An Alternate Business Strategy for FTTh Bill St

An Alternate Business Strategy for FTTh Bill St. Arnaud CANARIE Inc – www. canarie. ca Bill. st. arnaud@canarie. ca Last Revised: August 27, 2007

Safe Harbour Statement & Background > Currently CANARIE has contracted for construction of a fiber network through the center of Ottawa with a Montreal company called SRDP. The company that is building the fiber network is putting in extra fibers to enable an innovative fiber to the home project. (CANARIE is only paying for the fiber it requires for its internal purposes and is not subsidizing this project in any way). > CANARIE works with a number of fiber construction companies whose sole business is building and maintaining condominium fiber networks. These companies do not offer any telecom or Internet services. They sell individual strands of dark fiber to businesses, governments, school boards and other entities. These organizations then create their own private layer 1 networks – typically a star configuration with an anchor point at a local carrier neutral hotel. http: //www. canarie. ca/canet 4/library/customer/frequentlyaskedquestionsaboutdarkfiber. pdf > > To address the problem of challenges of developing a FTTh business case, especially in brownfields, CANARIE is brokering discussions between the fiber contractor and several/gas electric companies on a more novel business case to market and sell the fiber. A small trial is underway in a downtown Ottawa neighborhood. > The basic concept is to bundle FTTh as a premium on a customer's energy or gas bill. If the consumer reduces their energy consumption, (the higher cost per kwh because of the broadband premium would serve as an economic incentive to reduce consumption) then they may end up with free broadband the added of benefit of lower reduced green house gases. We have nicknamed it "Green broadband" or "Al Gore broadband"! As well additional revenues can be made in brokering CO 2 credits because of tele-communting, and other energy saving ideas. > The energy retailers make money on the arbitrage of the power and selling carbon emission credits. The FTTh itself is a loss leader. There is a hell of lot more money to be made on power arbitrage trading and carbon emission credits then there ever will be with broadband Internet (e. g Exxon $40 billion profit). > However for those customers not interested in Green Broadband, or signing up for a 5 years electrical/gas energy deal, can purchased their connections directly > Ultimately it is our belief broadband services and the next generation of the Internet are going to be free ( or very nearly so). We are already seeing this in some jurisdictions with companies like Inuk and Sky (in partnership with Google) offer telephony, free broadband (up to 2 Mbps) and free cable TV. They make their money by selling eyeballs to the traditional over the air broadcasters. (www. inuknetworks. com). Many TV networks and movies studios are also delivering their products directly y to consumers over the Internet. > > If broadband services like telephony and broadcast TV are going to be free, the challenge then is to find a way to build out and pay for the infrastructure. This is why we believe user owned and controlled optical last mile networks are important - you don’t want to be in the business of maintaining SLAs for services that are free or have high opex costs. The traditional telco approach for justifying FTTh is to deliver "premium" services, or services delivered through a Qo. S channel to extract additional revenue (and thereby create non-neutral networks). But if the services are free it is going to be hard to extract that revenue to justify the cost of the network build out.

August 27 Update on Ottawa Pilot > SRDP has deployed trunk fiber through the targeted neighbourhood and established splice points for distribution fiber to homes > All customers will be provided with dedicated home run fiber back to City Hall or Level 3 POP > Market survey completed of over 100 homes – 30% overall said they would purchase green broadband (but about 10% said they would rather purchase fiber outright rather than signing up with energy/gas retail company) > Business plan initial take up rate is 10% > Current biggest challenge is finding retail Internet company who will be primary customer facing organization – Retail Internet business has virtually disappeared in Canada

The purpose of this project > Broadband Internet is critical to the future economic well being of the country – New applications like Web 2. 0, Business 2. 0, Citizen Sciencem etc will create new opportunities, wealth and jobs > Competitive broadband with multiple facilities based competitors is the ideal solution – Multiple competitors with a level playing field is the best way of promoting innovation and lowering prices > But business case for multiple facilities based competitors for residential broadband is extremely tough when competing with established telco and cableco > A new business model is needed, especially one that deals with issues such as: – Revenues are trending towards zero for traditional services such as voice, TV and Internet – Fiber to the homes requires significant capital investment – Allows for multiple competitive providers

Business Plan Outline > Customer owns the last mile fiber and is free to connect to any service provider of their choice with direct fiber cross connect – Speed, cost, and type of connection and ONT is decision between customer and their service provide of choice – Home rune fiber is essential (will not work with PON) – Customer has direct one to one physical connection with service provider > Capital costs of deploying fiber is bundled with 5 year deal of purchase gas and/or electricity from reseller > It is expected that over time costs of Internet, voice and cable TV will trend to zero – This is already happening in UK and France where there is a much more competitive market > If customer reduces energy consumption (and hence carbon emissions), they still keep fiber and overall bill may be significantly less than they pay today for energy + broadband

Problem: You can’t make money from broadband > Broadband networks, whether wireless or FTTx, overbuilders, municipal or customer owned, requires huge capital outlay with a big risk of slow take-up. In addition: – subject to intense competition from incumbents – High churn – Low takeup – “Tyranny of the takeup” > Consumers unwilling to spend more than $40/mo for broadband – Generally prefer lower cost, rather than higher bandwidth • http: //news. com/DSL+strikes+a+chord+with+frugal+shoppers/21001034_3 -6084717. html – Margins are very thin, even for incumbents > Many companies starting to offer free broadband, both wired and wireless – Inuk, Sky, Talk, Google, Microsoft, Cable and Wireless etc > The real winners in the broadband game are those providing advanced services and basic infrastructure – Google, Inuk, Yahoo, Skype, Joost, etc – CBS, ABC etc is going to deliver prime time TV over Internet this fall – one day ahead of broadcast TV

Current FTTh business plans are flawed > Current FTTh business plans are predicated on triple play with following minimums – 40% takeup – $130 per month revenue per customer > But voice and long distance revenue declining annually and will continue to do so > Most broadcast TV and film distribution is moving to Internet with no revenue filtering to content delivery companies like cable or IPTV > Many companies offering free Internet when packaged with other service offerings such as satellite, groceries and other services > Bottom line – unlikely that triple or quadruple play will underwrite cost of FTTh

A New Business Strategy for last mile infrastructure > Combine FTTh with resale of electrical and gas power – Consumers and business spend considerably more on electricity and gas than on telephone, cable or broadband combined > Many companies worldwide specialize in sale of retail energy – gas and electricity – They make money on arbitrage between long term contract (typically 5 years) of retail power at fixed price and wholesale and/or futures market – Billing is done by energy utility and payments then made to retailer > But today retail sale of electrical power & gas is a difficult sale – It is seen as a basic commodity service with marginal price differentiation from public utility and often associated with shady business practices – Recently spot market prices are lower than retail prices > Resale of electrical power & gas will be a lot more attractive if bundled with FTTh, free broadband, free telephony, etc – It will also allow greater arbitrage spreads between retail and wholesale/future prices

Who are electric & gas resellers? > They are NOT utilities > Gas and electric resale is a multi-billion business with hundreds of companies across North America > Industry was created when structural separation was mandated for gas and electric distribution > Gas and electric resellers purchase energy directly from gas fields, power generations or energy futures markets and then resale power to residential and commercial customers over infrastructure provided by utilities – They make money on the arbitrage between wholesale and retail price > Utilities do the billing on behalf of the resellers – but price and terms are established between the reseller and customer > Most gas and electric resellers over a variety of marketing bundles including appliances, home renovation, free long distance etc – So why not FTTh?

Direct Energy One of North America’s largest reseller

The Pitch > Offer consumers special deal on long term power contracts bundled with FTTh in partnership with retail energy companies – Profit is made on arbitrage of sale of electrical/gas power and/or premium on sale of power – The loss leader is free Gigabit broadband, telephony, cable, etc offered by companies like Inuk, Google, etc > Customers or encouraged to save money through reduced energy consumption – Higher premium for “Green Broadband” will be an incentive to reduce consumption – May end up paying substantially less then they do now for gas + electricity + broadband + telephone + cable – And thereby also reduce greenhouse gas emission – Customer (or electric gas retailer) can also earn dollars for CO 2 credits on energy savings – Customer (or their employer) can also earn dollars for CO 2 credits for Telecommuting > But since broadband is now a loss leader, we must keep broadband OPEX and CAPEX costs as low as possible….

Customer owns or controls last mile > If the customer owns or control the last mile infrastructure then it is not in their self interest to switch providers, – If they own the last mile they have a sense of responsibility with respect to quality and maintenance – Different pricing packages can be offered to insure reliability etc > Last mile infrastructure can be FTTH, Copper, wireless, etc – But concept works best with new FTTh builds – Fiber has the lowest opex costs > Use home run fiber with UCLP with RPON and software like Inuk, Netadmin or Packetfront so customer can control connectivity to service providers of their choice – UCLP = User Controlled Light. Path software- www. uclp. ca for customer control of OXC or electrical cross connect – RPON = Reverse Passive Optical Networking > UCLP software at future date can also be used to turn on/off electrical devices in home etc to reduce power consumption – And further reduce carbon emission and earn credits

Business Model > Current prices for gas and electricity in Ontario – Gas spot $. 22 but typical resale is $. 40 cubic meter • Typical household annual consumption 2000 cubic meter or $800 - $1000 per yr – Electricity spot $. 08 and typical resale is $. 09 kwh • typical household annual consumption 7000 kwh or $600 - $800 per yr > FTTh cost assumptions • Average lot width – 10 m (including roadways etc) • Backbone fiber installed on poles $6000/km • $1000 per home fiber drop + Ethernet ONU (does not include inside wiring) • 5 year amortization • Cost of money 5% • Maximum 20% take rate – Approx $400 per year per customer would be amortization plus carrying charges including maintenance etc, assuming no upfront fees paid by customer > Premium on gas or power charge – $. 06 kwh premium on electricity = $400 on typical house; or – $. 2 m 3 premium on gas = $400 – For 10% take rate annual cost would be $500

Advantages for consumer > Free Gigabit bandwidth* to a neighbourhood node or transit exchange – *In fact customer can chose any bandwidth they want > Free telephony** and free cable with Inuk*** (or equivalent) – **May be some small long distance charges – ***Canadian regulations may require some fees to be applied > Customer negotiates with ISP or carrier of their choice to install ONT or simple media hub at the premises – Customers who only want high speed Internet can purchase media hub for about $200 which includes laser, Gbe transceiver etc – Power users can even establish layer 1 peer to peer networks > Bundled costs of energy and broadband significantly less than buying separately because of long term contract > Incentive to significantly reduce energy and broadband costs by reducing energy consumption – Earn Kyoto CO 2 credits on energy savings and telecommuting

Advantages for retail energy companies > New loss leader to stimulate retail sales of gas and/or electricity – Schools, businesses, homes are potential target markets > Greater margin on retail price (because includes premium for FTTh) and wholesale futures price – Allows for greater arbitrage profit opportunities > “FTTh co” partner looks after all fiber connectivity and broadband details > Future potential revenue with smart meters and other services and CO 2 credits

Advantages for “FTTh Co” > “FTTh Co” installs and manages fiber and relationship with customer and service providers – Partners with energy retail companies to deliver “Green Broadband” > Customer pays for broadband as part of energy bill sent by utility by purchasing premium “Green Broadband” > NO sales costs, customer billing, accounting or receivable costs – Energy retail sales team markets Green Broadband as an inducement to get customer to sign long term contract for retail power – Payment made by utility direct to power retailer and FTTh Co monthly – Long term contracts for power mean little churn > FTTh Co can earn additional money by: – partnering in arbitrage of sale of power and earning CO 2 credits – sell additional strands to other service providers – sell colo space and backhaul “bitstream” transport to service providers > “FTTh Co” can also sell unbundled DSL local loops or open access cable – Allows quicker entry into the market – But higher opex costs – Fiber is cheaper, even with low take rate

Who is “FTTh co”? > Municipal electric telecom companies > Municipal, provincial or state wide electrical or gas utilities – Usually sell power to consumers at market spot price and responsible for billing > Municipal or community broadband networks > Overbuilders > FTTh co can also become licensed power retailer and sell wholesale power from utility as a straight pass through to customer, with additional markup for Green Broadband – But probably will lack knowledge and financing to arbitrage power purchases on spot and forward markets

Some possible rollout details > Key requirement for program: – Must sign up minimum 10%(? ) of homes in neighbourhood for customer owned fiber • This model has worked very well in Vesteras, Sweden – Set up neighbourhood blogs/wikis based on postal code so neighbours can convince each other to sign up for program (viral marketing) > Encourage large part of capital costs to be paid by home owners who purchase their home run fiber – One time sign up cost of $500 for fiber > Sell additional fiber strands to other service providers

Some marketing suggestions > Give customer choice of how they pay for fiber – Upfront capital with annual fee – Small premium on electrical and gas bill – Incentives for early adopters – refund on original price depending on how many neighbours sign up – Allow customers to share in revenue generation or cost reduction as more neighbours sign on – Earmarked money saved on power (unusually warm winter) to pay for fiber connection – Combinations of all the above > Customer can sell or transfer fiber to neighbour – Must pay costs of rewiring > Additional revenues – Selling rack space at neighbourhood colo to service providers – Back haul transport for service providers

Up to 15 km Last mile customer owned fiber School X Google Neighbourhood Yahoo Colo RBOC Customer owns fiber strand or micro conduit all the way to Neighborhood Node Colo Facility ISP B School Splice Box X Business with dual connections to their own strands 864 strands Condominium Fiber Trunk

Neighbourhood Colo and RPON Only the contracted SP provides return signal Aggregator (AOL or RBOC)) Google OXC Ports Yahoo TDM or WDM return Active laser & optional CWDM at customer premises Passive Optical Splitter Neighborhood Colo Node Customer Controlled or Owned Fiber Service provider can be several km away

ASP or ISP perspective Neighbourhood Colo with OXC Telco Private Fiber ASP, ISP Or Content School RPON splitter Middle Mile Condo Fiber Splice Case Private Fiber Network for Business Last Mile Condo Fiber Private Fiber Network School Note: Individual strands of fiber are show as different colors. This is not a DWDM system

“Last mile” Customer Owned Condo Fiber Details > Two approaches to customer owned fiber: – Micro-conduit – Optical ribbon fiber (up to 864 strands) > Both technologies are both well proven with numerous suppliers and proven installations > Optical ribbon fiber: – Lowest overall cost – Requires splices in the field as new customers acquire fiber – Allows for much higher penetration of customer owned fiber > Micro-Conduit: – Lowest initial capital cost – Disadvantage is that it may limit the number of homes that can purchase customer owned fiber because of number of micro-conduits available – No splices in the field – Fiber is blown in upon demand

Premise Equipment Details > With customer owned fiber, customer makes decision on customer premise equipment > If customer only wants high speed Internet – Media converter with Gb. E laser and transceiver – about $200 > If customer wants triple play then they can contract with carrier of their choice to acquire ONT – Carrier or customer can install ONT – Carrier manages customer fiber from CO to ONT for the life of contract with customer – Customer responsible for in house wiring > Power users can install low cost CWDM systems – Cost $500 -$2000 – Allows connection to multiple ISPs or ASPs at the same time – Can also physically peer direct with neighbours

Carrier Neutral Neighborhood Colo > Two possible models: – Simple splice case that contains RPON only direct mapping of all fibers to all service providers’ fibers ; or – Cabinet that also contains optical OXC and/or electrical switches (each provider has their own OXC ports) to optimize service providers fiber utilization – OXC or electrical switch may be distributed across several hierarchical colos upstream from the neighbourhood colo to give customer and service provider widest possible number of choices for meet me points – OXC and/or electrical switch can map or regenerate wavelengths > Customer’s laser signal is split with RPON to all service providers in the colo – PON technology allows 16, 32 and 64 split – Split ratio determined by power of customer’s laser and distance – At least one default split to “FTTh co” DHCP in order to provide basic connectivity for UCLP and other services – LX GBIC 10 kms – about $200 in small quantities > Customer contracts with service provider of their choice with UCLP – Selected Service provider then provides return signal to customer from their CO – Service providers in colo agree to use different colored lasers for return signal • Allow customer to connect to more than one service providers

Possible customer owned participants > Companies that would be adversely affected by two-tiered Internet – Google, Yahoo, AOL, MSN, Hollywood studios > Electrical Utilities and retailers – Earn revenue by brokering power between generators and consumers on a minute to minute basis – Additional savings to consumers through smart meter program – Additional incentive for consumers to buy retail electricity > RBOCs and telcos that are trying to expand outside their home territory – Capital outlays and challenges to incumbent are even terrifying to the large telcos > Equipment providers of ONTs, Media converters, home gateways, etc – Large market for FTTx equipment > Municipalities, municipal electrical utilities and communities that recognize importance of broadband

Advantage for content providers and aggregators > Direct connection to customers bypassing telcos and cableco and avoiding two tiered Internet > Large part of capital costs of FTTh avoided by having consumer pay significant portion of capital costs > “Tyranny of the take-up” avoided by promoting communities to self organize FTTH projects – Encourages leading municipalities to be active players – Beauty contest suggested to select leading communities based on committed take up rate > Very little churn because customer owns the last mile > Significant potential to be a major source of revenue once 40% take up reached

Background slides

Background material > We have a detailed costing analysis for customer owned FTTH as a result of a failed customer owned FTTH trial in Ottawa – Regulatory restrictions in Canada were major cause of failure – Contact bill. st. arnaud@canarie. ca for details > FAQ on Customer owned fiber at: – http: //www. canarie. ca/canet 4/library/customer/frequentlyaskedquestions aboutdarkfiber. doc > Many case studies and additional related news items at CANet news – http: //www. canarie. ca/canet 4/library/list. html > Frugal Broadband customers – http: //news. com/DSL+strikes+a+chord+with+frugal+shopper s/2100 -1034_3 -6084717. html

What is customer owned fiber? > Increasingly popular strategy at universities, schools, hospitals, businesses, etc > Various companies are specializing in deploying “condominium” fiber to institutions and enterprises – Each institutions purchase one or more fiber pairs in the fiber cable – Customer responsible for lighting their own fiber strands > Fiber cables terminate a carrier neutral colo facilities where customer can cross connect to service provider(s) of their choice > Since customer owns the last mile they are not restricted to a choice of service provider who has deployed last mile infrastructure i. e. telco > ROI is typically 2 -3 years versus purchasing managed service

Components of customer owned fiber > “Middle mile” condo fiber from downtown to neighbourhood colo – Usually can be self financed based on ROI to participants such as businesses, carriers and especially schools – With schools as anchor tenant you get excellent penetration into residential areas > “Last mile” condo fiber from neighbourhood colo to residence – Focus of this presentation > “Neighbourhood colo” – can be simple splice case or active optical cross connect and optionally active electronics to amplify signal from customer – Ideally located nearby to school where “middle mile” condo fiber terminates – Last mile fiber cross connected to middle mile fiber through RPON etc

Customer owned is NOT a municipal network > Customer owned networks are often confused with many municipal or community network FTTH projects – Some cases this is true > Most municipal fiber projects such as Utopia, Grant county, etc are no different than telecom networks – As such are subject to the same problems as churn and price cutting by incumbents and others > Doubtful whether municipalities should be in the business of providing network services – However they can play a critical role in providing low cost access to support structures such as conduit and poles to enable customer owned networks – They can also be important anchor tenants, especially schools to help defray costs of “middle mile” of customer owned network

Future Smart Metering

Ottawa backbone condo fiber & Green Broadband pilot City Hall Level 3 SRDP backbone fiber Green Broadband Pilot