Thursday, July 24, 2008

KPN is serious about FTTH

One last post before my vacation: KPN's FTTH plans. I sort of hinted at their increasing efforts over the last few months. After the Q2 results, two readers directed me to some interesting stuff. First, Reuters ran the story on KPN's estimates:
Smits said KPN generated about 140,000 euros ($220,300) of core profit per year from fixed-line services from an average neighbourhood of 1,000 homes -- but the profit was shrinking.

"We reckon that if we do 1 million euros of investment in those 1,000 homes, we can hook everybody up to Fibre to the Home and go to 250,000 euros EBITDA, and increasing," he said.

"That's a business case. The only issue is that this is a spreadsheet -- the question is: Does it work in the real world?"

Second, Dutch daily Trouw (here is a Google translation) quotes the company promising to hook up the entire (rest) of the city of Amsterdam. KPN is now looking to OPTA (the Dutch NRA) for some clear regulation.

Some remarks:
  • It will as come no surprise to readers of this blog.
  • It is quite clear that Reggefiber forced KPN into this advanced strategy.
  • It makes BT, DT and FT look quite dumb. KPN acknowledges the value of open networks, because one important thing counts: the utilisation rate.
  • Let's see how KPN's share price moves over the coming months. Was all this priced in, or are we going to see a dip? Will investors be as smart as KPN's management and acknowledge the True Value of the investments?
  • What will happen to KPN's foreign assets (Base in Belgium, E-Plus in Germany)? Stuff to chew on.
Back in August!

Wednesday, July 23, 2008

FTTH: in search of a metaphor

My holiday starts tomorrow, so there will be no posting until mid August.

I do however want to keep you busy in the meantime.

A valued reader the other day kept us Fibre Ringers busy with this quote:
The necessity question seems to be cleared, the new Scylla is "the profit in waiting just a tiny bit longer", the new Charybdis: "how massive will the losses be because of waiting too long".
This set Benoit off to write a lengthy piece.

Frankly, it got me going in a very different direction. I started to think of it as a competition of sorts: Try to come up with the best, the worst, the most obscure, the most far-fetched or otherwise interesting metaphor for the whole FTTH conundrum.

So, my submission is this: A movie, possibly 'My Cousin Vinny', or, since my memory is showing a hole, the courthouse drama in which an innocent man is accused (and fiercely cross-examined) of some very gruesome crime.

And now I leave it up to you to figure out how this is a metaphor for FTTH. Or rather: the FTTH business model. Or to be more precise: defending the FTTH business model.

Mail me (see right-hand column):
tim dot poulus at gmail dot com

Poll revised

A valued reader explained to me how he thought that something was missing in the three possible answers in my second poll (see right hand column). I adjusted it according to his views, so cast your vote again (more than one answer is possible).

Basically, I added an option (the third answer), which I originally thought was included in the last option.

Tuesday, July 22, 2008

New poll: P2P file sharing

A new poll can be found in the right hand column: "What to do about illegal P2P file sharing?".

I wonder if there will be any sort of consensus. I believe that there is some very negative sentiment around the issue, when it is related to FTTH: "Do we really need that super-highway, if all people do with it is illegal file-sharing?".

KPN's stealth advance in the FTTH market

A new site (Fiber Update, in Dutch) recently launched in the Netherlands, tracking mainly grassroots FTTH projects. What comes forward is a picture of KPN gradually fibering up the country. After their stealth move to hoover up ISPs, they have now embarked on a quiet mission to make FTTH widely available (as predicted).

Another issue for this post is Poll #1, which I ran in the right hand column for about a month: "Do we need infrastructure-based competition?" (see also Costas' post). The results are below.

First, KPN's fiber initiatives so far:
  • Greenfields in new housing areas, run by KPN Glasnet, in Enschede, Amsterdam, Etten-Leur and Vleuten/Vleuterweide.
  • Business parks.
  • Reggefiber FttH, a 41/59 joint-venture with Reggefiber. Setting up this JV is still pending and may get some scrutiny from NMa (competition commission), but it looks like it will be approved, since it is a passive layer operator only. It is not entirely clear what will and what will not be included, but I suppose Reggefiber will contribute most of its munifiber-assets. So far, we have: Almere, Deventer, Nuenen, Hillegom, Veghel, Uden, ...
What strikes me in most of the grassroots developments (see my updated FTTH 2008 database), is that these communities mostly team with Reggefiber (for the passive layer) and XMS (as a service provider). I am not sure who takes care of the active layer, but I suppose it is BBned (Telecom Italia).

Now let's see how these parties are tied together:
  • As stated, KPN will own 41% of Reggefiber FttH (+ an option to increase this to a majority stake). Other Reggefiber assets (business services) are left out of the JV.
  • Reggefiber (named after a river called De Regge) is owned by billionaire Dick Wessels, who gathered his fortunes in the construction sector (VolkerWessels), but mainly by selling, at precisely the right moment, his World Online stake in its IPO. World Online subsequently headed for a melt-down and was ultimately bought by Tiscali. A few years ago, Tiscali NL was acquired by ... KPN.
  • XMS is a service provider, owned by InterNLnet, which was bought by ... BBned, a unit of Telecom Italia.
What are the implications and most likely outcomes of these developments?
  • KPN, Reggefiber and municipalities are apparently making sure just a single super-highway is being constructed. That is, if cable (Liberty Global's UPC and Warburg/Cinven's Ziggo) remain on the sidelines.
  • This way, a new monopoly is born: the passive network owner. However, nobody seems to care, since all these networks follow the open access three-layer (passive, active, services) model, and there are plenty of service providers. Perhaps both Reggefiber and KPN will spin-off all their passive network assets into the joint-venture?
  • OPTA, the Dutch NRA, however will not accept a monopoly in the active layer. It looks like KPN and BBned could be the main contenders, togeter with the other current LLU operators (Tele2 and Orange (T-Mobile)).
So let me now turn to the poll in the right hand column. Since I will be taking a two week holiday, I will cut it short to this day. There were 35 responses:
  1. 1 vote for pure infrastructure-based competition (i.e. no open access whatsoever, I suppose).
  2. 7 votes for services-based competition only.
  3. 13 votes for competition in the active layer (i.e. the model I described above).
  4. 14 votes for competition at all levels.
It was just a quick & very dirty poll, so no heavy handed conclusions here, but I do find it striking that people seem to disagree on such a fundamental issue. Let me round off with a few short remarks:
  1. OPTA says: "two is not enough". I agree (see the US duopoly). But three (or more) seems totally unrealistic.
  2. Services-based competition will be a reality, according to the recent OPTA rules, in FTTC markets. I suppose this, in itself, could be no problem in consumer markets, but I think it wouldn't be sufficient in business markets (providers want to distinguish themselves by offering a rich portfolio of services).
  3. The big question remains: Who will really be committed to the Dutch market? Telecom Italia and Tele2 could exit the Netherlands altogether, and T-Mobile has put up Orange BB for sale.
  4. Cable will probably, at one point or another, construct its own FTTH network. The next question would be: must it offer open access? Do we need symmetry between infrastructures (both OA or both closed), as well as within? (Which brings to mind two conditions for FTTH investments: a decent return and regulatory clarity.)
Last remark: full symmetry arises only when networks are structurally separated. Only then are all providers equal.

Thursday, July 17, 2008

FTTH and cable open access require more common sense

Two major announcements this week - and both (BT's 'super-fast broadband' and OPTA's open access to cable decision) are quite hollow, to a degree.

Benoit rightly quotes Karl Bode on BT's "Fiber to the press release".

And the OPTA (the Dutch NRA) decision on open access to cable doesn't look like it will lead to very much either. Not only is it limited to services-based competition, analogue TV and anybody-but-KPN, there is more.
A pair of distingusihed readers points me to the tiny detail of getting the rights to all cable channels. Should a channel, for some reason, object, then the new entrant (the service provider) will have to provide each customer with a filter (at his home) to block that channel. This is an arduous task, both from a financial and a technical point of view. And the thing is: the channel owner may not have such lofty motives - like being owned by the cable operator.
There is also an issue around an information channel from the operator, which is hard to filter out as well.

Let's hope that Ofcom and OPTA will show more common sense when regulation (of both FTTH and cable open access) takes shape.

FTTH going to college

A few months back, two students interviewed me for their graduation work. They have now completed their document, which was sponsored by Compose Network Connections, and allowed me to publish it as a Google Doc (in Dutch): "Met glasvezel de toekomst in" (Fiber into the future) - by Melany Vossen and Roel de Vries.

I pulled the document through Google Translate for an English language version (check out Melany's last name!).

Full disclosure: See Dave Burstein's newsletter; I no longer work for IRIS Research (which is mentioned in the document above).

Tuesday, July 15, 2008

KPN to intensify cableco assault

OPTA, the Dutch NRA, has released preliminary regulatory changes for the Dutch telephony, broadband and leased line markets for the period 2009-2011. A consultation period will run from July 29 to September 8 2008. Definitive new regulation is set to be written into law before the end of this year.

1. Main findings (more detail below, under 4):
  • End to fixed telephony retail price regulation for consumers. KPN can step up its competitive efforts against cable.
  • Services-based competiotion on FTTC (WBA, since SDF access is not viable) and infrastructure-based competition on FTTH (ODF access). It looks like we will have a regulatory patchwork in geographical terms. MDF locations serving no less than 50% of the population will remain open. (I'm not sure if the 50% is new to the market.)
  • Service-based competition on cable networks, but no access for KPN. I doubt if this will catch on among cash-strapped altnets or new entrants.
  • Fixed termination will move to symmetry next year. Will KPN's charges go up or altnets' charges go down? Probably the latter, in which case the long-term benchmark for mobile termination goes down as well.
KPN was quick to cry victory and point out that this will help it better compete against cable (basically a two-player market: UPC, owned by Liberty Global, and Ziggo, owned by Warburg Pincus and Cinven). Let's put this into a perspective.

2. Telco/cableco convergence
Telcos and cablecos are converging in the sense that their product portfolios are starting to look like mirror images. Independent ISPs are struggling and selling out, so now incumbent telcos are increasingly taking aim at cablecos.

Let's first see how cablecos and telcos are moving toward each other:
  • Both offering triple play, even though IPTV remains a complex product. On the other hand, cable lacks a mobile offering (other than cheap resale) of its own.
  • Cablecos (and satcos) moving into the LLU market. Sky of course, now even looking at FTTC. Numericable is a wholesale LLU customer of Completel. Versatel is looking at AKF (but the Zon/Sonaecom merger is not going to happen).
  • Several cablecos are considering FTTH (Cox, Wow, Videotron, Compton).
  • CableLabs, the US cable association, is trying to turn Tru2way (middleware) into an interactive TV platform for both cable and telco networks.
3. Telco strategies against cable
Next, let's see what telcos are doing to kill the cable guy:
  • In the US, AT&T, Verizon and Qwest have set up Customers moving to an area served by a different Bell are helped to remain telco customers, instead of defecting to cable.
  • In the Netherlands, KPN hasn't exactly made much of secret of how much its Digitenne (DTT) product earns them: zip, or rather a negative sum (see it as a SAC). Digitenne has just one mission: pull away as many cable customers as possible.
  • Thanks to OPTA, KPN can now follow competitors into targeted price reductions for fixed telephony. We can expect a price war that will erode KPN's margins further, but it will serve their priority #1: expand market share.
4. Main points from the new rules
Here are some more details.
  • Fixed telephony consumer market: end to retail regulation (both minimum and maximum tariffs). OPTA says competition is sound, due to CPS, WLR (which will be extended to the business market) and cable telephony. However, after 2011 it expects it will be able to abolish regulation of the wholesale services (CPS and WLR) as well.
  • Business markets: increased wholesale regulation to stimulate competition, after which the retail market may be deregulated.
  • NGN, NGAN: KPN is moving away from MDF access to both SDF access (for FTTC networks) and ODF access (for FTTH networks) as regulated wholesale products. OPTA has decided not to demand WBA (wholesale broadband access) wherever ODF access is available, since it wants to stimulate infrastructure-based competition as much as possible. At the same time OPTA acknowledges that SDF access is not a viable platform for competition, and therefore it will demand WBA offerings in FTTC markets. In both cases, KPN will be granted a decent return, based on the EDC system (embedded direct cost), which by the way is contested by competitors. Fortunately, OPTA appears to be aware of the necessity of a long-term view (longer than the traditional 3-year regulatory review period) and regulatory certainty for FTTH investors.
  • Broadcasting: UPC and Ziggo will have to open their networks to services-based competition, because Digitenne, IPTV and Sat-TV haven't been able to really change the cable market (in terms of market shares or prices). Third parties will be able to take over the customer relationship (but they will have to take care of the related broadcasting rights for analogue TV themselves). This is aimed at third-parties; should KPN be granted a license to resell cable TV, then it could be incentivised to delay investments in IPTV and All-IP. In other words, KPN will not be a cable reseller (just as cablocos are not allowed to be KPN resellers).
  • All-IP: KPN is planning the closure of many MDF locations. There is an MoU with the biggest unbundlers (Tele2/Versatel, T-Mobile/Orange, BBned/TI). MDF locations covering 50% of the population will remain open for existing LLU offerings. No detailed migration deals have been signed however for the other locations. Therefore, LLU and WBA regualtion will remain in place.
  • Fixed termination: OPTA will end the asymmetry (KPN charges are lower than competitors') at the start of 2009.

Wednesday, July 09, 2008

FTTH Update

We updated and expanded our FTTH database for 2008. It now includes FTTH, other dedicated fiber networks (science, health), NGA regulation (digital divide) and separation issues.

Tuesday, July 08, 2008

EU telco regulation reform: not enough for FTTH

Monday night, two committees within the European Parliament approved, with amendments, the upcoming reform to EU telecoms regulation. The full EP is set to vote September 3, and the Council of Telecoms Ministers will have its say November 27. The main points are:
  • There will be a new pan-European body: BERT (Body of European Regulators in Telecom, basically an upgrade to the existing ERG), instead of the much more powerful EECMA as proposed by the EC. BERT (not the EC) will have veto power over NRAs.
  • NRAs will be able to enforce functional separation, but only if there is no other remedy, and on the condition of EC and BERT approval.
  • NGA: no monopolies and shared financial risk on the build-out through long-term leases (i.e. upfront payments from altnets) instead of regulated wholesale prices.
  • Striving for spectrum harmonisation across the EU, i.e. any technolgy and any service in any band (as long as the ITU and national policies allow it).
Good news then for FTTH aficionados: no monopolies. But this is not enough. Regulation needs more reform.
Time to see how recession-proof TMT markets and regulation are. A number of reports show that telcos (despite their utility-like nature) and B2B media (despite their must-have portfolios) are not immune. But regulation, particularly when it comes to FTTH, needs to take a look at the new reality too.
  • FTTH network construction: A valued reader tells me that pension funds, who take an interest in funding FTTH network build-outs, are typically looking for a 11-13% return (before inflation!). Viviane Reding has been hinting at proper returns for infrastructure builders (see below*). The other side of the equation (costs, let's say WACC) deserves some attention too. Unfortunately, regulators tend to look back trying to establish these numbers, when they really should be looking forward. And, they tend to look at services, instead of infrastructure. First of all, debt markets are in crisis and interest rates are significantly higher than they used to be. Second, the typical review cycle is 3-5 years, but fiber needs a much longer horizon of let's say 20 years (LLU gear may depreciate in 3-5 years, but not fiberoptic cables). What this effectively does, is create uncertainty for investors and infrastructure builders who are prepared to take a long-term (20 year) view.
  • Broadband internet service: The latest report from the Pew Internet & American Life Project shows that broadband penetration in the US grew from 54% in December 2007 to just 55% in April 2008.
  • B2B media: Reed Elsevier is trying to sell its RBI unit (valued at roughly GBP 1.25bn) but is hit by the credit crunch. The company may have to offer a GBP 100m loan to potential PE buyers. The Deal reports that "PE fundraising continues at breakneck pace", but "fundraising for traditional LBO funds fell off 20%".
* Recently Viviane Reding proposed a 15% 'risk premium' on top of wholesale prices for fiber networks (sources tell me she was really meant to be a little more careful by giving a 13-17% range because of local differences). I suppose this relates to the passive layer and the wholesale prices it charges to the active layer, but several things remain unclear: Can a vertically integrated operator charge a third-party active operator a 15% higher price than its own active operator unit? Does it include FTTN/VDSL-networks?

E-Health: a market waiting to be consolidated

Last week we had a talk with Monique Philippens, director of KPN Healthcare. The unit is still small, but shows some healthy growth. It has its own sales, marketing, product management and business development units and comprises 3 companies that KPN acquired over the past few years: I wrote about the market before. It is potentially very large and diverse. It benefits from a number of long-term trends, such as the ageing population, the rise in the number of chronically ill, and a (quite worrying) labor shortage. Therefore, it is not just an opportunity for all sorts of service providers - it is bare necessity to digitize and automate the healthcare industry. The market is also quite complicated. There are many participants:
  • Patients
  • Doctors (GPs), hospitals, pharmacists
  • Insurers and policy makers (governments agencies, municipalities)
  • Information providers: professional (the likes of Elsevier Science) and consumer-oriented (web sites, such as WebMD, Revolution Health, LiveStrong)
The overall Dutch healthcare market was worth about EUR 50bn in 2006, of which a mere 2% (EUR 1bn) was spent on ICT. The market is expected to grow to EUR 77bn by 2025, and it seems inevitable that ICT expenditure will expand to more of a market average such as 5-6% (which would imply EUR 4bn). KPN doesn't break out figures for Healthcare, but the unit is deeply entrenched in the market. It counts all 104 Dutch hospitals as clients, and services more than 50% of the other professionals (doctors, pharmacists, clinics, care organisations, etc.). By far the biggest challenge for the overall industry is creating (centrally located) electronic health records. In the Netherlands, a fully connected system is probably a generation off. There is however an LSP ('landelijk schakelpunt', national switch point), which is supposed to connect three existing 'information systems':
  • ZIS (z for ziekenhuizen = hospitals)
  • HIS (h for huisartsen = GPs)
  • AIS (a for apothekers = pharmacists).
In the US, Google (Google Health) and Microsoft (HealthVault) have set up websites for this purpose. What they do is, in fact, shift the burden of collecting all relevant information from hospitals, doctors and pharmacists to patients. Smart idea! However, there are two problems. First, this can only work if ZIS, HIS and AIS are well organized (which could be the case in the US, but certainly is not in the Netherlands), in order to allow consumers to collect all necessary information. Second, there are all sorts of privacy issues: Who has the right to know what? What does all that have to do with KPN? Obviously, a lot. KPN supplies connectivity to professionals and value-added services to both professionals and consumers. We have to say that we were positively impressed by KPN's strategy toward this market. It comes down to these three steps:
  1. Traditional ICT services.
  2. Connecting professionals (information exchange), plus value-added services from third-party providers.
  3. Consumer services.
We regrouped these capabilities in a slightly different way:
  • Link professionals. Building a relationship with professionals is essential in this market. KPN uses the fact that it is a certified ZSP (healthcare service provider), which allows it to exchange information between market participants. The first step in the execution of this part of the strategy was to build a nationwide secure network (basically, a closed VPN), called ZorgConnect ('care connect'). The larger participants are hooked up by fiber (hospitals, of which roughly 50% are now connected).
  • Value-added services for professionals. Some examples here. Recently, KPN scored a deal with ZorgDomein, which built a referral application for GPs. Using this, the doctor can easily refer patients who need specialist care. The doctor can see at which hospital a specialist works whose services are needed, check availability and make an appointment. Also, KPN has an application that allows oncologists nationwide to join in a videoconference and share multimedia content.
  • Information and entertainment for patients, whether in hospitals, clinics or at home. KPN built a platform (UI) that combines offerings from its traditional portfolio (VoD, internet access, etc) with information that is relevant to the patient-as-a-patient. For the latter, KPN uses third-party applications exclusively. KPN wants the platform to remain open; adding applications of its own would turn off other suppliers. To this purpose, KPN is even selling its in-house applications factory (part of Getronics). An example is Koala, for which KPN teamed with Menzis (insurance co), a local healthcare provider in Groningen as well as the recently acquired company IPT. KPN is building 5 services for now:
  1. Video communication
  2. Monitoring (heartbeat, etc.)
  3. Alarm
  4. Self-management
  5. Domotics
To round off, a few remarks.
  • KPN seems very well positioned to consolidate the market. It has built a network + services, and can now work to expand the KPN Healthcare unit. But of course, there are competitors such as Tele2/Versatel.
  • E-health is a complex and yet well defined market, with the patient clearly in the middle. Not quite the same goes for students (as the center of the telelearning market) and workers (in the teleworking market), but still: these markets could be approached in a similar way. There are dedicated networks linking schools, and it isn't very hard to think of applications for these markets (for students and workers on the one hand, teachers and managers on the other). To take the argument even further: how about soccer? (think of a network linking fans to stadiums, and service them with applications including games, gambling, Web 2.0, etc.).
  • I particularly like the bit where they say they do not want to develop applications themselves. They want an open platform (very much in Telco 2.0 style) and they want to be friends with everybody, in order to be the platform of choice.
  • When it comes to B2C services, the Daily Media box comes to mind. Not only does it allow service access from the TV, the Daily Media platform and business model hook into KPN's strategy very nicely. It is open too, so an health insurance company (for instance) could come on board to distribute the box and use it as a store front.

Sunday, July 06, 2008

Vodafone buys Ghana Telecom

Vodafone is buying 70% of Ghana Telecom for $900m. Ghana Telecom is the local incumbent and has:
  • 379k fixed lines and 15k BB lines.
  • 1.4m mobile subs, or a 17% market share.
  • 2007 revenues of $290m and EBITDA of $42m.
Some quick thoughts:
  • Obviously an emerging markets play, focused on mobile. The same motivation was found in the FT/TeliaSonera courting. So far, Vodafone has succeeded in making deals like these work. However, telcos are inclined to copy each other's strategies; how long before another bubble emerges (and bursts)?
  • The fixed network that comes along fits Vodafones total communications strategy. Soon (post Verizon), the compnay may have a lot of cash to spend. Are they starting to back away from their original 'infrastructure-light' intentions/promises? Are they starting to reshape themselves into a full-service telco? Tele2 is doing something similar, except coming from a completely different background (CPS).

Friday, July 04, 2008

FTTH: coming to major cities

Munifiber may be a tier 2 or tier 3 city toy in many countries - not so in the Netherlands.
Amsterdam, the #1 city, has its CityNet (run by GNA), which is looking at citywide deployment by 2013. And now Rotterdam, the #2 town, is planning to expand it's network (run by OBR, working with BBned) to do exactly the same: citywide by 2013.

Tuesday, July 01, 2008

Progress at Gaiacomm and Daily Media

Over here at Communications Breakdown we have two pet projects: Gaiacomm and Daily Media.

We have been hearing some good reports on the latter. It looks like there may be a press release within the next couple of weeks.

The former however seems to be less successful in the 4G wireless space, but its illustrious CTO Judah Ben-Hur tells us (we added the hyperlinks): " ... we are working on a technology to submit to the JIEDDO Committee for review and possible funding. We figured since 4g terahertz wireless communications is being stopped by the industry, we would at least use it to at least save lives in war. Boeing cannot argue with that considering their IED technology does not seem to work, thus the open bid. I am sure many families will appreciate the fact that we will be able to defeat IEDs and save their sons or daughters lives. Maybe this is better than 4g wireless for now."

Off-topic: extending life before being swallowed

Of red wine, robots and the Big Bang.

A hundred bottles of wine a day (or maybe just 35 - or even just 4 glasses) may extend your life. According to this New York Times article (free registration is a must for readers of this blog):
  • resveratrol (which is in red wine) may activate sirtuins,
  • which can trigger a reflex called caloric restriction,
  • which makes the (human) body's resources switch from fertility to tissue maintenance,
  • which cuts down on aging.

And when the body does start to fall apart, you may just download your consciousness into a computer. Rodney Brooks writes on the IEEE pages about a 'singularity period', rather than an event, possibly leading to a techno-utopia. He doesn't provide a timeline, but it won't happen before 2030. Fortunately, humans will always be a step ahead of the machine.

That is, if the earth isn't swallowed by a man-made black hole in the first place. A lot is being written about the Large Hadron Collider at CERN. The Guardian has now devoted a kind of a portal to the institute.