When carriers are not motivated to upgrade from copper to fiber upgrades, governments need to consider three main factors to guide the way forward, boost economic development, improve living standards, and transform industry.
HuaweiTech 2022 Issue 03
New infrastructure projects are critical not only to digital economic development but the national competitiveness. For fixed networks, swapping copper for fiber is both a necessary step and crucial for the transition towards green networks. For mobile networks, 5G's low latency and massive connectivity need the power provided by optical networks. However, these necessary upgrades are progressing more slowly in some countries and regions because carriers lack the motivation to swap copper for fiber. A way to resolve this is through government involvement and cross-industry collaboration.
The fixed network broadband market in most regions is expected to stay relatively static over the long term, with copper-to-fiber upgrades advancing very slowly. Carriers currently lack sufficient motivation to deploy optical networks due to three main factors.
The natural monopoly of fixed networks has resulted in a false balance between supply and demand. Since the 1990s, the global telecommunications industry has seen an upsurge in privatization, leading to the widespread belief that Western carriers are mostly privatized. However, other than carriers in the Americas, who are mostly privatized, nearly 50% of fixed-line and integrated tier-1 carriers in Europe and the rest of the world are still controlled by government. In a market where capital is dominant, state-controlled carriers can easily dominate or monopolize the market through inherited public assets, making it difficult for other players to compete at scale. Over time, this insufficient market competition leads to inefficient organizations, indirectly weakening network deployment capabilities.
The low return on investment typically seen with optical fiber also results in a lack of priority. While transmission over optical fiber is 10 to 100 times faster than over copper lines, new optical fiber deployment requires up to five times the investment of copper and yields a broadband service revenue increase of maybe 10%. In developed countries, carriers have used pricing to encourage and attract users to subscribe to all-optical home broadband services. French carriers set the prices of fiber-to-the-home (FTTH) packages and copper-line-based x digital subscriber line (xDSL) packages at similar levels. Spanish carriers also provide FTTH-based and ADSL-based home broadband packages at similar prices. This pricing strategy offers higher speed and quality for the same price, and provides higher-quality all-optical access to enhance user loyalty and keep churn rates low. In less developed countries and some developing countries, optical fiber deployment costs are directly reflected in carriers' package prices. For example, the initial cost of Gambian carriers' FTTH packages start at US$50 per month. This makes it harder for all-optical services to ramp up in countries with low per capita GDP. Because higher speeds don't bring in more revenue, higher quality doesn't lead to more users, and the fact that returns on copper-to-fiber investement is low, optical fiber deployment is not a natural priority in emerging markets.
A generational shift in technology cannot usually be driven by technological superiority or commercial forces alone. It typically also requires government intervention to be successful. The copper line industry is now mature. However, copper lines are being squeezed out in broadband applications and investments in many countries. Because mobile networks have outperformed fixed networks in coverage and penetration and perform similarly to fixed networks in terms of speeds and experience, many users are choosing Wireless-to-the-X (WTTx) solutions instead of Fiber-to-the-X (FTTx) solutions. In addition, governments are reallocating frequency bands to increase their revenues from auction fees, which naturally results in carrier investment plans that favor mobile networks. Without large-scale planning and deployment, ROI for all-optical network deployment takes longer, and technical superiority cannot effectively drive carrier decision-makers to make investment plans for all-optical access.
Current climate protection efforts mainly focus on strengthening regulations on power generation and other energy-intensive industries, while constraints on the ICT industry are still imposed on a voluntary basis. Carriers have kept a watchful eye on reducing carbon emission, but are not taking immediate action in this area because energy conservation in fixed networks is not urgently needed.
In 2022, the EU carbon price exceeded €70 per ton, while the carbon price in China reached 60 Chinese yuan (approx. US$8.95) per ton. Despite this, purchasing carbon emission allowances remains a good approach for carriers' green initiatives. Why? According to China Mobile's carbon peak and carbon-neutrality action plan, the carrier's total telecom service volume is expected to increase by 1.6 times by the end of the country's 14th Five-Year Plan, while its total expected carbon emissions will be limited to 56 million tons. In 2021, the carrier's revenue reached 848.3 billion Chinese yuan, capital expenditure (CAPEX) reached 183.6 billion, and net profits reached 116.1 billion. The cost of purchasing a large enough carbon emissions allowance to achieve carbon neutrality by 2025 would only take 1.83% of its CAPEX and 2.9% of its net profits. This expense is well within the carrier's means. Many carriers are committed to mid- and long-term energy transformations, but carbon reduction and energy conservation are not strong enough motivators to drive carriers to accelerate short-term investments or conduct large-scale copper replacement.
It is important for governments to see the strategic value of patience in this area and promote reasonably paced industry upgrades toward all-optical solutions. Governments must take into account the economic growth, social benefits, and industry development that such transformation would achieve, and increase investment to promote the deployment of fiber network infrastructure.
The digital economy is the way to the future. According to the Annual Report on China's Mobile Internet Development (2021), China's digital economy was worth 39.2 trillion Chinese yuan in 2020, accounting for 38.6% of GDP growth, with that figure growing by 9.6% annually. The digital economy is serving as a key driver of stable economic growth in China. The European Central Bank also states in the report The digital economy and the euro area that "digital adoption has increased notably since 2015", and "the Digital Economy and Society Index has risen from below 40 in 2015 to above 60 in 2020." In West European countries in particular, such as Germany, the ICT-related digital economy experienced rapid growth around 2016, faster than even real GDP growth. This increased government perceptions of the importance of the digital economy, and drove them to start planning and promoting the construction of digital infrastructure. International capital is also shifting from investment into tower construction to acquiring optical fiber assets. Many governments have also realized the importance of getting involved in digital infrastructure construction and driving capital investment.
Figure 1: Capital investment: International capital's acquisition of optical assets
The pandemic has dramatically changed the way people live. Applications such as distance education, telecommuting, and cloud-based travel are acting as catalysts for the digital and green transformation of society. This means digital infrastructure is needed for a resilient modern society. An independent report released in April 2020 by Assembly Consulting Group, a consulting firm commissioned by Huawei, put forward a quantitative estimation for the UK market, "The gigabit market in the UK will drive the digital economy to grow by US$51.3 billion by 2025, enabling millions of people to work at home, which is equivalent to reducing the energy consumption and emissions of traveling 3 billion kilometers by car." This reflects the social benefit that gigabit optical networks bring in terms of not just the digital economy, but also in reducing carbon emissions.
Market revitalization requires both capital and government involvement. When the former German chancellor Angela Merkel visited China in 2016, she proposed linking Germany's Industry 4.0 strategy with China's Made in China 2025 strategy. This promoted the importance of digital infrastructure, and increased government attention on the digital transformation of traditional industries and digital development of the ICT industry. Subsequently, many countries developed or accelerated the implementation of their own national ICT strategies. Individual nations across Europe and Africa, including France and Nigeria, have issued a range of national broadband deployment plans for their ICT industries to lead the way to the future. In addition, the cost of optical fibers and optical cables worldwide dropped sharply in 2019, and fiber deployment techniques, including micro-trenching, air blowing, and fiber splicing-free techniques, have become increasingly mature, which means all-optical infrastructure is becoming more popular than ever. This sharp reduction in fiber deployment costs also means that it is time for governments to get involved in the market to accelerate all-optical deployment and advance industry digitalization.
Figure 2: Changes of the optical fiber price in China (unit: CNY/core-kilometer)
We can look at how Western European countries typically use government power to accelerate all-optical deployment by turning to the example set by the UK's network development strategy. The UK launched its forward-looking broadband network deployment strategy, Building Digital UK (BDUK), in 2013. Early on, the government set a broadband rate target of 24 Mbit/s, upheld technology neutrality, and turned to copper-based, very-high-speed digital subscriber line 2 (VDSL2) technology to develop their broadband networks. However, in response to the new French government's decision to accelerate all-optical network deployment in 2017, the British government acknowledged the importance of optical fiber development by proposing the Local Full Fibre Networks Programme (LFFN) in 2018. At that time, LFFN only covered 13 pilot areas and did not promote full-scale deployment of fiber networks. In 2019, Prime Minister Boris Johnson raised an all-optical deployment proposal during his election campaign. After taking office, he and the new cabinet started planning all-optical development policies and launched Project Gigabit in March 2021. Through Project Gigabit, the government will invest £5 billion to drive private investment of £12 billion from carriers and ensure at least 85% of gigabit coverage is based on fiber access throughout the UK by 2025. It is clear that government involvement was the biggest driver of the copper-to-fiber upgrade in this case.
