Optical fiber networks have replaced copper cables in large parts of the core network, but up to now optical fibers have not been widely available in the local loop. Optical fibers are today not more expensive than copper cables, but as with copper cables, laying the fibers underground constitutes a substantial part of the costs. Therefore, the replacement of copper-based cables with fibers is a costly affair. In addition to this, the end equipment converting optical signal to electrical signals and vice versa is also expensive.
Deployment costs including components, civil works and installation have in Europe decreased from 1250-1500€ per connection in 2001 to 600-800€ in 2006 . The most expensive component is labor costs related to laying down fibers. This component will be far cheaper in countries with low unit costs for labor.
Due to the very high capacity, the unit costs per bit are very low, and much lower than in copper lines and in wireless systems. Optical fibers have first been installed in the core network. This has reduced the costs of long distance communication to less than 1% of the former costs per traffic unit. This indicates that the costs of fixed network services are concentrated in the local loop and convergence between the costs of local and long distance communication.
Incumbent operators are gradually replacing their copper lines with optical fibers, beginning with the trunk network and gradually approaching customer premises. However, other types of telecom operator are also installing optical fibers, particularly in the core network.
It is also common to install fibers in connection with construction work related to other network infrastructures such as electricity, water and gas. In contrast to network cables made of copper, optical fibers can be integrated in power cables, as the transmission of electricity power does not interfere with the light signals in the optical fibers. Public utility providers, in particular power companies, will therefore become new actors on the market for provision of communication network facilities (see practice note on NESA).
As the fibers themselves constitute only a small fraction of the total costs, it is common to lay down many more fibers than necessary when an optical network is constructed. These fibers will not be connected to the network and no transmission equipment will be installed in the end of the fibers. This implies that once optical fibers have been installed, it will be possible to upgrade capacity. As the maximum capacity per fiber increases constantly, it is unlikely that additional cables will be needed in the foreseeable future.
It follows that the installation of an optical fiber network involves substantial long-term fixed costs, and that there are very high levels of economies of scale and scope. However, the costs of end equipment are to a large extent variable, as the costs of transmitters, converters etc. depend on the capacity.
The wide availability of dark fibers has created a market for such facilities (see practise note What is a dark fibre?). It is therefore in certain areas possible to buy or lease fiber facilities. As the additional costs of upgrading existing dark fibers to a working communication network are much lower than building a new network, it becomes possible for new entrants to establish their own networks at very competitive prices.
This is however possible only at destinations where fibers are readily available. Therefore, the economics of fibers imply that unit costs highly depend on the supply of fiber capacity. Transmissions between major destinations, such the metropolises of Western Europe and the US may be far cheaper than connecting two small neighboring cities. A study of the European market for broadband connections shows prices which are largely independent on distance but highly dependent of the level of competition. The price for a fiber broadband connection in the most expensive monopoly markets were up to 39 times the price in the most competitive markets.
In conclusion, the techno-economic characteristics of optical fibers imply an increasing price gap between major routes and less developed areas. This trend is exacerbated by the supply of dark fibers offered at very competitive prices, not even covering investment costs.