Wednesday, October 31, 2007
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.
Tuesday, October 30, 2007
Looking at the technicalities, we have seen several interesting developments recently:
- Standard: The ITU approves the standard as 3G.
- Handover: Datang (a TD-SCDMA vendor) challenges the ITU decision, pointing to the lack of handover capabilities. Interestingly, Alcatel-Lucent and Onemax just demonstrated seamless 16e handover in the Dominican Republic, a 'world's first'.
- Interference: Reports out of Australia over satellite interference. Interesting to see how this develops.
Tuesday, October 16, 2007
(All fine and dandy, but I was reminded of a recent Greenspan quote: "It is not yet settled, although I guess it should be by now, that human beings are not significantly more perfectable than we are." Still, I strongly believe in the benefits of FTTH.)
Keep in mind however that New Zealand is not your typical place:
- Remote. It faces the risk of talented young people leaving the country. Also, it is very much reliant on the Southern Cross Cable (connecting it to Australia and the US), which needs an upgrade.
- Thinly populated. Projections are that even by 2018, 'just' 75% of the people will be covered by FTTH.
- Beautiful countriside! It tries to attract investments from the digital media industry specifically. Think 'Lord of the Rings' or 'Chronicles of Narnia'. One quote from the document: "It was cheaper for us to fly the data [to LA] than it was to send it over the network" (page 22).
The benefits are derived from enhanced productivity and growth, but also from opportunities in the 'weightless economy' ("a New Zealand Skype").
"Bandwidth demand has followed Moore's Law - roughly doubling every 18 months."
To capture the economic value, New Zealand needs to "cross the DSL wall to fibre".
Build-out should start by mid 2008. There is no mention of VDSL, so I suppose the institute recommends moving fast, and skipping the VDSL stage.
A hugely interesting topic. I will try to write a follow-up at some point. Let me just list some of the companies that are involved. Obviously, the market has many participants:
- Telcos: KPN has e-zorg, BT is building a network.
- B2B Media: Wolters Kluwer and Reed Elsevier publish research articles and journals and operate portals. Elsevier Science recently changed the business model to its oncology efforts: it is moving from subsciptions to a free + ads model.
- Internet verticals: ranging from Elsevier's Oncology portal to WebMD and RevolutionHealth and from Microsoft's HealthVault and Google Health ('Project Weaver')to the Sermo social network for physicians.
- Pharma: Pfizer is now working with Sermo.
Several countries (Poland, Italy, Australia), operators (Telecom New Zealand, TeliaSonera, eircom and of course BT) and the EC seem to be moving in that direction.
Here are the external forces driving or slowing down the movement. They differ from country to country, but the end-game is the same everywhere (FTTH), so separation will happen - sooner or later.
- Cable competition (i.e. inter market): forestalls separation. Sufficient BB market competition was a reason for OPTA to say that KPN needn't be separated (aside from OPTA not having the legal means to enforce it).
- Intra market competition: drives separation. BT is a prime example. The creation of Openreach kickstarted LLU.
- Wholesale offers: forestall separation. Here KPN is the perfect example. Moving from LLU (with fiber to the MDF locations) to SLU (with fiber to the cabinet), it managed to agree on MoUs with the nations largest unbundlers (Tele2/Versatel, TI's bbned and DT's Orange). In other words, no need to kickstart SLU by separating KPN.
- FTTH: drives separation. As this is the end-game, separation I believe is inevitable.
Here is my view of the future:
Nobody wants two FTTH networks, even duct sharing isn't sufficient. KPN resorts to being a service provider in Almere on the Reggefiber network, and UPC will be marginalized unless it follows KPN. The physical layer (the fiber) will be a monopolist utility. It will need to be regulated only once service providers start complaining over rates or services.
Thursday, October 11, 2007
Here are the possible outcomes I envision:
- Hang on to it. T-Mobile could kick-off a major strategy shift, away from being a mobile pure-play and go the way of Orange and Vodafone. Not impossible, but highly unlikely, I believe.
- Sell it to KPN or Vodafone. That's a double no. KPN has reached the limits of its market share, and Vodafone has just launched a complicated resale arrangement with the former Tiscali NL (now part of KPN). Also, T-Mobile wouldn't want to strengthen a competitor!
- Sell it to another unbundler, i.e. Tele2 or Telecom Italia's bbned. Why not. In time, it could be a way for cooperation between T-Mobile and the buyer of the Orange BB unit. Also, Tele2 is selling lots of assets (Denmark, Portugal, Hungary, Italy, Spain, Austria), and in the meantime focuses on other regions (Scandinavia, Baltics, Russia). It will be interesting to see if Tele2 is really committed to the Netherlands, where consolidation is making the market a lot more attractive. Sort of the same goes for bbned. Or is Telecom Italia only readying the unit for a sale, by beefing it up first?
- Sell it to Reggefiber. Unlikely, since Reggefiber focuses on building infrastructure (FTTH), and it doesn't seem to have access to unlimited cash. However, the argument could be: add a service provider business and in due course migrate the customers to the Reggefiber network (where possible).
- Sell to a new entrant. A wild card. Maybe Telefonica is willing to do a relatively small deal, since it turned away from larger ones. Also, Belgacom could be a candidate (as I have hinted at before).
So, my order of likelihood would be:
- Sell to Tele2 or bbned (TI).
- Hang on to it.
- Sell to a new entrant like Telefonica or Belgacom.
- Sell to Vodafone, Reggefiber or KPN.
Wednesday, October 10, 2007
Virtual + real calling
Vodafone ('InsideOut') enables voice calling on and off Second Life. Telecom Italia's Second Life service is limited to on-net calling (between avatars). This functionality may spread, as Linden Lab is working on interoperability with IBM, in order to allow avatars to move into other virtual worlds.
Internet + mobile IM
Billed as micro-blogging service or as a Twitter look-alike, Jaiku is the newest Google annex. It extends into the mobile realm.
Email to SMS/IM
The latest Yahoo! Mail version added the possibility of sending messages to mobile phones (as an SMS) or to an IM service (Yahoo! or Live).
SMS + LBS
KPN launched olllo (with Heineken and MTV for advertising), a flirting service. It uses both SMS (for communication) and the callers' positions on the network (to find a victim) and obviously goes a little bit further than Sprint's 'friend finding' service, which uses GPS (so the pin-pointing is better, but it takes a GPS-enabled handset).
UPDATE (Oct. 11):
Of course I could have included SMS services from Google:
- In September, it applied for a patent related to paying by SMS (Safaricom of Kenya apparently also has a payment system based on SMS, as does KPN-subsidiary Base).
- Yesterday it launched Google SMS (queries by SMS for local info) in India.
Monday, October 08, 2007
No need to step on the soapbox over this shiny new fiber stuff.
All we need is a single strand of fiber. Nobody would like to get into a land grab for access to ducts, buildings, homes, etc. (as we are seeing in France).
Wholesale as a sound business model. I defended it recently.
Service provider v. network operator
Sharing implies open access, separation and wholesale. KPN is stepping away from full network control and focuses on services. The network is relegated to Reggefiber, which feels at home in the infrastructure business (Dick Wessels roots are in the building and roads industry).
KPN is beating the cableco (UPC) to the punch, but Liberty Global sees no need to move to fiber anyway. The other large cableco in the Netherlands, Zesko (the merger product of Casema, Multikabel and @Home), just last week refused KPN access to its network.
KPN, not the cable companies, is pushing all the right buttons.
Friday, October 05, 2007
We mainly discussed two topics.
I think of wholesale as a very attractive business. Obviously, there is a strong connection to the separation stance.
In the old days, incumbents like KPN instructed managers pretty explicitly to frustrate their wholesale clients. Even today, Deutsche Telekom thinks it can only recoup their FTTN/VDSL investments by demanding a regulatory holiday, effectively allowing its retail organisation sole access.
Now, this is all reversing – maybe not at DT but I do think at KPN (a finalist for Light Reading’s Awards). More incumbents acknowledge that independent service providers (let’s call them BSPs) have something to add – things that are not in the incumbents’ DNA. Think innovation. Also, marketing to specific niches can handily be left to focused BSPs.
Linked to this is the telco stance that the investment incentive supposedly disappears when full (structural or ownership) separation is forced upon the company by the regulator. Again, I do not see this. Extending the portfolio, and opening the platform to third-party developers, looks like a sound business strategy to me. It will attract BSPs large and small. Sure, investing carries risk, but that’s part of doing business, isn't it?
Speaking of which – applications. Please allow me to wander off for a moment. I have been putting together a very short overview.
Back in April, BT took the lead by restructuring and establishing a BT Design and BT Operate unit, granting developers access plus a SDK. AT&T may be planning a similar move.
See my post on Orca Interactive and SeaChange. IPTV seems to me the one area that could benefit most from adding apps, in order to strengthen the telco vis-a-vis
the cableco or satco.
Facebook did very well, allowing third-party developers access to the APIs, even if monetization is not quite so easy. In any case, the apps worked well for the valuation of Facebook.
Yahoo! may follow.
Motorola launched a ‘solutions Catalog’ into beta to invite third-party developers.
Few will contest the strategic logic of the string of acquisitions (Telfort, Tiscali NL, Getronics, iBasis, etc.) by the Dutch incumbent, KPN. Right now, it looks like brand rationalisation will happen, but what does that mean when the company has a multi-brand strategy?
Of the above takeovers, obviously Tiscali is the one that will have to return its brand to the mothership in Italy. Normally, they would probably have 36 months or so. After that, I think KPN will revert to one of the existing brands. I guess XS4ALL, the premium brand, could be a candidate.
So, which holes are left in the KPN portfolio? After the Tele2 Belgium deal (which effectively precludes a Belgacom merger), KPN may shift its attention to Germany. I think E-Plus will be beefed up by an LLU operator. Some are not for sale (subsidiaries of Vodafone, Telefonica and Telecom Italia), many others probably lack sufficient network coverage. What’s left is Versatel Germany or QSC. The latter has a wholesale business only, so combining it with E-Plus may not be a bad idea at all.
Finally, for my readers at Belgacom – check out this Trouw article (in Dutch) on Reggefiber, the stealth FTTH builder in the Netherlands. Get back at those KPN guys who bought Tele2 Belgium, and enter the Netherlands by buying Reggefiber!
Some will argue that owning an (open access) network is at the lower end of the value chain, but I believe it can produce great returns, especially since a FTTH network is future proof. Granting independent BSPs open access not only allows you into the wholesale market, it will keep the regulator happy too. Furthermore, you can always start or buy your own retail organisation!
UPDATE (thanks Dirk 'FTTH' van der Woude: "It's been quite a while since I last reported something remarkable from the Netherlands, but I think this falls in that category.")
Reggefiber and KPN are teaming up in Almere, reports Trouw. That adds a twist to any Belgacom/Reggefiber speculation. Of course, all we need is a single FTTH network. KPN and Belgacom could dump all their FTTH assets into a Reggefiber Joint Venture and turn into service providers.
Here is an English translation of the Vincent Dekker story (translated by Vincent himself):
KPN has decided to join forces with Reggefiber to speed up the roll out of FTTH in Almere, the fifth largest city in The Netherlands. Reggefiber already owns some networks in smaller towns and in parts of cities, like the project in Amsterdam. This time they will build a network for the whole of Almere. KPN will deliver services on that network. It will bean open network though, so KPN will have no monopoly on it.
Then why would KPN do this? Well, I'm not sure, but it looks as if KPN has no other options. KPN is losing customers in great numbers to the TV-cable networks nowadays. These networks can offer full triple play, whereas KPN kan only deliver ADSL and telephony on its network. IPTV is not a success as yet. And its Digitenne (DVB-T) is also not good enough to really compete with the cablecos. KPN has a plan to roll out All-IP in the next 4 years, which is fiber to the street cabinets and old copper from there to the homes, but this VDSL will also not be good enough to protect marketshare.
So KPN needs FTTH badly. In Almere Reggefiber was already chosen to build the FTTH network and now KPN has decided to join forces with Reggefiber. It will encourage its customers to switch from the KPN POTS network to the fiber network. That should make the new network profitable in a very short time. On that network it will most probably not only offer very fast internet (100/100 to start with) and cheap IP telephony, but also DVD-quality analog video and digital hdtv. With that offering people might be persuaded not to switch to the cable company and even drop that cablecompany for their tv-service. In the Netherlands some 90 percent of all homes now still get TV via cable, the rest via satellite and a few percent via Digitenne.
KPN will keep its POTS network alive for the time being, but that can't last very long. So in a few years this incumbent will no longer own a network that covers the whole of the country. My guess is that Almere could very well be the start of much more cooperation between Reggefiber and KPN in other parts of the Netherlands, Amsterdam and other big cites to start with. KPN needs a network to compete witch cable, and it needs it fast. The news of todaycould therefore be good news for everybody in The Netherlands: the start of a national FTTH network at last. We're a few years behind Japan and quite a few other countries already, so it certainly is not too soon...
Almere is an interesting city for FTTH. The cable company there is UPC, owned by Liberty Global of John Malone. If Almere will show the same pattern as seen in other towns where Reggefiber already has fibernetworks, UPC can expect to lose some 70 percent of its customers in the next 2.5 years. After Amsterdam and Rotterdam Almere is UPC’s biggest market. So losing most of its customer there will hurt. And ater Almere, Amsterdam or Rotterdam could be next on the agenda of Reggefiber and KPN.
KPN has decided its POTS network in Almere has only marginal residual value. That's one message we got today. How long will it take before cable companies will admit that this is true for their network too?
Tuesday, October 02, 2007
070829: Truckee (Cal) plans network (15,500 homes/businesses, > $15.5m), with 180 Network Services
070902: Verizon 'FiOS' trials 100 Mbps
070903: CityNet (GNA (= Amsterdam, 5 housing corps, ING, Reggefiber) phase 1 on track (40k homes, EUR 30m) for completion mid 2008, with Draka Comteq and Van den Berg Infrastructuren
070903: Iliad ('Free') plans launch of service (TV (2 sets, >100 channels), 100/50 Mbps, free calls for 30 EUR/mo) in 2 Paris districts mid Sep 2007
070903: Lafayette RfP for building equipment housing comes in above budget
070904: Orange Slovensko (FT) launches network ($40m to cover 200k households in 2007) in Slovakia: BB (12/1 Mbps for 600 SKK/mo, 30/2 Mbps for 720 SKK/mo, 60/4 Mbps for 1190 SKK/mo), TV (from 360 SKK/mo), calls (480 SKK/mo incl 100 minutes)
070906: 22 CLECs (XO, Cavalier, RCN et al) ask FCC for open access to Verizon's FiOS
070906: Tellabs launches indoor ONT (for active ethernet)
070906: Telefonica plans network for 50 Mbps capability
070907: El Dorado Golf & Beach Club (gated community in San Jose del Cabo, Mexico; = Discovery Land Co) ordered network from ERF Wireless, X Analogue Comms, $2m, to be completed mid Sep 2007
070911: Sipperec (86 Paris municipalities) plans FTTP network 'Sequantic' (EPON 802.3ah, up to 1 Gbps), with Spie Comms, Wave7, to launch Oct 2007 to 6500k businesses in 147 areas
070911: Reggefiber plans network in Valkenswaard, with NEM Brabant
070911: Telstra plans network to greenfield (Rouse Hill, Sydney) from early 2008
070911: Telus plans trial fall 2007 - mid 2008 (1k subs in Calgary, Edmonton, Vancouver, Quebec)
070914: Embarq plans FTTP network in Portofino (267 homes in Clayton, NC)
070916: Monticello (Minn) plans network, referendum Sep 18 2007 (65% needed)
070917: China Telecom plans network in Wuhan, with Fiberhome Telecomm Tech
070918: Telenor orders gear from AlcaLu for greenfields, GPON (also FTTN + VDSL)
070918: UK government considers ultra-fast BB 'intervention', discussion with Ofcom and BT Nov/Dec 2007
070920: Hong Kong Broadband Network (HKBN; = City Telecom; operates FTTB) plans FTTH network 'FiberHome', 48.50 $/mo for 100 Mbps, 88 $/mo for 200 Mbps, 215 $/mo for 1 Gbps
070922: Oxford Networks plans FTTP in downtown Bangor and Brewer (Maine), $4m
070924: Cisco launches active ethernet CPE gear for FTT-MDU
070924: Wien Energie Wienstrom (= Vienna) orders gear from PacketFront (network and home gateway systems); active ethernet; Phase 1: 50k homes, EUR 10m
070925: North Kansas City launches 'liNKCity' ($8m)
070926: Ofcom launches consultation on NGA, until Dec 5 2007
070927: St Paul (Minnesota) City Council approves network plan, $150-200m
071001: Iliad ('Free') plans network in Valenciennes 08Q2
071001: STA (Andorra) plans FTTP network, with Wave7, Telindus (= Belgacom) and Cisco, to launch 08Q1, nationwide 09Q2
Look at the data (and previous posts) for several interesting developments since my last update. See also the recent flurry of press releases in the wake of the ongoing FTTH Conference & Expo in Florida.
What stands out most to me: Orange's expansion into Slovakia, Telefonica's stealthy expansion, Telus and Embarq tipping their toes, and of course Vienna, Hong Kong (and Andorra!) moving forward. Look at Telindus, the Belgacom subsidiary, that is leveraging its skills in the Andorra project (looks pretty much like BT leveraging its 21CN skills).
Monday, October 01, 2007
I believe demand for bandwidth and nations competing for a larger share of the worldwide GDP pie will drive investments in FTTH networks. Telcos feel the heat and are preparing investors for a large capex round.
At the same time, realisation builds that there is value in both networks and services. Telcos are leaning toward the latter, and are preparing for their new roles by introducing sharing, outsourcing and separation.
Below I elaborate on these issues.
Demand growth remains high. Statistics from internet exchanges, IPTV, the rising popularity of YouTube, monitoring services, etc. are used to corroborate this point. Add to that the following. As long as there is no true end-to-end connection and bandwidth is shared at some stretch (either on the open internet or in the last few yards), bandwidth should be redundant. So, if you need let’s say 30 Mbps, you really need peak performance of 100 Mbps. Check out Dean’s remarks.
1.2 Competition among nations
A valued reader suggested that there is a race going on between nations. Already, eastern European countries leapfrog places like Germany by building FTTH networks. If you want to maintain your share of the world’s GDP, you better not stay behind. Places ranging from Chattanooga (Tennessee) to Malaysia acknowledge this. No wonder Italy is weighing a massive investment into Telecom Italia’s network, once the company is separated. No wonder also why Ofcom launched a consultation, apparently aimed at paving the way for FTTH.
2. Future proof solution: FTTH
This point hardly needs any back-up, even if your long-term view is that the last few feet will be wireless. You better bring fiber at least to the doorstep of all the places where people like to hang out.
As I have written before, telcos are actually preparing investors for the big plunge.
I believe sharing is going to gain popularity. Right now it appears to be concentrated in areas where demand or scale is limited. You can find examples in such diverse areas as mobile TV (German operators jointly building a single network), WiMAX (look at this consortium in Malaysia), FTTN/VDSL (altnets in both Australia and Germany) and 3G (in the UK, for instance).
The question remains: which part are you willing to share? The passive (dumb) layer is an obvious candidate, but you want to remain in control of traffic and services. The Vodafone/Orange UK example takes (tower and antenna) sharing one step further than sharing deals elsewhere (including the Sprint/Clearwire deal), which are mainly focused on extending coverage to rural areas. For Vodafone and Orange, sharing means: separating the network from the services. It implies that the network must be redundant (so there will not be an issue over who gets how much capacity), and also that the days of network coverage as an USP are behind us.
4. Outsourcing and separation
The next logical step seems to be outsourcing. If you decide to sacrifice full network control, why not let some third party handle the network?
KPN is a case in point, since it started outsourcing many tasks in its fixed network to a whole range of IT providers. To be sure, I do not believe that KPN will save on costs. We all know the ways of IT companies. There will be lots of talk and writing policy documents. I counted at least 7 IT companies involved. IBM will be the lead integrator, but I am unconvinced that this structure will save KPN any opex within the next 3 years. I believe the move is designed to sharpen the focus on services, perhaps even pave the way for more (i.e. core network outsourcing and structural or even ownership separation).
The new focus on services opens the gates to (further) separation. In fact, it is already amongst us. First of all, let’s not forget that selling the tower business by mobile operators can be viewed as a form of separation, even if this only sets site sharing apart (and not antenna sharing or any activities ‘higher up’).
But there is much more. In Switzerland, Swisscom Broadcast received a DVB-H license, but it must provide equal access to all operators. Shortly before, TeliaSonera took the unusual step to create a separate infrastructure/wholesale unit in Sweden. Another voluntary action comes out of EchoStar, which proposed to split its satellite fleet (with wholesale operations) form the service provisioning unit (the Dish Network).
Telecom New Zealand will be split along the well known BT Openreach lines, creating a unit in charge of the access network in order to jumpstart LLU.
It remains to be seen if this effectively creates a new stumbling block on the road to FTTH, as the new structure focuses on LLU and therefore on maintaining ADSL(2+). It would be my preference to try and leapfrog intermediary technologies as much as possible and go straight to FTTH.
Some companies are obviously atttracted by the wholesale business model (the NetCo part of the business, as opposed to the higher valued ServiceCo units), providing a ‘natural monopoly’ and ditto cashflows. Consider such diverse players as Reggefiber (the FTTH company in the Netherlands), Frontline Wireless (plans a national safety network in the US, stresses the importance of wholesale access to the new 700 MHz spectrum in order to foster new entrants) and even Gaiacomm International (whose proposed VLF/terahertz network would not compete with exiting service providers).