Telefonica: no open access obligation to FTTH

Among this year's main themes, I believe, is sharing. So far we had a few announcements, spanning a wide range of network assets:

• Mobile in Spain: Orange and Yoigo (TeliaSonera) in transmission infrastructure.
• Mobile TV in Hungary: T-Mobile and Vodafone.
• Fiber-to-the-business in the Carolinas: Charter and TWC.
• Duct sharing in Spain: Telefonica has to open up, according to new CMT plans (see also this remarkably readable Google translation).

As to the latter, I have noticed quite some resistance (revulsion is perhaps a better word) against governments getting involved, either through regulation or through direct investment. My personal view is that there is nothing a priori wrong with government bodies taking part, especially when you do not see them as intrinsically bad. They can afford a longer horizon, when public companies cannot. Add to that the view that open access is the way forward, allowing network operators to maximize utility rates of their networks.

By way of reality check: what if you really want to insist on the market taking care - in this case: of building FTTH?

All you have to do is drop one of the two basic assumptions (FTTH = end game; 1 network should suffice). Obviously, it would be the second. This would mean that we would potentially end up with perhaps 3 fibers entering our homes: one telco, one cableco, one (or more) altnet. This is pretty much what CMT (the Spanish NRA) seems to be aiming at, if I interpret the Cinco Dias story on the current market consultation correctly:

• "(...) want competition in infrastructure, not only in services".
• "(...) the abandonment of the idea of a single Spain (...) two types of areas, the competitive and the non-competitive." Alas Ms. Reding: fragmentation seems unavoidable.
• "Telefonica will not be obliged to open its network to rivals whenever a new pure fiber infrastructure that reaches households."
• "But Telefonica rivals have achieved a victory and that the network of copper will maintain its existing regulation. But it is a pyrrhic victory, because this infrastructure is doomed to disappear, and they know it."
• "More real is the obligation imposed on (...) Telefonica to open their rivals pipes - the conduits through which the (fiber runs)." This is the duct sharing part of the CMT plan. In other words, CMT seems to consider the duct network the only real dumb part of the physical layer.
• "(...) encourages investment from Telefonica, which will not have to share its new network with the rest, and force rivals to develop their own infrastructure. (...) But it is a gamble that can go well or not. In the worst scenario, operators alternatives not considered profitable investment and reduce its presence in Spain, or go entirely, which would strengthen Telefonica."
• "Have you ruled out functional separation of the network of Telefonica? (...) remedy of last resort."
• "The rules will not be ready before mid-2009."

UPDATE: see also Quinta's assessment.

TWC to trial broadband billing by usage

This looks like an interesting option: Time Warner Cable will trial broadband billing by usage.

That would be the solution to the broadband incentive problem. Only heavy users (estimated at c. 5%, using more than 50% of available bandwidth) would be impacted. It remains to be seen if those heavy users walk away, and if competitors will follow TWC's lead.

However, consumers took up broadband in the first place because of the simplicity of flat-rate billing. Marketing the new message could scare away everybody, not just heavy users who suffer bill shock.

Or could it be be a smart move? Who cares about those 5% - they only cost you money. Other providers will not be eager to allow them onto their networks, so they may grab the opportunity to follow TWC's lead. So, in the end the industry could make the shift to usage-based billing.

Viviane Reding: how do we get to FTTH?

Viviane Reding delivered this interesting speech at a KPN Forum in Brussels, this week. Thanks to one of the leading Communications Breakdown MUVRs for providing the text.

I am very sympathetic to most views and proposals coming out of the EC, even if the new EU regulator (EECMA) could be a stretch (it remains to be seen how bureaucracy and harmonisation will be balanced).

Here are some quotes that I find particularly interesting, but do read the whole thing (it's not very long):

• "(...) by summer in the mid-term review of the i2010 strategy, I will publish a new indicator of broadband take-up in Europe that compares national performance, not only on broadband penetration but also geographic coverage, speed, competition and price." This is important, since penetration only doesn't tell the whole story. Compare the OECD Broadband Portal.
• "Further service development is likely to result in the need for significantly higher broadband speeds of up to 100 megabit per second or more." There is some room for debate - I have shown some scepticism myself, but 100 Mb/s must be the milestone to focus on. Among the many drivers will also be Web 3.0, which may have significant implications for both bandwidth and storage.
• "I found a widely held view that the European regulatory framework and its emphasis on access obligations to open up competition is not at all the impediment to investment and innovation that some market players claim, (...)." Bravo.
• "How we treat next generation access is therefore the single most important policy question in the telecoms sector today."
• "(...) one of the potential attractions of functionally separating access networks is to make this incentive structure clearer and more operational." Mind you: functional, not structural. KPN is a good example of a telco staving off the 'threat' of structural separation by making functional separation really work (transparancy, good portfolio of services, happy wholesale customers).
• "My worry is that such bundling will, de facto, stifle choice and innovation."
• "Let me be very direct: except where the structure of the market has non-discrimination built into it such as in a well designed system of functional or structural separation the incentive of the telecom company is to design new infrastructures in a way that controls or chokes off competition."

Furthermore, she looks at the "three different models of network upgrade":

1. FTTC + VDSL. "In terms of open competition however there are serious concerns that VDSL could be attractive to incumbent telecom operators, because they require competitive market entrants to substantially scale up their investment in switching capacity." But "(...) unbundling requirements at street cabinet would have to continue to allow competitive access operators to stay in business."
2. FTTB + PON. "But the flexibility in the medium term may be more limited, not least because the end user equipment and the equipment in the network have to be compatible. Unbundling these passive fibre networks is therefore more difficult and the incumbent increases control." (...) "It is unclear that passive optical networks can be unbundled in the way that we see today on copper networks. This requires close attention and probably experimentation with novel architectures, using wave division technology to offer virtual unbundling as a more flexible alternative to bitstream access."
3. FTTH. "The difficulty here is cost: existing ducts are often too small to allow multiple fibres to pass through and therefore major construction spending is required. This is by far the most expensive option." (...) "Point-to-point fibre deployment, meanwhile is rarely being deployed by private market investors. Certainly, this is due to its high cost, but it is also probably due to its openness. Where we do see it being used is in open access schemes initiated by municipalities, in cities such as Stockholm and Amsterdam. These schemes are local partnerships that take a pure 'infrastructure utility' approach by building ducts and end to end dark fibre and then leasing access to service providers. Clearly by so doing these cities have created for their business and citizens a future proof network infrastructure and for the investors in the networks a very long term stable return on their investment given that ducts and dark fibre have a potential operating life of several decades. Under these conditions of guaranteed open access circumstances, perhaps, infrastructural competition is less important than an open and high performance platform. However, the municipal solution seems unlikely to be relevant for all of Europe and could lead to a very fragmented landscape." This highlights the fact that the EC is not a friend of munifiber and is very critical about them. "Whichever infrastructure route we take forward, my conclusion is clear: regulation will have a role to play to keep networks open and to guarantee progress, efficiency and choice."

FTTH: Amsterdam v. Singapore

Just a few short postings.

First, I added a few noteworthy documents in the right hand column. Go down to 'Favorite Articles'.

Second, another WSJ story on the Amazon Web Services. Outages will be tackled and QoS added, so large corporates can buy the services also. What makes it so interesting to me, is the strategy of trying to maximize utilisation rates of Amazon's hardware. In telcoland, it is called embracing wholesale services.

Third, a thought on subsidizing broadband: Amsterdam v. Singapore. Assumptions: FTTH is the end game and nobody needs two fiber networks. Here is the reasoning:

1. Politics will put broadband on the agenda for its GDP, environmental and social benefits. As long as (public) companies are not ready to commit, governments will get involved.
2. States could participate (honoring MEIP), which is the basis of many munifiber projects such as Amsterdam.
3. Governments could choose to subsidise a regulated (natural) monopoly, implying separation and sharing. This is what is happening in Singapore.

Key questions:

1. Will Amsterdam put copper and coax based networks out of business? Many are skeptical. Check out these stories on the UTOPIA initiative in Utah, refuted here.
2. Will the NetCo monopoly in Singapore be incentivised to invest?

KPN: preview 07Q4 and strategy update

Yesterday KPN mailed its invitation for the upcoming analyst meeting in London, February 5. They added that it will contain a 'strategy update'.

My employer isn't so generous as to let me attend the meeting in person, so I will be following the webcast. Too bad KPN has shifted focus to London, after its previous IR manager left (he steered those meetings to the home country, in order to fortify relations with local analysts).

Anyway, the meeting will be quite interesting. KPN is a company in flux, but some major milestones were realized or at least determined. Hence, the need for an update and some new targets. Let me summarize how KPN responded to the telecom woes of recent years:

• Consolidate the markets by acquisition: Telfort (mobile NL), Tiscali NL (altnet), Tele2 Belgium (altnet), iBasis (international voice), Digitenne (DTT in the Netherlands) and Getronics (international ICT, but currently refocussing), to name just the big ones. I think KPN has reached its limits for growth by acquisition in the Netherlands. The result is a much more friendly market, with only 3 MNOs and cash constrained (but extensive) cable competition. In Belgium it could buy a company like Scarlet. Germany is wide open for consolidation. Further, KPN is trying to create an MVNO business into interesting European markets, first in Spain. Last year, market rumours circulated about KPN being interested in buying Bouygues (#3 mobile in France), but KPN denied. ICT obviously is a market that KPN could expand into also.
• Deploy new technology: swith to IP, under the All-IP banner; extend fiber (FTTC + VDSL2, as well as some FTTH); HSPA as the next evolutionary step in the GSM networks. These will bring both cost efficiencies and new revenue opportunities (mobile data, IPTV, convergence services, bundles, ehealth, telecommuting, etc.).
• Shrink the company: revenue growth, on an organic basis has been negative for a long time. At the same time, KPN is aggresively cutting jobs, buying back shares, outsourcing.
• Plant seeds for growth. Expansion in mobile, broadband and ICT, enabled by acquisitions, new technology and new services.
• Improve relations: job cuts have been done pretty quietly, and new contracts were recently negotiated; competitors are now seen as partners as well (co-opetition), as KPN is embracing wholesale revenues; OPTA (the national NRA) has been approving most of KPN's actions, thanks to the company's transparancy (accounting separation) and attractive wholesale portfolio.

For its strategy update KPN could focus on these issues:

• Technology (All-IP (FTTC + VDSL2), FTTH, HSPA): roll-out, real estate sales, service launches.
• Integration of recent takeovers: Getronics, Tiscali NL, iBasis.
• Sharing, outsourcing.
• Regulatory: mobile termination (currently to mid 2010 in NL and to March 2009 in Germany) and international roaming (voice was agreed upon through 2009; SMS and data may follow).
• Acquisitions, MVNO launches.
• Dividend, share buy-back.

I expect the following:

• Overall: Dutch market conditions improved considerably. Mobile markets will see lower margins and more regulatory rate cuts. KPN is very much capable of integrating acquisitions and cutting jobs and has large opportunities for more cuts, outsourcing, sharing and real estate sales. This is very important, as organic growth remains very low. IPTV, mobile TV and mobile data take a long time to really take off. Debt will remain at such levels where the balance sheet is healthy but not overly so. From time to time takeover rumours emerge. In short, not a very pretty picture, with growth coming mainly from successful shrinking.
• Revenue growth: Getronics and iBasis will add 20% or so, but organically growth will remain very low.
• EBITDA growth: low growth and Getronics will lower the overall margin ('up the value chain' nonetheless, according to KPN).
• Capex: will likely remain around the same level (12.7% in 07Q3).
• FCF: a big drop in 2008 as a result of a hike in cash tax payments (despite the lowered Dutch corporate tax rate), but growth thereafter.
• I suppose KPN will keep raising its dividend. A new share buy-back is likely, but it remains to be seen if it will be worth of a half or a whole billion euros.

BT's Ebbsfleet project needs some work

A short follow-up to my earlier post on the BT project in Ebbsfleet. A couple of Communications Breakdown MUVRs (mega ueber value readers, pronounce MOVERs - thanks James) reported:

• Keith McMahon mailed me about the project back in July.
• Dirk van der Woude adds some pricing details from one of his own MUVRs (also see the Guardian). Ebbsfleet could be less than spectacular. The top tier product is asymmetrical (e.g. 100/2 Mb/s) at a rather expensive price point (530 GBP/yr = 707 EUR/yr ex VAT at the wholesale level). Compare that to Iliad/Free's famous 30 EUR/mo = 360 EUR/yr (at the retail level). Dirk also adds 'his own' tariffs, at Citynet in Amsterdam: 20/20 Mbps for 300 EUR/yr (retail, incl VAT) in the first two years.

Fuel and carbon savings could help finance FTTH

My post on FNV (Dutch union) supporting teleworking led to a brief email conversation with Herman Wagter of Citynet, the Amsterdam munifiber network.

His claim: the fuel and carbon related savings, induced by teleworking, may help financing a nationwide FTTH network.

Here are some of his back-of-the-envelope calculations:

1. Travel savings: 3.7bn km/year (according to ADV, the agency that conducted the FNV survey). This translates into fuel savings of ~400m EUR/year (using ~1 EUR/liter and ~0.1 liter/km).
2. Carbon emission reduction: using 3.7bn km/year and 191 grams/km (also from ADV, based on CBS statistics) the result is ~715m kg/year.
3. Carbon-related savings: using the 715m kg/year and 23 EUR/ton (the current cost of emission rights, according to Herman) add another ~15m EUR/year (of interest may also be carbon capture and sequestration costs and carbon-offset money.)
4. Capital cost: the Netherlands have ~7m homes. At a cost of 800 EUR/home (compares nicely with Verizon FiOS numbers, but may be a bit optimistic when wiring up rural areas as well), capex would be EUR 5.6bn. At a 7% interest rate, the yearly interest bill would be ... EUR 400m!

The question obviously is: how to redirect spending on fuel and carbon to fiber? I suppose it is hard see this done without the government actively taking part. As long as the physical layer is recognized as a regulated and natural monopoly, it could be subsidized. This is exactly what is happening in Singapore (a Citynet look-alike).

BT to launch its first OA residential FTTH network

Bravo to BT. Its first residential FTTH network will launch in August in Kent (a greenfield housing development called Ebbsfleet Valley, with Land Securities). The 10k homes are offered a wonderful 100 Mb/s. And it's open access too! I wonder who will be service providers, except for BT Retail.

Teleworking and FTTH may enter Dutch political agenda

Broadband in general, and FTTH in particular, may enter politics in the Netherlands. An FNV sponsored survey (in Dutch), conducted by ADV Market Research, revealed that people increasingly want to work from home (teleworking = working through home broadband connection).

FNV and ADV point out that teleworking will contribute to reduced pollution (less traffic congestion), increased productivity (migration of hours spent from sitting in the car to being productive), as well as more people joining the working ranks (mums returning from maternity leave; disabled people; etc.).

FNV is the largest union in the country, so this may very well be put forward in future wage negotiations and political discussions.

As I wrote before, broadband is an indispensable enabler of teleworking, and FTTH will add video conferencing. That may stimulate those managers who so far are reluctant to allow their people to work from home. According to the survey, one in three of those eligible for teleworking is refused to do so for fear of lack of oversight. A videolink will mitigate this.

To round of, here is an interesting calculation from the survey. Should all current teleworking ambitions (83% wants to telework 1 day a week, 14% wants 2 days, 3% wants 3 days) be awarded, nationwide carbondioxide reductions could reach 11%.

Telco M&A update

Never a dull moment in telcoland.

• Is Telefonica still hunting KPN after all?
• Is Carphone Warehouse selling out to Vodafone?
• Will AT&T go international once more? Previously a Telecom Italia bid failed and AT&T is now reverting its attention to Telekom Malaysia's international mobile assets.
• Is Deutsche Telekom expanding in eastern Europe, bidding for a chunk of Telekom Slovenije?

Observations:

• A KPN deal seems unlikely, but when asked if KPN will be around as an idependent company in 10 years time, most people will probably reply 'no'.
• Companies appear to be replicating Telefonica's and Telenor's success abroad. For Deutsche Telekom eastern Europe gains importance, and AT&T may expand into southern Asian mobile markets on the back of a TM International acquisition.
• DT buying into Telekom Slovenije is, in a way, a backdoor entrance into the FTTH market. It is interesting to see how strategies differ across borders: DT has no FTTH strategy at home; KPN fights the incumbent in Belgium; AT&T could be a mobile-only company in Asia; etc. When fighting the incumbent or defending an incumbent operation, words must be chosen carefully, or companies risk being confronted with their own foreign subsidiaries' statements by the regulator.

Sprint Nextel: no inflection point nor WiMAX success just yet

Sprint Nextel is a tricky investment case. On the one hand, there is a meltdown of sorts. On the other hand, WiMAX holds a promise as a 4G solution. For those wanting to catch up, read these two articles: Light Reading summarizes all the big disasters (management, churn & customer service, joint ventures & technology choices), while IEEE focuses on the biggest issue going forward: WiMAX.

All will depend on the company reaching an inflection point and the take-up of the Xohm WiMAX-service. Success is inevitable, but timing is everything.

I believe it is still to early to jump in.

As to the former, it is very hard to make a trustworthy valuation in a case like this one. Market target prices range from $12 to $28, but personally I believe the share is still overvalued (based on takeover speculation, I suppose, related to Comcast which may find it harder to grow its basic subscriber base when capped at a 30% penetration rate).

As to the latter, I am a big believer in mobile broadband, but one has to be realistic. Mobile data so far is a big disappointment.
WiMAX may have a headstart over LTE, but there are several challenges: (1) LTE is the technology of choice for most entrenched players (all GSM and possibly some or most CDMA operators, including Verizon Wireless), (2) how does it scale?, (3) will there be enough of a choice of handsets and devices?, (4) will Xohm be open enough, and last but not least (5) demand as related to pricing.
What Sprint needs to do most, I believe, is to make Xohm really open to all internet-based services and it should come at a reasonable price.
Look out for usage numbers at Vodafone, which may have finally understood that currently data tariffs border on the insane. Vodafone NL is reducing data tariffs by up to 85%.