CenturyLink gets aggressive with FTTH, but cable retains upper hand in sub-10 Mbps markets

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Sean BuckleyCenturyLink (NYSE: CTL) is seeing its FTTH rollout in 16 markets helping create awareness for its broader broadband portfolio, enabling it to take share and win back share from cable.

In the markets where CenturyLink offers 1 Gbps FTTH, it is no surprise that the service provider isn't seeing every user taking up service since most users don't need that much bandwidth.

Instead, customers are purchasing other speeds like its 20, 40, 80 Mbps tiers where it has built out a fiber-to-the-node (FTTN) architecture that shortens copper loop lengths reaching customers. The presence of a 1 Gbps product is showing customers that it can deliver a number of tiers that maybe it had not aggressively market.

Stewart Ewing, CFO of CenturyLink, told investors during the recent Citi 2016 Global Internet, Media & Telecommunications Conference that this phenomenon happened in Omaha, Neb., one of the first markets where it rolled out 1 Gbps services to about 45,000 homes.

"When customers called and weren't in the fiber footprint and realize they could get 20 Mbps or 40 Mbps and when they did they were willing to switch," Ewing said.

Ewing added that "we need to do a better marketing to these customers."

CenturyLink set an ambitious goal to bring its FTTH services to 700,000 homes by the end of 2015. The service provider will likely provide guidance on the progress it made in reaching FTTH buildout goals during its upcoming fourth quarter earnings call in February. It also accepted $500 million in the second phase of the FCC's Connect America Fund (CAF-II) to extend up to 10 Mbps broadband service in rural areas.

Still, like its ILEC counterparts AT&T (NYSE: T) and Verizon (NYSE: VZ), the issue is how it will overcome customer defections in areas where it can deliver only 10 Mbps and lower. The service provider admits that it faces challenges in the markets, particularly if a cable provider is present -- it sees a lot of defection to cable.

This plays to the bigger issue and opportunity for CenturyLink.

Cable operators like Comcast (NASDAQ: CMCSA), Cox and even regional providers like Grande are complementing their 1 Gbps rollouts with various speed tiers of 50 Mbps up to 400 Mbps and related price discounts in their respective markets.

One near-term advantage cable does have in markets where CenturyLink does not have fiber is that they can use their existing hybrid fiber coax (HFC) plans to deliver higher speeds on legacy networks and eventually 1 Gbps, leveraging emerging DOCSIS 3.1 technology. Having a technology that enables cable to deliver higher speed services in tandem with FTTH deployments will give cable an even larger upper hand in markets where CenturyLink does not deliver FTTH service.

While it has not revealed any specific plans or trials yet, CenturyLink could tap into various emerging technologies such as VDSL2 with bonding and vectoring as well as emerging methods like G.fast, which claim to theoretically deliver up to 500 Mbps and beyond in short distances.

Already, it is making the move to deliver higher copper-based speeds in its Salt Lake City market where it currently offers a 100 Mbps option, for example. It said that based on how the service performs there it will consider a broader rollout. Being a copper-based technology, the amount of homes that can be served by served by a 100 Mbps service depends on the distance each home is from the nearest CO or Remote Terminal (RT).

Regardless of the challenges of the limitations, CenturyLink has to continue to find ways to stem the broadband subscriber bleeding.

Consider the fact that in the third quarter, CenturyLink lost 37,000 broadband subscribers. To be fair, a large majority of the losses were related to a new credit policy it put in place to weed out customers who were not paying their bills and cancelling service.

The service provider maintains that this move, while impacting its subscriber numbers in the near-term, will enable it to reduce future broadband churn.

However, the top telcos overall lost a total of 140,000 broadband subscribers in the third quarter of 2015, according to a recent Leichtman Research Group (LRG) report. This was down from the 110,000 subs that telcos gained in the fourth quarter of 2014. Cable, by contrast, added nearly 2.3 million subscribers during the same period.

In order to help stem these ongoing losses CenturyLink and other traditional telcos will have to find ways to more aggressively look for opportunities to attract new customers and potentially lure new customers that may not need 1 Gbps or even 100 Mbps, but want a 20, 40 or 50 Mbps connection.

As the telecom industry begins its fourth quarter earnings reporting season, it will interesting to see what progress CenturyLink made with its FTTH rollout and if it was able to start righting the broadband subscriber ship.--Sean