How US fiber-to-the-home providers can navigate an evolving market

In a highly competitive market, fiber-to-the-home (FTTH) providers need to build intentionally and deliver dependable, value-focused service.

In brief

• The adoption case for FTTH remains strong. Consumers recognize FTTH offers fast, reliable service to meet growing bandwidth needs.
• FTTH opportunities could lie in lower-density areas, but providers must be careful when selecting expansion markets.
• Transparent pricing, service quality and value-added service bundling can serve as key differentiators.

As global connectivity expands, consumer demand for high-speed, reliable internet is escalating exponentially. Fiber-to-the-home (FTTH) network providers and digital infrastructure investors have responded to consumer demand with rapid deployment growth.

As of the end of 2024, nearly 80 million US homes had access to fiber – more than half of residences in the country – up from approximately 60 million in 2022.1 The drive for fiber has been accelerated, in part, by government subsidies, such as the $42b of Broadband Equity, Access and Deployment (BEAD) funding set aside to improve the US’s broadband internet infrastructure.

However, with FTTH competition intensifying, infrastructure costs climbing and consumers demanding both speed and affordability, fiber providers need to be creative in how they capture their share of the FTTH prize.

Consumer demand and better performance drive a strong adoption case for FTTH

Over the last five years, US customer consumption of broadband has grown 20% year-over-year (YOY), driven by the proliferation of video and audio content streaming, 4K content demand and remote work, especially during the COVID-19 pandemic.

With urban and dense suburban areas becoming increasingly competitive, fiber builds have gradually shifted to less dense regions, such as the outer suburbs or “dense rural” towns. An estimated 46% of new FTTH builds in 2024 were in lower density suburban and rural areas where there are fewer than 60 homes per road mile, up from 35% in 2023.

The shrinking development landscape means the risk of overbuilding has increased significantly in many of the denser areas. According to the Federal Communications Commission’s (FCC) US Communications Marketplace Report, in 2022, roughly 4% of US homes had access to two or more FTTH options: typically, incumbent local exchange carrier (ILEC) fiber. In 2023, the number rose to approximately 7% of US homes, a near doubling in FTTH versus FTTH provider competition.

Given that most of the large metropolitan areas of the US have heavy FTTH coverage, new opportunities are increasingly adjacent to existing fiber deployments. We estimate that nearly 60% of attractive remaining build opportunity lies in markets with over 50% existing fiber coverage, up from 38% in 2022. Multiple operators will likely chase these adjacent opportunities, further increasing the risk of overbuild in denser areas.

2. Labor cost increases and higher build costs are negatively impacting returns

Although labor and materials constraints have eased since the acute COVID-19-era shortages, per unit build costs have continued to increase steadily. In the Fiber Broadband Association’s 2024 Fiber Deployment Cost Survey, median reported cost per foot for fiber builds increased by approximately 6% (equal-weighting aerial versus buried reported costs). The majority of surveyed operators (55%) expect deployment costs to continue increasing in 2025.

We expect sustained near-term deployment cost increases with continued nationwide builds and BEAD deployments getting underway.

3. Higher interest rates are impacting required FTTH return hurdles

Interest rates have pushed the cost of capital up. As a result, many of the FTTH opportunities that were attractive in 2022 are no longer viable. We estimate that FTTH build return minimums have risen from 8% to 10% between 2021 and 2022, to 12% to 15% today, largely due to interest rate shifts as well as the risk of competitive overbuild.

While recent competitive builds have had the largest impact on remaining expansion areas, we estimate build cost increases and interest rate shifts have reduced FTTH expansion opportunities by a combined 6 million units since 2022.

Definitional notes on Yield and TAM estimates:

• TAM defined as high-yielding potential future fiber builds into current non-fiber whitespace (12%+ yield for 2024 TAM estimates).
• “Yield” defined as future gross margin (product of penetration, Annual Revenue Per User [ARPU] and variable costs) divided by build capex and success-based costs to reach stabilized penetration over five years:

• TAM estimates exclude all units already serviced by more than two fast wireline providers (FTTH + cable, FTTH + FTTH, etc.). There are additional units at theoretically attractive yields in these competitive areas. TAM estimates are also non-subsidized, i.e., exclude impact of potential BEAD funding on build economics.

As competition in the US broadband market intensifies, consumers are increasingly value-focused and bundle-conscious

In the EY Global Digital Home Study Report 2024, transparent pricing or pricing promises were the most important criterion in selecting an internet provider, outside of guaranteed speed. Customers have been particularly frustrated by perceived “bait-and-switch” tactics by providers, whereby customers commit to a two-year contract for internet services at one price only to see the price increase three or six months later.

The EY Global Digital Home Study Report 2024 also finds that six out of 10 consumer respondents report being concerned about their broadband provider raising their monthly price, and social media threads are filled with rants about what they see as deceptive pricing strategies.

More than ranting, however, a sizeable number of respondents say they are prepared to back their talk by walking. Nearly 40% of respondents say they’re willing to drop fixed broadband in favor of wireless options (mobile or fixed wireless), with cost as the primary driver for switching.

While cost and convenience are cited by 60% of respondents as benefits of bundling, consumer respondents are not purely cost-focused. One third or more are willing to pay a premium for bundled value-add services. For example, 38% say they’d be willing to pay more for broadband if they also received privacy, security and wellbeing features. Meanwhile, 37% say that they’d be willing to pay more for broadband in return for good customer service.

Three actions to help FTTH providers succeed in today’s evolving market

While the adoption case for FTTH remains strong, there are three actions providers can take that can help them stand out and realize value for customers and shareholders:

1. Focus on intentional market selection

When targeting dense suburban and urban areas for FTTH expansion, focus on intentional market selection that balances competitive risks and considers historical sales effectiveness in various competitive environments. Once markets are selected, FTTH providers will want to track and improve speed-to-market to maximize competitive advantage.

Dense suburban and urban FTTH builds can offer high returns, but only when penetration and ARPU targets are met. Consider an intentional market targeting plan that carefully forecasts performance versus current and potential future competitors in each market, accounting for known historical metrics in various competitive environments.

Detailed sales effectiveness tracking systems can help operators make more informed decisions against historical performance at granular geographic and competitive levels. Once markets are selected, FTTH providers will want to use operational metrics to measure deployment progress, installation times, and service and network quality, which can help to optimize buildouts for speed and efficiency, and lower times from market selection to credible expansion.

2. Target less dense areas using a balanced portfolio approach that reduces competitive risk

Reduce competitive risk by targeting suburban and “dense rural” areas in a balanced portfolio approach, augmented by subsidies. FTTH providers will want to consider the value trade-off between penetration and ARPU volatility, and up-front build capital expenditure in crafting an optimal market expansion plan.

FTTH providers will also want to be deliberate about developing a balanced strategy that prioritizes durability, in the form of sustainable long-term penetration and ARPU growth. Lower-risk rural markets are potentially more capital-intensive but offer more secure long-term outcomes. The higher costs in these markets may be offset by subsidies. FTTH providers should consider leveraging subsidies on offer through the American Rescue Plan’s Capital Projects Fund and the Infrastructure Investment and Jobs Act (IIJA), all of which provide funds to deliver high-speed internet to underserved communities.

3. Be transparent and value-focused in pricing connectivity offers, while considering bundled options and premium offers to drive adoption and ARPUs

Transparency and guaranteed pricing through a fixed contract term can go a long way in building trust and brand loyalty. For the cost-conscious consumer, offer competitively and transparently priced high-bandwidth services that stand out from competitors’ promotional offers. For consumers focused on value-for-money, consider premium services (e.g., privacy and security features) to drive differentiation, ARPU uplift and churn reductions.

Whether offering pure fiber connectivity or a suite of value-added services, such as mobile or streaming, customer service quality remains a proven differentiator.