Earlier this week I spoke with a colleague who is in charge of providing debt to TMT companies worldwide. FTTH was the main topic.
It was enlightning to notice how much aversion there is in the market against government funding - to any degree. My colleague holds that, after the telco sector was privatized and liberalized, the last thing we should want should be a return of government bodies (‘tax payers’ money’), to the market.
More fundamentelly, he clearly sees the technical benefits of FTTH but believes consumers are solely interested in price and couldn’t care less about bandwidth claims. ‘Timing is everything’, and this is simply not yet the time for large-scale FTTH roll-outs, he contends.
So here is a reality check if I’ve ever seen one.
Still, I think there are largely two reasons for holding a different view on FTTH and munifiber.
First, debt investors have a very short-term focus. Interest payments have to start within a couple of months, so there is no patience for long-term views and lofty strategies. In this respect, telco managers obviously are incentivised in the same way, having to deliver each and every quarter.
If you are building for the future and try to leapfrog cable networks, there is no way you can turn cashflow positive within a few months.
Second, I think there is a whole new dynamic in the markt: governments vying for their share of the world’s GDP growth. Market leading countries, including emerging markets without legacy infrastructure, force established markets into considering FTTH to drive economic growth. Build-out takes years, and in the meantime congestion of the freeway system eats away at GDP growth. Hence the need for a long-term view.
Free markets may provide us with FTTH in the long term, but since telco managers (and debt investors) have a short term focus, government interference could help break the stalemate. Earlier this week I also spoke with a friend at a leading trade journal. He suggested that government interference can take several forms, ranging from PPPs to subsidies or tiered regulation (to bridge the digital divide).
Further, the European Union sets the terms for government participation (MEIP). Nuenen, a small town in the Netherlands, has often been quoted as a prime example of successful government interference in FTTH. It is only fair to stress that the 90% take-up rate was due to getting the service for free for a year. An offer nobody could refuse. However, to say that this is throwing away 800 EUR/sub of tax payer’s money is not completely fair, I believe. Any commercial company could have opted for this sort of aggressive promotion. It may fit very well within a sound business plan – one with a long term focus.
To round off, there are a few more hurdles for telcos to take the big leap to FTTH. First, absolute size (multi billion euros). Second, limited infrastructure-based competition and a high barrier to entry (i.e. limited competitive need). Third, I strongly believe FTTH (the physical layer) is a natural monopoly. This implies open access and the possible need for regulation, things that telcos by nature dislike.