MicroNode Economics. Copyright 2007 Alloptic Page 1 of 1

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1 MicroNode Economics Introduction Alloptic recently introduced the MicroNode product line, which is a portfolio of optical transceivers that enable the evolution of HFC networks into FTTH topologies. Service providers are rapidly deploying MicroNode technology to enable return path services, expand bandwidth, and replace aging HFC networks. A whitepaper explaining MicroNode technology and applications is available at One network operator recently began upgrading their HFC system using the MicroNode products. A key factor in their decision to use the Alloptic solution was the economic advantages. The operator assisted Alloptic in performing an in-depth analysis of the measured and anticipated returns from this deployment. This paper details that analysis and, where possible, quantifies the economic benefits for this customer s project. Projections are also included in the summary section for other deployment scales to give readers an indication of how the economics might apply to their network. The network operator s corporate policy precludes using their name in this paper, so for convenience we will call them CSP Corp (Communications Service Provider Corporation). CSP is a network operator and services provider of voice, data, and video to a region encompassing 400,000 homes passed. Like most network operators, CSP does not have a homogenous network that supports all services to all subscribers in all locations. Some sectors have coax plant that has been in place for years, with limited channel capacity (22 channels in some areas), no interactive video capabilities, and high maintenance. CSP was faced with rebuilding portions of the network to control costs and fend off competitors with more complete service offerings. In early 2007, CSP began researching ways they could upgrade the most seriously lacking regions of their HFC network. CSP decided on a strategy of migrating to a fiber-to-the-home (FTTH) topology rather than rehabilitating the HFC plant. The decision was largely based on economics; although the virtually unlimited bandwidth capabilities of an all-fiber distribution plant were key. After extensive research and modeling, Alloptic s MicroNode products were chosen as the technology for that migration. CSP considered many economic factors, including: o Installation/deployment costs o Operational and maintenance costs o Revenue enhancement Copyright 2007 Alloptic Page 1 of 1

2 CSP s migration plan is to restructure the headend-to-node architecture, deploy fiber from the new node (now termed V-node by CSP) to the residence, and terminate the fiber at the home using the Alloptic MicroNode transceiver. Additionally, they would add CMTS equipment in the headend to implement a DOCSIS 2.0 network. The following diagram illustrates the before and after network topologies. HFC Laser Transmitter EDFA W D M Return Receiver RF Video Services Power Power EDFA W D M Node Hub Power CMTS Return Receiver Laser Transmitter Node Node Hub Hub MicroNodes MicroNode FTTH Hub Power Headend Figure 1. CSP Network with HFC & with MicroNode FTTH Deployments began in a pilot project of 1,500 homes passed with 780 subscribers, replacing 14 miles of HFC plant. The project started in mid-2007, with completion expected in early The metrics in this paper were measured and derived from the available pilot project results. In some cases actual data were either proprietary or simply not available. To give the reader a sense of scale and potential, industry averages and accepted norms were used and noted as such. Installation Economics Benefits In modeling the project, CSP found that it was less expensive to build a fiber-to-thehome plant than to build an HFC plant. Several factors were considered. First, CSP compared the material cost for fiber -vs- coaxial cable plant. When compared with the cost of coax plant, CSP found they could install as large as 200count fiber for the same costs as two coaxial cables over the same physical path. CSP chose to deploy 12, 24, and 36 count fibers, giving them infrastructure capacity along with spare fibers for less than the cost of coax. Copyright 2007 Alloptic Page 2 of 2

3 Moreover, from a strategic perspective CSP considered that prices for the raw copper and aluminum materials used in coaxial cabling and metallic enclosures are spiraling upward, driving coax plant costs higher. The price of fiber cabling is trending down and is stabilizing. As shown in the following graphs, aluminum prices have doubled in the last 4-5 years while copper has more than tripled. Fiber optic cable prices have shown significant price decreases over time as shown in the following chart, although prices are believed to have stabilized. According to KMI Research, the average price for fiberoptic cable is not expected to decrease significantly in the next five years. i 7,000 Fiber Optic Cable Prices (/km) 6,000 5,000 4,000 3,000 2,000 1,000 0 Source: IGI Consulting Costs for the active electronics were compared as well. MicroNode network material costs were 30%-40% less than HFC, up to take rates of about 50%, and marginally more at higher rates. Even at higher take rates, when summed with other material costs as shown below, the Alloptic MicroNode solution delivered the lowest total cost. Labor was the second major contributor to costs of building the new network, and again fiber was less costly than installing the HFC network. CSP is somewhat unusual in that construction crews are permanent employees rather than contracted workers. That lessens the overall labor rate, and it does so whether installing HFC, fiber, or any technology. CSP concluded that installing fiber actually took 50% less time than installing an HFC network. Copyright 2007 Alloptic Page 3 of 3

4 There are differences in the layout and deployment of the fiber network that contributes to lower costs as well. It was the practice of CSP to build the HFC plant to within 250 feet of every home passed to accommodate drop wiring if and when a subscriber started service. If a home was 500 feet from the coax right-of-way, a lateral was built to reach that location whether or not the homeowner subscribed to services. Now, with fiber, the network is built within only 1000 feet (and sometimes more) of homes passed. Lateral builds are no longer necessary for non-subscribing locations. That means less network is built for non-subscribers and construction expenses are applied more towards revenue-generating locations. Another not-so-apparent cost savings is in pole attachments. CSP s plant is largely aerial. They pay attachment fees of 5.00 to per pole, depending on the utility and attachment type. Strand and drop attachments are priced differently and require different application paperwork to the pole owner. A CSP manager explained attachment advantages this way [With HFC] in a location where [CSP] had to build a lateral to feed a house that sits 500 feet off the road, I may have replaced two poles because there wasn t enough room to attach strand and drop coax. With a fiber drop, I drive a J-lag in and I can attach it within 4 or 6 inches of the other utilities on the pole. I don t run that drop until that guy wants to be a customer and then I send in a drop attachment application to the utility, which is less stringent than a strand attachment agreement. Then I ve got revenue coming in to pay for that lease or that space on that pole. Data from the pilot project is not sufficient to quantify each of the above installation costs independently. However, using the CSP data that is available plus information from industry studies, a macro view of deployment costs can be calculated. CSP estimates costs for installing this pilot project of 780 connected subscribers are: Materials 157,861 Labor 150,318 Total 308,179 That is an average cost of 205 per HP, or 395 per subscriber. Readers familiar with FTTH research will note that this price differs significantly from the per subscriber often cited for FTTP/FTTH deployments. MicroNode FTTH technology is a significant departure from those systems, with large cost differentials. For instance, the MicroNode topology requires no OLT, and the headend equipment remains intact from HFC architectures, dramatically reducing deployment costs -vs- traditional PON. Readers can find more information about MicroNode network technical aspects at or in CED magazine. ii One revealing study of HFC costs is by John Browse from an ITU-T workshop iii. It estimates the costs of HFC deployments as: Materials 13,110 per mile Labor 16,518 per mile Total 29,628 per mile Copyright 2007 Alloptic Page 4 of 4

5 With approximately 14 miles of network in the project, had HFC been used the installation costs would have been: Materials 183,540 Labor 231,252 Total 414,792 HFC installation costs would have been 277 per HP, or 532 per subscriber. From a pure Materials and Labor perspective, CSP saved 72 per HP with the MicroNode solution, which is 26% less than they would have expended for an HFC network of the same size. Operations and Maintenance Economic Benefits Beyond lower installation costs, operations and maintenance cost savings are being realized by CSP. Those savings have been identified in four major areas: 1. Reduced routine CLI and sweep maintenance tests 2. Reduced need for emergency powering equipment and dispatch 3. Lower power consumption 4. Reduced plant maintenance costs CLI and Sweep Test Reduction. By installing a passive optical fiber-to-the-home network, CSP has removed almost all of two sources of routine maintenance CLI (Cumulative Leak Index) tests and amplifier sweeps. Those maintenance activities required 2 days per quarter of dedicated engineering time to test the 14 miles of HFC plant in the pilot project area. After the upgrade with MicroNode FTTH, 98% of the CLI and sweep testing is eliminated. All that is left is V-node testing. The result is a savings of 2,249 per year in labor costs. Not quantified are the savings in CLI and sweep test equipment, truck/travel expenses, and the opportunity costs of technical personnel performing routine maintenance instead of value-added activities. While 2,249 per year may not seem significant, consider the savings when applied across all of CSP s 400,000 HP serving area. Using the project area as a basis, density is 107 HP per plant mile. CSP is spending 161 per mile per year for CLI and sweep tests. Thus for 400,000 HP, the annual tab for CLI and sweep testing is 594,000 most of which can be eliminated with a MicroNode-based fiber network. Note that average density in the US is closer to 50 homes per mile of plant, driving potential savings even higher in lower density applications. Emergency Power Savings. CSP has a policy of maintaining emergency generators for dispatch to any node undergoing a power outage. Experience has shown that 3-5 generators are needed per 100 nodes. By implementing an all-fiber, all-passive plant, CSP has eliminated the need for the emergency generators used with their HFC network; except for V-nodes. For the project area, two generators were kept available; only one is required for V-nodes with the MicroNode FTTH architecture. Spread across CSP s entire network, generators are no longer needed. At an average cost of 2000, there is 60, ,000 in capital that can be recovered in generators alone. More is available from the trucks and other equipment that were dedicated to power outage dispatches. Copyright 2007 Alloptic Page 5 of 5

6 Emergency generator dispatches are also virtually eliminated by CSP s change to PON architecture. The policy was to provide standby battery backup of 2-4 hours at a node. Normal response time to deploy a generator is hours. That meant that any time there was a power outage alarm from a node, the emergency generator was immediately dispatched so power generation could begin before the batteries were depleted. In most cases AC power was restored to the node before the generator was put on line, creating expense for the needless dispatch and frustration for CSP. After deploying MicroNode FTTH, the need for generators was greatly reduced because of node elimination. Also, CSP re-engineered standby battery power to support 6-8 hours of service from the V-node, eliminating emergency generator dispatches to all but outages lasting for sustained periods. The additional battery time became possible because of the reduction in power requirements per V-node plus the large reduction in node count dramatically reduced battery expense and maintenance. The savings from fewer generator dispatches may appear to be modest - 11,560 - because of the relatively small size of the pilot project. However, spread across CSP s entire network it is certainly significant. At any given time in a 24/7 environment, CSP estimates that there are 3 active emergency generator dispatches. Using an hourly rate of per technician and 712 per month per truck, CSP was spending 620,000 per year to support emergency generator deployments. Implementing the Alloptic MicroNode solution and longer battery capacity across the network will save at least 95% of that. There is one other cost associated with emergency power that bears examination. That is the cost of battery backup. CSP uses 4 or 8 batteries in each string at an average cost of 100 per battery. The batteries are changed every 3 years, with annual maintenance and testing. CSP spends 4 hours to maintain and replace the string over the 3-year battery life. Using those parameters, the annual expense for battery maintenance in the project area is 702; for CSP s full network, the expense is 162,000. As noted above, at least 95% of that expense can be eliminated with Alloptic s MicroNode solution. There are other costs associated with emergency power not included. For example, the costs of dealing with batteries as hazardous materials are not considered although expenses for storage, regulatory compliance, and legal risks are very real and significant. Lower Power Consumption. By deploying the MicroNode FTTH solution, CSP is enjoying an overall reduction in AC power expenses. They have eliminated the outside plant powering needs except for V-nodes, and the MicroNode transceivers are powered from the homeowners AC mains. Copyright 2007 Alloptic Page 6 of 6

7 Prior to the MicroNode FTTH deployment, each of CSP s nodes consumes 1.35KWH. At the average U.S. commercial rate iv of , their annual expense to power nodes in the project area was 4,101. After deployment CSP has reduced power consumption by 96% to only 171 as a result of fewer nodes and less power used per node. (Please note that this translates to a monthly cost of 14.25, which is below minimum monthly billing for some utility companies (as a result higher charges may apply.) The potential savings for their entire network is 904,000 per year. Reduced plant maintenance costs. Clearly, fiber plant is less expensive to maintain than copper/coax plant. In the previously noted study by John Browse 1, HFC maintenance costs were found to be 1,103 per mile. Fiber maintenance is generally accepted to be on the order of 10% that of copper/coax. Other studies note plant maintenance rates dropping by over 80% with PON. CSP is experiencing similar improvements, although deployments have not been in place long enough for a conclusive quantification. Using the more conservative 80% number, which is higher cost than CSP has experienced so far, maintenance costs for the FTTH network are 221 per mile. For the pilot project area, this is an annual expense of 3,094 compared with HFC maintenance of 15,442; a savings of over 12,000 per year. For CSP s entire network, the annual savings is 3.3M (4.1M for HFC vs- 800K for FTTH). Revenue Enhancement CSP s ability to offer more extensive services is another significant economic benefit of the MicroNode FTTH network. The 25+ year-old HFC system supported only 22 video channels with no return path for VoD (video on demand) or other interactive video services, no data services, and no voice services. After installing the Alloptic MicroNode RF over Glass (RFoG) and upgrading head-end equipment, a full suite of services are enabled that is rapidly driving revenue per household increases. RF bandwidth is extended to 1.1GHz, which opens CSP s entire lineup of 245 channels, including 21 HD channels. VoD is also enabled, with free pay-per-view, and subscription options. Residential data services are now available to subscribers in the pilot project area. CSP currently offers a single tier of Internet access up to 4.4Mbps via DOCIS 2.0 technology. With a future upgrade to DOCSIS 3.0, multiple levels of access are planned. Voice services are now available to subscribers in the pilot project area. For a single monthly fee, subscribers have unlimited local and long distance calling via VoIP (voice-over-ip) technology. It is still very early in the deployment cycle to conclude steady state take rates for the new services. For the purposes of this analysis, take rates are constant at 52%, which was the rate for basic service that existed before the upgrade. The national average is 58.8% v, so using 52% is conservative with a reasonable expectation of marginal increases. Copyright 2007 Alloptic Page 7 of 7

8 CSP s early service mix results are trending toward those reported elsewhere in the industry vi. Following that course, CSP s revenue per subscriber will increase from 41 to 96 per subscriber as shown in the following chart. ARPU Added Revenue Telephony Internet / HSD Prem Vid + HD/DVR Premium Video Basic Video Video Growth Before Upgrade With FTTH MicroNode For the pilot project area with 1,500 HP, the increase in ARPU (Average Revenue Per User) is an additional 514,800 in annual revenue. Other revenue is enabled as well. First, CSP offers business services in other regions, and those services will be extended to the pilot project area in the near future. CSP s business services encompass a range of options that include: o Internet access, tiered up to 10Mbps o WiFi hotspot hosting with free and billable access options o Website hosting o Business telephony o Music and television services o Commercial security monitoring These services have been major revenue sources in other CSP regions, and are expected to contribute significantly in the pilot project area as well. Because of differences in business density it is not practical to project revenue based on other regions, and data is not yet available to quantify business revenue potential in the pilot project area. Intangible Economic Benefits There are two additional intangible benefits CSP realized with the Alloptic MicroNode FTTH solution that readers should note. First is that CSP now has an all-fiber access network in place. Whatever future services are offered, whatever the bandwidth requirements, CSP has the outside plant necessary to support those services. Perhaps the electronics on either end of the network will change, perhaps not. In either event they have made the investment necessary for a fiber plant that will deliver services for the life of the fiber 20, 30, 40 years or more. Copyright 2007 Alloptic Page 8 of 8

9 The second benefit is closely related and more near-term. CSP can now adapt the MicroNode FTTH network with a PON overlay system such as Alloptic s Gigabit PON. In this Hybrid RFoG architecture, both RF FTTH and Ethernet FTTH operate concurrently on the same network without any changes to outside plant architectures or topology. By implementing this overlay, CSP can offer enterprise-class rich Ethernet services at gigabit rates for business subscribers, gain bandwidth for IPTV expansion, deploy VoIP from the ONT (without in-home gateways), or backhaul TDM wireless traffic. Summary and Projections CSP is realizing significant cost savings and revenue enhancement by deploying the MicroNode FTTH solution as a replacement for an outdated HFC system. The chart below summarizes the economics for the project area. Project Area Economics HFC Cost Savings MicroNode & Network Revenue Growth Installation & Deployment Materials 183, ,861 25,679 Labor 231, ,318 80,934 Total 414, , ,613 Operations & Maintenance CLI & Sweep 2, ,249 Emergency Power 22,358 10,798 11,560 Purchased Power 4, ,930 Plant Maintenance 15,442 3,094 12,348 Total 44,196 3,094 41,102 Revenue Enhancement ARPU / Year Increases 383, , ,800 Economic Benefits Total 842,748 1,209, ,515 To illustrate how those benefits might work in larger deployments and across all of CSP s serving area, the following chart includes projections for 10,000, 50,000, and 400,000 HP. Costs are calculated per mile; the revenue increase basis is per user. Of course results vary for every application. For instance, installation costs are very different for aerial versus buried cable. Also, many network operators already offer services beyond basic cable video with the current HFC networks, so the revenue enhancement from added services would be less than for CSP s pilot. In many regards, the CSP pilot area is an ideal business case with its aging plant and limited services. Nevertheless, this case offers a view of the many real-world economic benefits CSP is experiencing and insight into the benefits other network operates can achieve with the Alloptic MicroNode FTTH solution. Copyright 2007 Alloptic Page 9 of 9

10 Economic Benefits with MicroNode FTTH Homes Passed 1500 (CSP Pilot) 10,000 50, ,000 Installation & Deployment Operations & Maintenance Revenue Enhancement Total Economic Benefit 106, ,521 3,807,607 28,176,293 24, , ,366 6,381, ,800 3,432,000 17,160, ,280, ,559 4,365,995 21,829, ,837,804 i ii KMI Research, Worldwide Markets for Fiberoptics In Broadband Access Networks, 2006, p.57 CED magazine, Make way for the Micro-node, July 2007 iii John Browse, Fiber Access Network A Cable Operator s Perspective, presented at ITU-T All Star Network Access Workshop, Geneva 2 4 June 2004 iv US Energy Information Agency, v National Cable & Telecommunications Association, June vi Merrill Lynch, Media and Entertainment Conference, Sept. 17, 2007 Copyright 2007 Alloptic Page 10 of 10