Quotes of the Day

According to the prevailing wisdom, broadband customers don't want to know about the technology that lies underneath the cornucopia of phone, TV and Internet services they enjoy — they just want it to work well and be affordably priced. Don't tell that to Frédéric Roy, who's excited about FTTH, an inelegant tech acronym that stands for "fiber to the home."

Roy, who lives in Paris, applauded when Free, the Paris-based broadband provider and subsidiary of French telecom firm Iliad, announced last month that it will spend €1 billion to run high-speed fiber-optic lines to 4 million French homes by 2012. "This change is necessary because we've come to the end of the copper," says Roy, referring to the metal wire that has traditionally brought phone traffic and then digital data to the home. "With fiber optics, they'll get rid of the glitches that degrade the TV and telephone service," he says.

But if some consumers were thrilled by Free's announcement, investors were not: Iliad's stock dropped by 12% the day it declared fiber ambitions. Investors worry that fiber investments will not pay off, even though many big players are jumping in: NTT in Japan is in the midst of a $47 billion fiber deployment and Verizon in the U.S. is spending about $18 billion to do the same. In general, "Investors see a lot of capital expenditure going out without revenue — it's a bit like the dotcom boom," says Robert Grindle, a telecommunications analyst with investment bank Dresdner Kleinwort in London.

So are fiber-optic lines the savior of the telecom industry, or a financial millstone? The technology itself is nothing new. Fiber lines — strands of glass wrapped in a plastic sheath that carry signals in the form of light rather than as electrical impulses — have crisscrossed countries' backbone networks for decades.

In most telecom networks, fiber lines connect to slower, lower quality copper wires tens of meters or even kilometers away from the home. The reason: connecting each home to fiber is a costly endeavor that often requires digging a trench to every house. Free, for example, plans to route its fiber to homes through Parisian sewers. Joe Savage, head of a U.S. fiber-to-the-home advocacy group called the FTTH Council in Lake Oswego, Oregon, says that completing a home fiber connection can cost a provider anywhere between $600 and $2,000 per subscriber, depending on the amount and difficulty of digging.

Many telecom companies believe such expenses are worthwhile because of their customers' insatiable appetite for more bandwidth. As users grow hungrier for services like high-definition television, video-on-demand, gaming, Internet-based phone calls and streaming music, fiber is a good way to feed them. Fiber typically delivers speeds of up to 100 megabits per second (Mbps), a rate 50 times quicker than average broadband, delivered by cable or digital subscriber line (DSL) technology, in some countries. (Telecom companies are, though, also ratcheting up DSL speeds as high as 50 Mbps by further tweaking copper wires.)

Fiber could therefore be a fantastic weapon as telecom companies fight against cable and satellite providers to offer high-speed Internet, phone, TV and video services. But there are risks. Iliad's chief executive Michaël Boukobza says, "Our biggest challenge is the technical part of getting fiber optics through sewers." But that's not the only one. What happens if users sign up for basic fiber access, but then decline to buy video-on-demand and "triple-play" service packages — including hundreds of channels of TV and Internet-based telephone plans as well as high-speed Net access — on which companies like Free and Verizon are banking for profits?

Such providers risk simply becoming online access pipes as users go out and find the content they want themselves. Even if people do buy the packages, price wars could damage profits. "Everybody is scrambling for differentiation, for unique content, to find out what it is people will pay for," says Savage at the FTTH Council. "It's a huge gamble."

Verizon vice president of Internet and technology policy Link Hoewing says that Verizon's triple-play packages will engender user loyalty. He points out that more than 60% of Verizon's fiber customers are buying services that include high-end set-top boxes with digital video recorders (DVRs) and HDTV, and that 80% of its customers who buy TV are also buying phone and Internet services. Verizon seems to be on the right track. Late last month it said it expects to have 725,000 fiber-optic Internet customers by the end of the year and about 7 million by 2010 — a 5-10 percentage point increase from its earlier projections. It also projects that about 175,000 will take TV services this year.

Verizon could also charge extra to either content providers or end users who would gain access to special high-speed products like video games, a prospect that alarms some people who claim it begins to shut off the open Net to which users have become accustomed. In the U.S., Verizon has faced several regulatory battles. Oregon Democratic Senator Ron Wyden, for instance, is holding up a telecom reform bill sponsored by Republican Senator Ted Stevens of Alaska. Wyden wants to assure that Verizon and others keep their networks equally open to all and don't favor users or content providers who are willing to pay a premium. European regulators have similar concerns.

For those and other reasons, many big telecom providers are staying out of the fiber game. No one is questioning the need for faster speeds, but companies including BT in the U.K. and Deutsche Telekom in Germany are continuing to improve their use of copper by deploying variations of dsl that can deliver speeds of between 24 and 50 Mbps — or as fast as fiber in some cases. And cheaper wireless Internet technologies like wi-fi and a stronger version called WiMax could also help lessen the need for fiber.

Jonathan Coham, a London analyst with telecom market-research firm Ovum, says Eastern Europe, for example, will avoid fiber altogether through 2010 in part because wireless technologies will be more affordable. Although BT is putting fiber into new housing developments where construction companies are digging water, gas and other utility trenches that can easily accommodate it, the British carrier is not spending to run fiber all the way to existing copper-wired homes. "When we look at what applications justify it, we have yet to find one,'' says Petri Allas, BT Group's corporate strategy director.

Whichever technology wins out, fiber providers can take heart in knowing that their users care. "How can you not be satisfied that Free is stirring things up?" says Free user Roy in Paris. "Fiber optics at 50 Mbps can only make people happy." Now someone needs to figure out how to make it pay.

• MARK HALPER
• With soaring broadband demand telecoms are turning to fiber