Versatel's Mesch brothers reappear at CityFibre

Here's a reprint of an earlier background article to be found here: http://goo.gl/149hN

Versatel founders pop up at UK's CityFibre

The founders of Versatel, Greg and Gary Mesch, have started CityFibre in the UK to roll out FTTH. Time for a short analysis of the power of challengers on the telecom market.

The telecom sector is dominated worldwide by incumbents, and only in mobile telephony has there been a definite breakthrough in the situation. The UK offers perhaps the most extreme example of this: BT sold its mobile activities (first called BT Cellnet, then mmO2 and now O2) in 2005 to Telefonica. On the fixed market, cable provides competition and in Europe unbundling has also been added, bringing new players and lower prices to the market and growing broadband penetration.

However, the eternal question is whether there is truly competition if vertically integrated companies compete with their own infrastructure? But then how many types of infrastructure can the market support? Doesn’t the existence of two or three networks lead to an oligopoly? Does mobile (4G) even figure in this? Is infrastructure not a natural monopoly, which as such can be best managed by the government, just as other utilities?

Challengers

However much sympathy you may have with the last point, which in Australia is more or less underway with the construction of the National Broadband Network, there are still a number of places in the world where challengers are shaking up the market with their own infrastructure. A few examples:

• Hong Kong: incumbent PCCW is under pressure from the newcomers City Telecom (of Hong Kong Broadband Network, HKBN) and Hutchison Telecom. The local market is relatively easy to cover with fibre due to its compact size and high density, making a FTTB network an obvious choice.
• France: a real FTTH market is in bloom, although limited to certain regions, including of course Paris. The latter makes grateful use of the easily accessible sewers network. In addition to France Telecom, Numericable, SFR and Iliad are active. Iliad, which operates under the brand name Free, has acquired a certain hero status, for keeping pricing simple (EUR 30 per month) while at the same time continuously expanding the range of services provided. The basis is its own DSL network, but a couple years ago it started rolling out FTTH. In addition Free develops its own software and hardware.
• Italy: FastWeb is one of the most important competitors of Telecom Italia on the fixed market. It started with its own FTTH network in Milan and later expanded to the DSL market. In 2007 the company was acquired by Swisscom, but it still has a minority stake listed on the stock market.
• Netherlands: Versatel was started already in 1995 in order to compete with KPN, focusing on the business market. In 2002 the company suffered a financing crisis and could no longer pay the interest on its accumulated debt. It started afresh, but fell into financial troubles again in 2004 when it bought the broadcast rights to the Eredivise football. Versatel wanted to launch a pioneering IPTV service, but barely had its network ready in time for the new football season. It failed to attract a significant number of customers and Tele2 acquired the company. In addition, Regggefiber is active on the FTTH market, although the company is largely in the hands of KPN since 2008.
• UK: the British broadband market is dominated by BT and its unbundlers on the one hand and cable operator Virgin Media on the other. Newcomers have largely limited their efforts to local projects. Among them is CityFibre Holdings, which acquired the assets of i3 Group. The assets include H2O Networks and FibreCity, which plan to roll out FTTH, partly through the sewers, in Bournemouth, Northampton, Dundee and other cities.

The common factor among all these is FTTH, but success is also clearly determined by good, innovative services at a low price. HKBN and Free have been the best at that. Versatel suffered from financial problems, and as part of Tele2 really only has much impact on KPN on the business market. With its Best Deal motto, its ambitions as well as its market share have stagnated on the consumer market. i3 Group was forced to sell its assets due to financial problems, and the new CityFibre has ambitious plans to roll out FTTH in a number of cities, starting with Bournemouth. CityFibre is led by a number of former Versatel people: the brothers Greg and Gary Mesch, Mark Collins, Chris Toller and Leo van Doorne.

Conclusions

FastWeb saw that it was too soon for FTTH and made an understanable shuift to DSL. Since then demand for bandwidth has been near insatiable, and FTTH has become profitable. HKBN and Free are examples of this, remarkably also with innovative and low-priced services. Financial problems are always lurking in the shadows, and too much debt becomes a problem when forecasts are too optimistic. Being acquired by Tele2 (Versatel), KPN (Reggefiber) or Swisscom (FastWeb) may provide for financial stability, but can also be a brake on ambition. CityFibre, for those who see the history of Versatel clearly, is therefore a company to keep an eye on.