DSL Deployment Analysis of RBOCs and Independent LECs in Metropolitan and Rural Areas – Q4 2001

Introduction

To better understand the forces driving DSL deployment, especially with regards to the FCC’s proposed deregulation of broadband services, Pinkham Group has assembled this detailed analysis of DSL coverage for all incumbent local exchange carriers through Q4 2001. This report was not commissioned, funded, or requested by any third party, but rather an independent attempt to add clarity to the debate over whether or not decreased regulation of the Regional Bell Operating Companies (RBOCs) is needed to promote the rural deployment of broadband services within the United States.

The purpose of this report is to provide insight into how each LEC has addressed the burgeoning demand for broadband services based on analysis of central office level demographics and DSL deployment patterns. Using a variety of mapping tools, and Census data, Pinkham Group derived the household coverage of each U.S. central office, in order to determine how many homes are served by DSL deployed central offices (CO’s); how many homes are within range of DSL service; and how many homes are not yet covered. Data on central office deployment was derived from publicly available sources, and direct provider inquiries. Of the total 20,000 central offices providing local exchange services in the US, Pinkham Group was able to obtain specific DSL deployment data on CO’s serving over 99.5% of all U.S. households.

Background

In marketing and deploying broadband services, the RBOCs contend that they are at a distinct disadvantage to their primary competitors, cable TV operators, who offer high-speed Internet service via cable modems. In lobbying the FCC and Congress, the RBOCs argue that broadband Internet access cannot be offered more widely without regulatory relief. More specifically, the RBOCs have generally maintained that they are unable to profitably deploy DSL beyond their current availability footprint due to the high cost of compliance with FCC regulations mandating competitive access.

From a regulatory standpoint, cable operators are still treated primarily as television broadcasters, even though they offer the very same telephony services, as do the RBOCs. Unlike the RBOCs, however, cable operators are not required to provide similar competitive network access, and clearly benefit from the current regulatory mismatch. In order to provide a more level playing field, and to spur DSL deployment in the yet unserved areas, the RBOCs propose that less regulation is needed. More specifically, they have argued that unless they are allowed to substantially restrict competitive access to their broadband infrastructure, further investment in this area is not financially viable.

The entire issue of deregulation has generated tremendous debate in political, regulatory and technical arenas. Discussions specific to the impact of deregulation on broadband deployment are often based on vague or inaccurate deployment data, further confusing relevant issues. In an attempt to clarify the key mechanics driving deployment, this paper provides actual deployment statistics of the major Telcos with respect to demographics and geography.

The Methodology

The analysis is designed to identify how similar market opportunities have been addressed by RBOCs verses Independent LECs. The underlying assumption is that the decision to deploy DSL services in a given central office is driven primarily by the market opportunity for broadband service (i.e. the number of potential customers). In examining DSL deployment over the entire United States, we can develop a statistically meaningful picture of how each of the Telcos has addressed broadband overage. Where the RBOCs argue that DSL services cannot be offered profitably beyond their current coverage areas, we would expect to see a similar pattern in DSL deployment by the independent LECs.

The paper provides a comparison of DSL deployment of the RBOCs verses the independent local exchange carriers (LECs), using the following criteria:

• Total households covered
• Household density at the central office level
• Household income at the central office level
• Household coverage based on distance to the central office
• Coverage of “rural” verses “metropolitan” geographies

Findings

As of the Dec 2001, DSL services were offered in central offices servicing 77% of all U.S. households. The table below provides the summary data:

National DSL Deployment as of Q4 2001

Summary Statistics

	Total Coverage	DSL Coverage*	No Coverage
Households Served (M)	100.8	77.3	23.5
Central Offices	19,633	6,828	12,805
Avg Hhld Income ($K)**	$ 54.6	$ 57.9	$ 43.6
Avg Hhld Density per CO***	5,136	11,327	1,835
* gross households - not adjusted for DSL distance limitations
** based on 1998 Census estimates
*** the number of homes per CO

Looking at deployment from a top-level perspective, an observer might draw the following set of impressions:

1. DSL is widely deployed; available to over three quarters of U.S. homes.
2. The Telcos have targeted DSL deployment in the larger central offices (typically in metropolitan areas) as opposed to the rural areas where there are fewer households per CO. As this trend continues, the metropolitan areas will eventually have 100% availability in metropolitan areas, while rural America will have scant coverage.
3. DSL is availability is strongly biased towards high-income households, indicating that the Telcos are deliberately leaving lower income areas undeployed.

4. Due to the high costs associated with DSL deployment, and the high number of COs yet to be deployed, a reduction in RBOC regulation may be needed to promote wider broadband availability.

These observations, however, are in fact poorly supported by the underlying data. The U.S. telecom market is extremely diverse. Over 900 incumbent telephone companies provide local phone service, each with unique coverage areas, and deployment strategies. To understand the issues impacting DSL deployment, top-level data is unfortunately of little value. Accurate assessment must be based on coverage analysis at the central office level. Only CO-level data makes it possible to compare DSL availability among the various Telcos. Using this methodology, a very different set of observations can be made.

1. DSL is not widely available. Less than half of American households, possibly as low as 40% - 45%, are able to obtain service due to technical limitations of the currently deployed technology. Reports issued by various research houses that indicate DSL is available to over 70% of U.S. homes are categorically wrong, and have not considered DSL’s technical limitations.
2. The Telcos do not appear to direct deployment based on any “rural versus metropolitan” type of assessment. The decision of whether or not to deploy DSL in a given central office is primarily based on an assessment of homes per CO (household density), with the largest and most dense COs being deployed first. A comparison of the CO deployment among the various Telcos consistently shows that the largest COs are deployed first. There is, however, a tremendous difference in how aggressive the various Telcos have been in deploying medium to small sized COs. The independent Telcos have pushed DSL coverage into many rural areas served by very small COs, in stark contrast to the far more conservative deployment patterns of the RBOCs.
3. DSL deployment to date is not targeted substantially (if at all) by household income levels, but rather by central office size. Household income is very closely correlated to the CO size. In prioritizing deployment based on CO size the Telcos also cover the higher income households. In fact, due to reach limitations of DSL technology, the Telcos are currently unable to serve many of the highest income households.
4. The idea that further deregulation of the RBOC will spur DSL deployment in the yet unserved areas, is not supported by the deployment data. In fact, with regard to rural coverage, RBOC deregulation would likely have the exact opposite effect. The extent of rural coverage among the vast majority of Telcos, suggests that DSL deployment is profitable even in lightly populated areas. A comparison of deployment patterns indicates that the DSL investment criteria used by the RBOCs is significantly different than that of the independent Telcos. BellSouth alone among the RBOC to deploy DSL in an aggressive manner similar to the Independents. BellSouth’s DSL rollout suggests that broad RBOC deployment is viable in the current regulatory environment.

To better understand how these observations are supported by the underlying data, this white paper evaluates DSL deployment from a number of perspectives:

• The technical and distance limitations of current technology.
• The effect of distance on household income demographics.
• Differences in metropolitan verses rural coverage statistics.
• Differences in RBOC infrastructure verses that of the independent Telcos.

The Technical and Distance limitations of DSL technology:

Unlike standard dial tone services, DSL services are distance limited, and typically available to only those homes served by copper circuits under 18,000 feet in length. The percentage of homes within DSL range varies by central office, and can range from under 50% for some rural COs to as much as 100% for some urban COs. Using mapping software and census demographic data, we calculate that on average, only two-thirds of the homes served by a deployed CO are actually within DSL range. For households which lay beyond the 18,000-foot threshold, a variety of long-reach DSL solutions are possible, but few Telcos have chosen to invest in this type of equipment. For this analysis, we have estimated both the “in-range” (under 18K circuit ft), and “long-reach” (over 18K circuit ft) households.

While distance to the CO is the primary factor affecting household availability, several other variables, such as circuit quality, special electronics, and the presence of remote terminals or digital loop carriers (DLCs) are also important. Not all homes within the 18K circuit foot range can be qualified for service due to these technical issues. Only the Telcos have the data on the actual number of homes impacted by such factors, and have never made this data publicly available. For the purposes of this analysis we have not attempted to adjust the number of in-range homes based on these technical factors. Based on experience obtained in designing and testing DSL qualification engines over the past three years, however, we estimate that between 10% - 20% of homes within 18K ft circuit distance to the CO are technically unable to obtain DSL service because of line impairments and other engineering issues.

As of Q4 2001 the national breakdown of homes served is illustrated in the following chart.

As the chart shows, there are more homes currently unable to receive DSL service because of distance limitations, than there are homes unable to receive DSL because they are served by an undeployed central office. When you consider that only 50% of the homes in undeployed areas are actually within DSL range, you begin to understand why many Telcos are more focused on solving the “long-reach” problem, than on deploying DSL in their smaller COs. Based on current deployment, an effective long-reach DSL solution would allow the Telcos to market DSL to twice as many homes than they could otherwise reach by deploying the rest of their COs.

As the pie chart illustrates, there are actually two distinct sets of unserved households; those not served by a DSL-deployed central office, and those served by a deployed CO, but are so far from the CO that a long-reach DSL solution is necessary. While long-reach DSL is technically possible today using a variety of approaches, the fact remains that it is not broadly deployed today due to its higher cost and complexity. Several RBOCs have attempted to offer long-reach DSL, but to date, BellSouth is the only RBOC to widely offer these services within its coverage areas. Qwest and SBC offer long-reach solutions in limited areas, while Verizon has no long-reach solution. While beyond the scope of this white paper, our assessment of currently available long-reach products does not find any to be a viable long-term solution for the Telcos. As technologies develop and new broadband revenue opportunities immerge, the economics of long-reach DSL will improve. But until then, DSL will not be an option for most households beyond 18K feet from the CO.

The Effect of Distance on Household Income

In order to better appreciate the impact of the DSL reach limitation, consider how household income varies among the served and unserved areas.

Household Income and DSL Deployment as of Q4 2001

		Overall U.S. Avg.	DSL Coverage			No Coverage
			Total	In-Range	Long-Reach
	Avg. Hhld Income ($K)*	$ 54.6	$ 57.9	$ 56.0	$ 61.8	$ 43.6
** based on 1998 Census estimates

Household income levels are significantly higher for long-reach homes. The higher income homes are typically located outside of the downtown areas (where the central office is located), and beyond the range of DSL services. Herein lies another crucial dynamic that has polarized both the pro and anti deregulation lobbies: these high-income homes are also targeted cable TV operators offering both high-speed Internet and telephony services. In serving these households, the MSOs (Multiple System Operators) often have a substantial advantage over the Telcos. Over the past five years, the MSOs have been upgrading much of their cable plant to support digital video, telephony and cable modem services. Because cable-based services are not distance sensitive, the MSOs can already offer high-speed service to many of the homes beyond the reach of DSL.

Partially due to the difficulty in accurately determining how many homes are affect by distance and other technical DSL limitations, and partially due to keep this type of information proprietary, the Telcos do not generally disclose how many of their DSL unserved homes fall into the “long-range” category and how many homes are unserved because their CO has not been equipped for DSL. As a result, the category of “unserved homes” is often misinterpreted as referring to only those homes not served by a deployed CO. This category actually includes both the high-income suburban homes, as well as lower income rural homes. Not only do the two groups of unserved homes differ in terms of demographics, but also in their competitive environment and revenue opportunities for the Telcos. The two populations are so dissimilar that Federal policy designed to spur broad DSL deployment would need to address each separately.

Rural verses Metropolitan Coverage

Another of the major factors impacting DSL deployment is tied to this country’s geography. The U.S. population is highly centralized in metropolitan areas covering just 20% of the country’s area. Over 80% of U.S. households fall within Metropolitan Statistical Areas (MSA’s), which are boundaries used by the Government in measuring and reporting economic activity. Much of the current regulatory discussions in Washington have focused on the disparity of DSL availability in rural verses metropolitan areas. Policy maker’s fear that Telcos in general, and RBOCs in particular, may not invest adequately in rural broadband infrastructure unless special inducements or regulations are enacted. Here again, much of this discussion has lacked reference to specific deployment data.

This analysis segregates central offices into rural and metropolitan categories in order to look more closely at the mechanics behind deployment. Where the majority of households for a central office fall inside MSA boundaries, it is classified as “metropolitan”; otherwise it is classified as “rural”.

National Telephone Infrastructure - Q4 2001

Metropolitan versus Rural Coverage

	Total U.S. Coverage	Metropolitan Coverage	Rural Coverage
Households Served (M)	100.8	79.8	21.1
Central Offices	19,633	8,303	11,330
Avg Hhld Density per CO	5,136	9,605	1,860
Avg Hhld Income ($K)	$ 54.6	$ 58.6	$ 39.4

As the demographic data in this table indicates, metropolitan DSL deployment is more attractive for several reasons. First of all, metropolitan COs service more homes than their rural counterparts. Secondly, metropolitan COs tend to cover smaller geographic areas, placing a much higher percentage of homes within DSL service range. The average household income also tends to be higher in Metropolitan areas. As a result, Telcos have tremendous incentive to deployed DSL service in cities first as opposed to rural areas.

The rural central offices tend to have very low household densities by comparison. Consider the fact that 10% of all U.S. homes fall under the combined coverage of fully two-thirds of all central offices. Over 7,500 of these COs serve less than 1,000 homes apiece, while metropolitan COs typically serve ten times that amount.

Not surprisingly, a comparison of DSL deployment in the two areas (below) shows that metropolitan households are much better covered, with nearly 90% served by a DSL deployed CO.

National DSL Deployment as of Q4 2001

Comparison of Households coverage in Metropolitan versus Rural Areas

	DSL-Deployed		Non-Deployed
	Hhlds*	% of Total	Hhlds	% of Total
Metropolitan	69.2	87%	10.5	13%
Rural	8.1	39%	13.0	61%
* gross households - not adjusted for DSL distance limitations

What is most striking, however, is not that the metropolitan areas are better deployed, but that the rural areas are deployed to the extent that they are. In comparing the average household densities of deployed COs, we find that the rural COs on average serve only 3,400 homes, compared to 15,600 homes per CO in metropolitan areas.

Using the number of potential customers as a simple gauge, the typically deployed rural CO has less that a quarter of the revenue potential of a metropolitan CO. Yet despite this apparent drawback, rural deployment progresses at a rapid pace, even while metropolitan deployment has stalled. Rural homes account for only 10% of those with DSL availability, but rural COs account for 36% of the total deployed COs.

To understand dynamics behind rural deployment we need to look more closely at which Telcos are deploying, and which are not. A good starting place is to compare the DSL deployment of RBOCs verses Independent Telcos.

RBOC verses Independent LEC Coverage

The four RBOCs operate over 50% of all COs, and service over 86% of U.S. households. Coverage of the remaining households is divided among over 900 independent telephone companies, many of which operate only a handful of central offices. The breakdown of national coverage between RBOCs and independents shows how greatly they differ.

Comparison of Coverage

RBOCs versus Independent Telcos

	Total U.S. Coverage	RBOC Coverage	Independent Coverage
Households Served (M)	100.8	86.4	14.4
Central Offices	19,633	10,834	8,799
Avg Hhld Density per CO	5,136	7,974	1,641
Avg Hhld Income ($K)	$ 54.6	$ 56.2	$ 44.5

In addition to their tremendous advantage in total homes served, the RBOCs also benefit from serving the areas of highest household densities and income. These factors combined give the RBOCs far greater revenue opportunities than the Independents. In looking at the relationship between DSL deployment and CO household densities, the RBOCs advantage is clear. They have the ability to amortize their CO investments against a potential market many times the size of the Independents.

When we compare RBOC and Independent coverages in rural and metropolitan areas (below) we see that the RBOCs have broader DSL deployment on both an absolute and a relative basis.

Metropolitan Coverage Comparison
	Total Coverage		% DSL Deployed
	Households	COs	Households*