Rva Ftth Status April 2011 Final Final

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I. INTRODUCTION A ND M ETHODOLOGY

Since 2001, RVA LLC has surveyed North Americancommunications providers in order to determine thegrowth in fiber-to-the-home. Partnering with theFTTH Council North America, RVA releases twomarket estimates annually (Q1 in March and Q3 in

September).

Fiber-to-the-home (FTTH), sometimes called fiber-to-the-premises (FTTP), refers to a type ofcommunications network where fiber-optic cable isinstalled all the way to the individual living unit. Othersystems using fiber optics for only part of thenetwork, such as fiber to the curb (FTTC), fiber to thenode (FTTN), fiber to the last amplifier (FTTLA), fiberto the building (FTTB), hybrid fiber coax (HFC), etc.,are not included in the data for this report. Such

partial systems contain a final leg of the broadbandjourney via another type of media, typically copperwire or coaxial cable, which greatly limits thebandwidth possible over the system. Because fiber-optic cables allow much faster and more efficienttransfer of data than copper does, end-to-end fiber-optic systems facilitate much higher bandwidthcapacity in both directions.

It is important to note that FTTH does not refer solelyto Internet connections. Active fiber can also servevoice services, paid video services, and even meterreading connections, and can be delivered either as asingle service, or more commonly, in multiple servicesto fiber-optic lit homes.

The methodology utilized for this study involved amulti-faceted review of the market using extensive

primary research. While FTTH vendors were alsointerviewed, the research primarily relied on a bottom-up methodology based on interviews withrepresentatives of many FTTH providers. To date in2011, RVA has surveyed more than 360 NorthAmerican providers and potential providers viaInternet, telephone, and mail surveying methods.(Published data from large public providers has alsobeen utilized.)

II. R EVIEW O F F INDINGS

A. FTTH M ARKET S IZE

Homes Passed FTTH became commercially viable in about 1998.RVAs first survey of the market estimated just over

19,000 homes passed with FTTH in September 2001.The number of homes passed has multiplied morethan 1,000 times since that point, and as of March 30,2011, there are now approximately 20.9 millionhomes passed in North America.

North American FTTH Status March 31, 2011

NORTH AMERICAN FTTH STATUS - MARCH 31, 2011


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The term homes passed in this report means theactual number of homes where a fiber connection is technically available. About 97% of this NorthAmerican activity has been in the United States todate.

Homes Marketed

The estimated number of actual FTTH homesmarketed to consumers is approximately 19.3 millionas of March 30, 2011. The term homes marketedrefers to the number of homes that are actively beingmarketed with FTTH. There is sometimes a delaybetween technically being able to serve consumersand tangibly marketing to them. This is especiallytrue for large builds. In certain instances, providersmay choose to avoid marketing to a specific area untilthe entire area is ready for service.

Homes Connected The number of homes actually connected with lit fibernow exceeds 7 million.

- 5,000,000 10,000,000 15,000,000 20,000,000

Homes Connected

Homes Marketed

Homes Passed

North American FTTH HomesMarch 30, 2011

See Appendix for actual numbers by year.

Video Homes Connected The number of homes serviced with traditional paid

video channels over end-to-end fiber has nowreached 5 million.

Verizon and many smaller FTTH providers offertelevision via fiber. In some cases this is via achannel lineup of RF video. More often, it is via anIPTV methodology.

North American FTTH Video HomesCumulative

0

1

2

3

4

5

6

Sep '01

Mar '02

Sep '02

Mar '03

Sep '03

Mar '04

Sep '04

Mar '05

Sep '05

Mar '06

Sep '06

Mar '07

Sep '07

Mar '08

Sep '08

Mar '09

Sep '09

Mar '10

Sep '10

Mar '11

Millions

FTTH Growth While still relatively strong, FTTH growth has slowedsomewhat since 2008.

FTTH Homes Passed & ConnectedAnnual Change North America

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,000

Sep'01

Sep'02

Sep'03

Sep'04

Sep'05

Sep'06

Sep'07

Sep'08

Sep'09

Sep'10

Sep'11

Homes Passed Homes Connected

Forecast

Slower growth in the number of homes passed overthe past two years is primarily due to Verizon slowingtheir network build and turning attention to marketingconnections as they get closer to their first FTTHproject targets.

Other factors include general economic conditions,and the fact that the federal stimulus legislation mayhave had unintended negative consequences in 2009and 2010. Many interviewed in those years felt thestimulus program caused some projects to be put onhold while the providers evaluated the possibility ofpublic funding.

Annual build rates are expected to stabilize andgrow slightly in 2011 as U.S. projects from non RBOC


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providers accelerate, and fairly large projects inCanada continue to build out.

U.S. growth in 2011 is a result, in part, of stimulusmoney now starting to flow to FTTH projects. Basedon data collected from more than 50 random surveyswith FTTH ARRA stimulus award recipients, RVA

estimates that a total of 38% of FTTH stimulusprojects are currently underway, and another 36% arepreparing to start. The remainder of the ARRAprojects are in various stages of engineering andenvironmental approval. (A small percentage ofthose interviewed have actually declined funding dueto unexpected factors, such as the high wage ratesrequired under regulations for such Federal grants.)

Status of ARRA FTTH Stimulus Grants

0% 5% 10% 15% 20% 25% 30% 35% 40%

Declined Funding

Construction Planned in Future

Engineering

Environmental Assessment

Awaiting RUS Approval

Preparing to Start Construction

In Construction

B. D EPLOYMENTS B Y T YPE O F P ROVIDER

Regional Bell operating companies (primarily Verizon)represent over 73% of all North American FTTHconnections. (It should be noted that total FTTHconnections estimated for Verizon includes reportedFioS Internet connections, plus an estimate of FioStelevision-only connections.)

While Verizon is the largest U.S. FTTH provider by avery large margin, there is actually a very long tail ofother providers. As of March 30, 2011, RVAestimates that there are more than 770 providers ofFTTH in North America.

Of these non RBOC suppliers, smaller incumbenttelephone suppliers (ILECs) account for 61% of theprimary base. Most of these are classified as Tier 3ILECs with a market concentration in one limitedgeographic area. Some of these also haveassociat

ed competitive or CLEC activity. True facilities-basedcompetitive providers (CLECs) and publicly ownedsystems (MUNIs) together account for 24% of thetotal. The remaining builds are from integratorsworking with developers, MSO/cable TV companies,and electric utilities and coops.

FTTH Non RBOC Deployments by Provider Type

0% 10% 20% 30% 40% 50% 60% 70%

Electric Utility/Co-op

MSO/Cable

Developer/Integrator

Municipality/PUD

CLEC

ILEC

C. O VERALL P ENETRATION

FTTH has now reached over 18% penetration of U.S.households in terms of homes passed and 6% interms of homes connected.

FTTH Penetration

Cumulative United States

0.00%

4.00%

8.00%

12.00%

16.00%

20.00%

Mar '02

Sep '02

Mar '03

Sep '03

Mar '04

Sep '04

Mar '05

Sep '05

Mar '06

Sep '06

Mar '07

Sep '07

Mar '08

Sep '08

Mar '09

Sep '09

Mar '10

Sep '10

Mar '11

Homes Passed Homes Connected

D. FTTH TAKE-RATES

The overall take-rate for FTTH services continues toincrease. (Rates declined in a period from March


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2004 to September 2005 due to the heavyinfrastructure build by Verizon with few initialconnections. After Verizon began connectingcustomers at a good pace, overall take-rates turnedupwards again.) The overall take-rate for FTTH hasnow passed 36%.

FTTH Overall Take RatesHomes Connected vs. Homes Marketed

0%5%

10%15%20%25%30%35%40%45%50%

Sep '01

Mar '02

Sep '02

Mar '03

Sep '03

Mar '04

Sep '04

Mar '05

Sep '05

Mar '06

Sep '06

Mar '07

Sep '07

Mar '08

Sep '08

Mar '09

Sep '09

Mar '10

Sep '10

Mar '11

For non-RBOC FTTH customers, take-rates havebeen fairly steady at near 50%. Take-rates droppedslightly in the past year reflecting the transfer ofsome Verizon customers to Frontier.

FTTH Non RBOC Take RatesHomes Connected vs. Homes Marketed

0%

10%

20%

30%

40%

50%

60%

Sep '01

Mar '02

Sep '02

Mar '03

Sep '03

Mar '04

Sep '04

Mar '05

Sep '05

Mar '06

Sep '06

Mar '07

Sep '07

Mar '08

Sep '08

Mar '09

Sep '09

Mar '10

Sep '10

Mar '11

While these rates include some cases where the

network have been upgraded with fiber for allcustomers, including voice-only customers (whichmeans essentially 100% take rates), it is important tonote that even voluntary take-rates for someindividual FTTH projects exceed 70%. This isespecially true in more rural areas that werepreviously underserved by both Internet and videoproduct.

For RBOCs (especially Verizon FioS), take-ratescontinue to increase. This is true despite the factthat their service territories generally involvecompetition from large MSOs with reasonably goodproduct, and a continuing FTTH build whichsuppresses net take-rates. (Verizons take-rate inareas where FTTH has been available for two to

three years is higher than its average net take-rate.)

FTTH RBOC Take RatesHomes Connected vs. Homes Marketed

0%

5%

10%

15%

20%

25%

30%

35%

Sep '01

Mar '02

Sep '02

Mar '03

Sep '03

Mar '04

Sep '04

Mar '05

Sep '05

Mar '06

Sep '06

Mar '07

Sep '07

Mar '08

Sep '08

Mar '09

Sep '09

Mar '10

Sep '10

Mar '11

In terms of penetration by provider type, Verizon andTier 3 ILECs have actually penetrated a relatively highpercentage of their customer base. These providers who we may call aggressive ILECs addressroughly one-third of the total U.S. population.

Verizon recognized early a need for a new businessmodel, and their strategy appears to have been drivenby accurate predictions of how things would play out.Regulatory changes, such as the 2004 FCC TriennialReview and later video franchise rulings, have alsoplayed a key role in their decision to move forward.

Drivers for FTTH upgrades in the rural independenttelco segment include aging copper lines in need ofreplacement, the opportunity to deliver video given amore robust platform, and a pioneering tradition. Insome cases these providers have also been aided byloans and subsidies, such as rural broadband loanprograms and universal service funds.

Other parts of the U.S. have had more spotty FTTHdeployment mostly from facilities-based CLECs,real estate developers, and public entities such asmunicipalities and groups of municipalities. (In theseother areas, the incumbent telcos, such as AT&T,Qwest, and Tier 2 ILECs, have completed some


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builds of FTTH in new housing developments, buthave conducted only limited overbuilding of theirexisting copper network to date.) Some FTTH buildsby cable TV providers in new developments are alsonow beginning.

E. F UTURE FTTH G ROWTH P ROSPECTS

Growth in FTTH after 2011 looks positive. As justone example, non RBOC incumbent telephonecompanies are already very bullish on FTTH. MostILECs that have already deployed FTTH plancontinued deployment, and those who have notdeployed any FTTH are now planning futuredeployment.

Likelihood of Adding FTTH Linesby Current Non RBOC FTTH Providers

Very Unlikely

Somewhat Unlikely

Somewhat Likely

Very Likely

All Customers haveFTTH

70%

North American countries outside of the United Statesalso report increasing activity in the next five years.Canada is currently experiencing growth asincumbent telephone companies in some areas are

moving quickly to FTTH to better compete with cableTV MSOs that are introducing higher bandwidthsusing DOCSIS 3.

F. INTERNET S PEEDS

FTTH providers are more aggressively differentiating

their service offerings from the competition. Someproviders are now offering as much as Gigabit (1,000Mbps) symmetrical service. Municipal providers areleading the charge here, and now average a topresidential offering of over 100 Mbps (influenced by afew offering 1,000 Mbps).

Higher bandwidth symmetrical services shouldcontinue to fuel growth especially as newapplications increase consumer demand for fasterconnection speeds.

Highest Average Internet Speeds Offeredby Non RBOC Provider Type

0 20 40 60 80 100 120 140

Muni

CLEC

ILEC

Muni

CLEC

ILEC

2010 2011

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Mbps

APPENDIX

NORTH AMERICAN FTTH STATUS (AS OF THE END OF THE FIRST QUARTER OF EACH YEAR)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Homes passed 35,700 110,000 189,000 1,619,500 4,089,000 8,003,000 11,763,000 15,170,900 18,249,900 20,914,500Homes marketed 35,700 110,000 189,000 829,700 3,218,600 6,643,000 10,082,000 13,875,600 16,992,600 19,344,700Homes connected 10,350 38,000 78 ,000 213,000 671,000 1 ,478,600 2 ,912,500 4,422 ,000 5,804,800 7 ,094,800

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Rva Ftth Status April 2011 Final Final