfirst intends to build service for all of Sacramento County, and will likely need to convince about half of AT&T Broadband’s subscriber base of 270,000 — or 135,000 conversions — to be profitable here. The company has reported it needed 50 percent of cable subscribers in Los Angeles to be profitable.

WINfirst has decided to build out the entire county area instead of developing small pockets and growing outward from them.
Whether it can make it with that strategy remains to be seen.

“It’s still too early to tell,” says Rich Esposto, newly appointed executive director of the Sacramento Metropolitan Cable Television Commission. “The technology is awesome. But the economics are not yet proven.”
Consultant Reiman agrees.

“WINfirst is in the challenging position of having no customers,” he said. Other competitors, such as cable companies, have an incumbent customer base to draw upon. “Overbuilders historically have not been successful. It’s a model that has not proven itself.”

He and Esposto agree that a fiber-to-the-home business model has a better chance of success in lining up customers in new residential developments. That enables slow but profitable progress for the providing companies, who need subscribers to survive.

WINfirst’s Ashizawa defends the regional overbuild approach to setting up fiber to the home, over a smaller-scale incremental approach.

“Our original game plan was for a regional build as a basic deployment for a metropolitan area, and it’s still our game plan,” says Ashizawa. But because of the tight capital markets, “We will fully implement, but at a slower rate.”

Ashizawa is confident that his company will offer a choice to locals that will sharpen competition by making competitors pay more attention to customer service. And convince competitors’ subscribers to switch over to WINfirst’s offering for $100 or so a month.

So far, he says, there is interest among local subscribers in all three services — TV programming, phone and video — not just one among the three, and that he’s encouraged by positive responses from customers.

“I get feedback everyday from customers through letters and messages saying they are thrilled with the service,” he says.

The biggest competitors Esposto sees, beyond cable providers, are the satellite-TV companies. They continue to gain market share from the cable-TV market. And he notes that the proposed merger of satellite programming providers EchoStar and DirecTV, a deal that is hotly opposed by the cable industry, may work to fuel much more video and broadband services competition from that sector.
On the other hand, AT&T Broadband, hasn’t made any visible counter moves in Sacramento with the incoming WINfirst, he added.

As for SureWest’s local fiber-to-the-home project, Reiman applauds it as the telecom company’s acknowledgment of the value of deploying the technology, which he says is ultimately superior to cable modems or DSL phone lines for Internet connections.

He expects SureWest will eventually add services to its fiber-optics subscribers.
Demand unexplored: While there has been a lot of emphasis on building fiber to the home with infrastructure, Reiman contends the masses haven’t been educated enough about what it can do. With more awareness, he says, would come more market demand from those seeing the payback of signing up for such services.

“We’ve hyped ourselves that consumers want all this, but no one has tapped on their door and asked them,” he said. Now, the big sellers are high-speed data and entertainment. But there are many more applications, he notes.

Some of the services a fiber-equipped home can have, he says, include energy meter reading that can shut off the pool pump, for example, when power rates are highest, security systems, and in another five years, he figures phone calls will be placed over the Internet on fiber connections.

For now, however, Reiman sees fiber’s high-speed data services as the technical trump card which an overbuilder like WINfirst should tout over TV programming or phone service.

But until fiber to the home begins to attract subscribers in big numbers, Reiman figures the big phone companies such as SBC/Pacific Bell, Verizon and others, won’t jump in with their own fiber-to-the-home offerings. Their main broadband product is DSL — phone lines that are beefed up to provide high-speed Internet connections.

But that technology has long-term limitations that a fiber system doesn’t have, and at some point the big telecommunications companies will likely move to fiber systems. Or, if they keep competition at bay, they can stay with their copper-based systems.

For now, Reiman predicts the progress of fiber-to-the-home systems, “is going to be stop-and-go. I don’t see a consensus approach.”

But he sees the greenfield approach of fiber systems put in new developments as a way to get the big players watching.

“My practice is to make everybody (in telecommunications) a little bit nervous,” he says. “That’s what fuels growth.”