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 Movearoo.com. 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.

1 comment:

Dave Burstein said...

Tim

Important stuff, especially as fiber is coming. I'm actually writing this on an Earthlink cable connection over Time Warner cable, a model that has completely failed in the U.S. Time Warner was required to share as part of the merger with AOL, but made it effectively meaningless when they set the details.

The key thing unbundling fiber and cable is to make sure the price is per customer, not per bit or by speed. That corresponds to the actual costs, within a very wide range, unless there is a congestion problem between the home and the handoff point.

Essentially every fiber node or DSLAM is designed to be non-blocking and offer the top speed physically practical to every customer. So there is no difference in the marginal cost the customer has a 10/1 circuit and uses 2 gig a month or 100/100 and uses 250 gig.

That means that any unbundling that actually follows telric will charge the same no matter the speed or the usage. Cable is a little tougher, but with DOCSIS 3.0 congestion should be very rare. Comcast is talking a cap at 250 gig, and something like that is appropriate for a price differential as well. There is a cost of any user who's usage is so high they slow others down or force an upgrade.

Here's a very important upside to this: the unbundler can offer a seriously better service than the incumbent, unless the incumbent also gives unlimited bandwidth and maximum speeds at the same price. There's still a backhaul/transit cost, but that's usually less than 5%.

The happy result is that the basic service will become close to the maximum, as happened in France and Japan. Son and Niel looked at their costs, said they can go maximum at the same price, and changed everything. The incumbent had no choice but to match.

If you price per bit or speed in the local loop, the costs become prohibitive if you give your users more than the incumbent. That allows the incumbent to charge more for higher tiers, even if they don't have higher costs. That's the plan at DT and Bell Canada, and we'll see if the regulator stands for it.

Which is why things didn't go anywhere in the U.S. on cable. Time Warner "shared" with Earthlink, but handled everything except newservers and the like. Earthlink had no way to be better than TW, and the economics didn't let them be much cheaper. So there was no way for them to get customers, and they all but abandoned the project years ago.

Glad to see you're back writing.
db