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?

Is usage growth outstripping available bandwidth?

Akamai just released its first quarterly 'State of the Internet' report (free registration). It focuses on security and connectivity issues, but also has some data on penetration and broadband.

Looking at the number of connections at high broadband speeds (> 5 Mb/s, page 13), the usual suspects top the list: South Korea (64%), Japan (48%), Hong Kong (35%), Sweden (29%). Two things stand out:

• Romania and Nepal in the top 10. I am not sure about the state of the internet in those countries, but perhaps it is a matter of 'double or nothing': you are either very well connected (probably a limited number of people), or not at all.
• There is a quarter-on-quarter drop in that number for several countries, including South Korea (-4.7%), Hong Kong (-9.8%) and Sweden (-9.0%). Perhaps this is a result of more people coming on line, and usage rising, whereas the network isn't upgraded at the same pace. Remember that no matter what the architecture or protocol is, fundamentally all networks (not just coax) use shared bandwidth.

Broadband reality checks

Here are some newsbits that may serve as reality checks of broadband demand in general and FTTH in particular. Food for thought, Fibre Ring!

• Previously announced plans for doing FTTH in Lisse (NL) were abandoned by Lijbrandt, for lack of demand. I suppose targeted pricing actions from the local MSO prevented the signing up of at least 40% that Lijbrandt, a Wessels/Reggefiber company, aimed for.
• Apparently, broadband is not an issue in the US elections so far. It attracted just 1% of the votes in a poll.
• Last month, Deloitte issued their 2008 predictions that I got via a Mondaq newsletter (free). Among the trends they mention are the effects of an economic downturn on both spending and the need for profitability. "In the wireline sector, the current speed to beat is 100 Mbit/s. (...) there may also be a growing group of individuals who question the consumer need for faster speeds and the tens of billions of investment dollars this may entail."
• Of an entirely different order: the number of subsea cable cuts in the Middle East reached four. Conspiracy theories abound. Rerouting (if not self-healing) happens pretty quickly, but it shows the vulnerability of the internet (see Benoit's post also).

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.

BROADBAND://The truth about the Dutch lead

Here is why the Netherlands are among the leading nations when it comes to broadband penetration, P2P downloads, traffic levels at the Amsterdam Internet Exchange, etc. It's called stinginess.

I'm afraid the Dutch are notorious for this characteristic. It's not just college kids addicted to free downloads.

Happy Holidays, Scrooge!