Wither Orange NL's broadband unit (2)

The balance seems to be tipping in favor of holding on to the former Wanadoo unit.

What is happening? Deutsche Telekom bought Orange NL to merge it with T-Mobile NL. However, Orange NL also operates an LLU unit (the former Wanadoo operations). So far, Deutsche Telekom appears to have either a PTT (eatern Europe) or a mobile-only strategy 'abroad' (even as Vodafone is entering the fixed-line business). I therefore assumed that the BB unit would be put up for sale.

Now Deutsche Telekom has spoken, in Barcelona. It aims to reduce its dependence on the domestic business by expanding abroad - in both mobile and ISP assets. The latter is really new to the strategy. (remember that Club Internet (France) and Ya.com (Spain) were sold). See also the recent Q3 report (page 17, under Group Strategy): "Grow abroad with mobile communications" (which, by the way, is repeated in the Barcelona presentation).

This addition to the strategy could have quite far reaching consequences, as T-Mobile operates (mobile-only) units in the UK, the USA, Poland, Austria, the Czech Republic and the Netherlands. Deutsche Telekom could be a major consolidating force, but it remains to be seen if the company truly pursues this strategy.

KPN: away from network ownership and toward FTTH

Today I had the honor to meet with Joost Farwerck, director of Wholesale and Operations at KPN. Most striking were unequivocal belief in FTTH ('the endgame', as I have referred to it before) and an apparent decline in interest in being a network operator.
Joost very tellingly was able to see me in between a trip to Australia and New Zealand and a meeting with bbned (Telecom Italia).

Here are my edited notes.

1. All-IP

• KPN is planning the migration to an NGN, as I have written about before. Many MDF locations, LLU and ADSL2+ will be phased out and replaced by SDF locations, SLU and VDSL2. Fiber will be pushed deeper into the network, to reach all the way to 28k street cabinets (FTTC) and bypassing 1300 MDF locations. No FTTH as yet, only in greenfields and selected towns (Enschede and Almere).
• Currently, details of an MoU are worked out. The MoU was signed over the summer by both KPN and the main unbundlers (bbned, Tele2 and Orange). The new agreement is to be published around December 15. The details are about phasing out the MDF locations, the migration and KPN will present an alternative to line sharing (this product is on the way out anyway, as it is replaced by full LLU). Apparently, street cabinets offer enough space for SLU. Bbned is going the way of SLU.

2. Network operator v. service operator

• KPN believes WBA (wholesale broadband access) is a good product that will ensure competition, based on equivalent access.
• Joost seems to think that OPTA nor the new EU regulations, will lead to functional separation. I think KPN is a case in point where proper accounting separation and a good wholesale strategy + portfolio can fend off functional separation.
• By the way, accordin g to Joost, a wholesale customer can be more valuable than a low-end retail client.
• Outsourcing is becoming a major part of KPN's strategy. At Joost's division up to 50% of current employment levels will disappear.
• Joost seems to be much more of a services man than a network operator. I have noticed this before at both Tiscali and Telecom New Zealand. Network control is less important in a regulated all-IP world.

3. Co-op

• I am a big fan of cooperation. So is Joost, but challengers seem to think differently. KPN tried to team with Tele2/Versatel several years ago, but was turned down. Also, unbundlers are sub-scale in many cases, but (foreign) owners appear to be 'believers', as Joost put is. They all seem to think that they can make it work on their own. Too bad that there are few G9 (Australia) type of intitiatives.
• Joost seems to be similarly at a loss when it comes to long-term commitment of the large Dutch unbundlers. Tele2 is selling off many assets; T-Mobile may sell on the Orange BB unit; Telecom Italia may get rid of bbned.

4. FTTH

• "FTTH is the endgame". I couldn't agree more.
• However, VDSL gets deployed 5-7 times faster (and is written-off in 3-4 years), so it cannot be skipped. Here Joost is very much on the same track as Belgacom.
• KPN recently teamed with 'public enemy #1', Reggefiber, for the city of Almere. Joost told me they will own the passive infrastructure together (I was under the impression it would be 100% Reggefiber); KPN will serve as network operator; KPN (and others, if they wish) will be service provider.
• KPN beefed up its Belgian mobile operator by acquiring Tele2 Belgium. That obviously begs the question: will E-Plus make a similar move in Germany? Joost seems to see better business opportunities for some German expansion (out of the Netherlands), e.g. to the Ruhr area, than for doing FTTH in some rural Dutch areas.

FTTH ultimately drives separation (2)

Will functional (or even structural) separation happen to the European telcos?
Several countries (Poland, Italy, Australia), operators (Telecom New Zealand, TeliaSonera, eircom and of course BT) and the EC seem to be moving in that direction.

Here are the external forces driving or slowing down the movement. They differ from country to country, but the end-game is the same everywhere (FTTH), so separation will happen - sooner or later.

• Cable competition (i.e. inter market): forestalls separation. Sufficient BB market competition was a reason for OPTA to say that KPN needn't be separated (aside from OPTA not having the legal means to enforce it).
• Intra market competition: drives separation. BT is a prime example. The creation of Openreach kickstarted LLU.
• Wholesale offers: forestall separation. Here KPN is the perfect example. Moving from LLU (with fiber to the MDF locations) to SLU (with fiber to the cabinet), it managed to agree on MoUs with the nations largest unbundlers (Tele2/Versatel, TI's bbned and DT's Orange). In other words, no need to kickstart SLU by separating KPN.
• FTTH: drives separation. As this is the end-game, separation I believe is inevitable.

Here is my view of the future:

Nobody wants two FTTH networks, even duct sharing isn't sufficient. KPN resorts to being a service provider in Almere on the Reggefiber network, and UPC will be marginalized unless it follows KPN. The physical layer (the fiber) will be a monopolist utility. It will need to be regulated only once service providers start complaining over rates or services.

Demand drives FTTH drives separation

FTTH and separation are probably the most important trends in telecom right now. They are also linked.

I believe demand for bandwidth and nations competing for a larger share of the worldwide GDP pie will drive investments in FTTH networks. Telcos feel the heat and are preparing investors for a large capex round.
At the same time, realisation builds that there is value in both networks and services. Telcos are leaning toward the latter, and are preparing for their new roles by introducing sharing, outsourcing and separation.

Below I elaborate on these issues.

1. Drivers

1.1 Demand

Demand growth remains high. Statistics from internet exchanges, IPTV, the rising popularity of YouTube, monitoring services, etc. are used to corroborate this point. Add to that the following. As long as there is no true end-to-end connection and bandwidth is shared at some stretch (either on the open internet or in the last few yards), bandwidth should be redundant. So, if you need let’s say 30 Mbps, you really need peak performance of 100 Mbps. Check out Dean’s remarks.

1.2 Competition among nations

A valued reader suggested that there is a race going on between nations. Already, eastern European countries leapfrog places like Germany by building FTTH networks. If you want to maintain your share of the world’s GDP, you better not stay behind. Places ranging from Chattanooga (Tennessee) to Malaysia acknowledge this. No wonder Italy is weighing a massive investment into Telecom Italia’s network, once the company is separated. No wonder also why Ofcom launched a consultation, apparently aimed at paving the way for FTTH.


2. Future proof solution: FTTH

This point hardly needs any back-up, even if your long-term view is that the last few feet will be wireless. You better bring fiber at least to the doorstep of all the places where people like to hang out.
As I have written before, telcos are actually preparing investors for the big plunge.


3. Sharing

I believe sharing is going to gain popularity. Right now it appears to be concentrated in areas where demand or scale is limited. You can find examples in such diverse areas as mobile TV (German operators jointly building a single network), WiMAX (look at this consortium in Malaysia), FTTN/VDSL (altnets in both Australia and Germany) and 3G (in the UK, for instance).
The question remains: which part are you willing to share? The passive (dumb) layer is an obvious candidate, but you want to remain in control of traffic and services. The Vodafone/Orange UK example takes (tower and antenna) sharing one step further than sharing deals elsewhere (including the Sprint/Clearwire deal), which are mainly focused on extending coverage to rural areas. For Vodafone and Orange, sharing means: separating the network from the services. It implies that the network must be redundant (so there will not be an issue over who gets how much capacity), and also that the days of network coverage as an USP are behind us.


4. Outsourcing and separation

4.1 Outsourcing

The next logical step seems to be outsourcing. If you decide to sacrifice full network control, why not let some third party handle the network?
KPN is a case in point, since it started outsourcing many tasks in its fixed network to a whole range of IT providers. To be sure, I do not believe that KPN will save on costs. We all know the ways of IT companies. There will be lots of talk and writing policy documents. I counted at least 7 IT companies involved. IBM will be the lead integrator, but I am unconvinced that this structure will save KPN any opex within the next 3 years. I believe the move is designed to sharpen the focus on services, perhaps even pave the way for more (i.e. core network outsourcing and structural or even ownership separation).

4.2 Separation

The new focus on services opens the gates to (further) separation. In fact, it is already amongst us. First of all, let’s not forget that selling the tower business by mobile operators can be viewed as a form of separation, even if this only sets site sharing apart (and not antenna sharing or any activities ‘higher up’).
But there is much more. In Switzerland, Swisscom Broadcast received a DVB-H license, but it must provide equal access to all operators. Shortly before, TeliaSonera took the unusual step to create a separate infrastructure/wholesale unit in Sweden. Another voluntary action comes out of EchoStar, which proposed to split its satellite fleet (with wholesale operations) form the service provisioning unit (the Dish Network).

Telecom New Zealand will be split along the well known BT Openreach lines, creating a unit in charge of the access network in order to jumpstart LLU.
It remains to be seen if this effectively creates a new stumbling block on the road to FTTH, as the new structure focuses on LLU and therefore on maintaining ADSL(2+). It would be my preference to try and leapfrog intermediary technologies as much as possible and go straight to FTTH.

Some companies are obviously atttracted by the wholesale business model (the NetCo part of the business, as opposed to the higher valued ServiceCo units), providing a ‘natural monopoly’ and ditto cashflows. Consider such diverse players as Reggefiber (the FTTH company in the Netherlands), Frontline Wireless (plans a national safety network in the US, stresses the importance of wholesale access to the new 700 MHz spectrum in order to foster new entrants) and even Gaiacomm International (whose proposed VLF/terahertz network would not compete with exiting service providers).

Does anybody want to compete in the Netherlands?

As I've written before, LLU is coming to and end in the Netherlands. France Telecom yesterday in a way referred to this, meandering on its strategy regarding Orange NL.

The consequences of the next stage in copper-based competion:

• KPN thinks it's so clever, forcing the competition out of the market. Only a player like KPN can afford to build a FTTC + VDSL network ('All-IP'). However, the plans could backfire: OPTA could go the separation route; OPTA could allow UPC to merge with @Home to form an MSO with near-national coverage (and create a duopoly US style); altnets could band together Australian style (the G9 consortium, proposing a FTTN network of its own).
• OPTA, the local NRA, together with all market participants, is studying a Full Alternative for LLU. Could it be SLU (FTTC + unbundling from the street cabinet)?
• Altnets have invested very little over the past two years or so. Coverage of their ADSL-networks has not expanded.
• Municipalities are cleverly moving in, building FTTH. There seems to be kind of an arms race between KPN (also buying up ISPs) trying to get involved and Reggefiber (the Dick Wessels company).
• Orange NL was put up for sale in February (rumours, but I had them sort of confirmed). Then in March, at the final 2006 results, it was denied. Now, at the Q1 results, France Telecom acknowledges all options are open. The same happened to Telecom Italia subsidiary bbned: for sale, and then all of a sudden it wasn't. This can only mean one thing: FT and TI want out, but they can't. And with market regulator NMa still studying the KPN takeover of Tiscali NL (report due May/June), KPN is no longer a buyer.

No potential buyers and LLU coming to an end - do I hear monopoly? Is duopoly the simplest answer to this? Or can altnets overcome their cultural differences and build a joint G9-style network?

Telecom Italia starts SLU trial in the Netherlands

Telecompaper reports that bbned, the Dutch wholesale internetprovider owned by Telecom Italia, is starting a VDSL trial in three Dutch towns in the Amsterdam area. For now, it appears to be a technical trial.
The infrastructure exists of fiber connected street cabinets, in which bbned installed VDSL gear. In other words, it uses SLU (sub-loop unbundling), instead of the more traditional LLU (running from MDF locations).
InterNLnet and SURFnet will retail the service. Speeds are 40/10 Mbps.
Bbned is also involved in munifiber projects.

Some remarks:

• As KPN is planning and building it's All-IP network (including nationwide FttExchange + VDSL2 by 2010), bbned appears to be the most committed altnet. This comes as no surprise. Orange (which denied being for sale, much like bbned itself) and Tiscali NL (which will be bought by KPN if the competition regulator NMa allows it) are on the sidelines. Tele2/Versatel is committed as well.
• When it comes to VDSL services, bbned is actually beating KPN. KPN is targeting a May launch, which is questionable now that the telecoms regulator OPTA is reviewing the All-IP plan and the market's response to it (due June). However, a bbned launch could support the case for an early KPN launch, as this shows that SLU is viable after all.
• Talking of which; Analysys produced a report which all but ruled out SLU conducted by altnets for lack of scale. In other words, as LLU becomes unavailable (when KPN closes and sells MDF locations), SLU may be realistic after all. This will make matters much easier for OPTA, which has to come up with an alternative to LLU.

Regulation 2.0 coming to Ireland

Battling cable, eircom apparently has similar plans to KPN: pushing fiber deeper into its network (to street cabinets), going from FttExchange + ADSL2+ (with LLU as an option) to FttCabinet + VDSL (with SLU as a theoretical option), thereby:

• creating the option of closing COs, savings costs;
• moving DSLAMs closer to end users, expanding available bandwidths;
• frustrating altnets who have DSLAMs in those COs as well but lack the scale to move them to the street cabinet level, making SLU unfeasible;
• forcing regulators to come up with some other alternative to LLU.

We have seen this in the Netherlands, and now it is spreading to Ireland. Watch out for regulation 2.0 coming to Europe in the next few years.

CONSOLIDATION://Orange NL for sale

A newspaper in the Netherlands reports France Telecom has hired Lazard to shop Orange NL around. The unit has 600k BB subs and 2.0m mobile subs and should bring in EUR 800-850m.

Observations:

• Fixed NL: KPN is forcing a choice upon altnets, building its All-IP network: retreat (or be a reseller) or step up investments to make SLU work, as the old paradigm (FTTEx + ADSL2+ = LLU from up to 1300 exchanges) is replaced by a new one (FTTN + VDSL2 = SLU from up to 28k street cabinets). The outcome is still up in the air, as OPTA seems to be backtracking on earlier support of KPN's plans, but Orange seems to think neither option is very attractive. Telecom Italia, through bbned, and Tele2/Versatel seem to be committed to the Dutch market.
• Mobile NL: The mobile market is going to a three-player model if T-Mobile or Vodafone moves in. T-Mobile could even go from a mobile-only strategy (as in the UK) to a triple play offering (as in France). Unless of course China Mobile, Weather, Telefonica, Telecom Italia, Belgacom, Swisscom, CPW or TeliaSonera (cf. Xfera in Spain) deems the time right for a new market entry.
• France Telecom: Going from 5 to 4 countries for its triple play offering (France, UK, Spain, Poland).

Consolidation is continuing, driven by a need for scale economies in mobile and LLU (not to mention SLU). More units could be put up for sale (DT France, DT Spain, Tiscali UK, Tiscali Italy, SFR). What is intriguing is:

• Companies are abandoning saturated markets, like Scandinavia and now the Netherlands (the Tiscali NL sale to KPN is pending at the NMa) and are turning to emerging markets.
• Vodafone, according to the newspaper, wouldn't be interested in Orange NL. Puzzling. Could this be the first step of Vodafone putting even more focus on emerging markets?
• If T-Mobile isn't interested, they might as well leave the market altogether.
• Telefonica is definitely a consolidator. Will they bid for Orange NL, or target the bigger prize: KPN?
• Will this be the European entry of an 'eastern' company (after Hutch and Weather)?
• As PTTs are fighting each other in their home markets, could this sale mark the formation of a pan-European kartel, e.g. FT and DT getting out of each other's markets?

UPDATE: obviously, existing players could strengthen their current presence:

• Telecom Italia: to add a retail business (and mobile) to their bbned offering.
• Tele2: to gain scale and a mobile license, in order to migrate their current reseller business.
• Scarlet: to mirror Tele2's strategy of turning into a facilities-based operator.
• Cableco: to add mobile and to sell the fixed business to somebody else.

REGULATION://Setback for KPN regarding closure of MDF locations

nwrjAs I have posted before, moving from FTTEx + ADSL2+ to FTTN + VDSL requires a Full Alternative to LLU. This is exactly what is happening in the Netherlands, where KPN is building its All-IP network. OPTA, the local regulator, today published a brief note on how it will proceed.

Back in October, OPTA was generous in recognizing that it should support KPN in moving forward, i.e. it planned to allow KPN to close many of its MDF locations. The trouble is, that is exactly where competitors' DSLAMs are colocated.

Today OPTA publishes the timeframe for how it will proceed. The note seems to include a big setback for KPN: OPTA will, for now, not proceed in making formal Policy Rules. It seems to acknowledge that SLU is not a Full Alternative to LLU. Things seem to be pretty much deadlocked.

The main points from today's note:

• Market analyses to be published 07Q2.
• The report from Analysys may be published (what does that mean?). The main conclusion is: SLU is not economically viable as an alternative to existing LLU players (unless such a network would be limited to 1000 street cabinets in the most densely populated areas).
• SLU + SDF backhaul doesn't seem to be a Full Alternative to MDF access. It appears that MDF access cannot be withdrawn (unclear is under which circumstances KPN would still be allowed to close any locations). OPTA is pondering what a Full Alternative could be and thinks it will publish the result late February.
• The NERA report on applicability of the British model (Openreach, equivalence) is to be published mid February.
• Making rules on jointly laying fiber has no priority.

REGULATION://Extending fiber deeper into the network challenges LLU

Deutsche Telekom is switching back to ADSL2+, apparently to have wider coverage for IPTV (T-Home). VDSL roll-out is haulted and stays at 10 cities (original target: 50).

Big changes are ahead in the European telecom sector. DT cites regulatory uncertainty for haulting the VDSL deployments.

Upgrades to ADSL2+ left the competitive landscape, based on LLU, unchanged, but VDSL and FTTH have created different environments. I believe Europe will support the survival of 'inter-copper' competition, but now it has to come up with an alternative to LLU. This is a hot topic in Germany, but even more so in the Netherlands, where OPTA has to come up with a fully-fledged alternative to LLU. Watch out for this to happen in Q2. OPTA will host an analyst meeting in The Hague next Friday (Jan 19).

So now operators have a choice:

• ADSL2+, with fiber not extending beyond the exchange. This is the case at BT, which sees no business case for FTTN/FTTC, let alone FTTH. This makes the UK an attractive market for LLU-based competition.
• FTTN + VDSL: KPN, Belgacom, DT (now haulted), TI. This renders LLU-based competition quite uncertain at the moment. Will regulaors find a fully-fledged alternative, and/or will altnets be prepared to step up their investment program to keep track with the incumbent?
• FTTH: FT (at least partly, further decisions in 2008). FT is responding to both Iliad and neuf cegetel (and Verizon), by making the network future-proof.
• A mixture of all: Most notably at Swisscom and Telefonica, but I suppose in many other countries too. FTTH is probably pretty common now for new builds.

REGULATION://IP networks in the Netherlands and Germany

OPTA has published a time schedule, as a follow-up to its Position Paper on KPN's All IP network:

• Conversations with all market participants: January 2007, follow-ups in February/March 2007.
• Market research from Analysys et al: still on-going.
• Decision-making (or drafts): 07Q2.

Uncertainty persists. While KPN keeps working on its All-IP network, altnets are on the sidelines. KPN plans to launch VDSL service May 1.

Related news: in Germany the regulator just opened a consultation on IP-interconnection. It closes February 26, 2007.

REGULATION://Fully-fledged Alternative for LLU v. Structural Separation

The press in the Netherlands has taken interest in KPN’s statements ahead of OPTA’s decision on its All-IP network. KPN wants to charge competitors for MDF locations that it would have to maintain for their use only; KPN is interested in being a reseller on cableco networks and FTTH networks; KPN says its network has been and always will be open to resellers, so there is no need for structural separation (to any degree, be it the equivalence/Openreach model or full separation as may happen in Ireland and Denmark). Also, the press picked up a statement form OPTA (about looking into splitting up KPN), which wasn’t new at all.

The important thing about this is that it is OPTA who will decide, not KPN. I believe KPN is trying to convince everyone of its reseller potential. I’m sure they have it, but I’m equally sure that KPN in reality isn’t serious about those efforts. I do not believe KPN would limit itself to service-based competition, i.e. competing on price alone. Also, KPN is trying to convey the message that there is nothing wrong with service-based competition.
It’s all about politics and creating some negotiating space. The same goes for those juicy statements of altnets, which unfortunately didn’t get any media exposure.

To name a few (not literal):
- Regulation should be abolished altogether (T-Mobile). Sound familiar? (hint: Deutsche Telekom).
- Selling MDF locations is not necessary for KPN’s All-IP network and it probably is illegal (ACT).
- KPN isn’t investing at all, they are not contributing to the general economy; all they do is relocate assets by selling certain ones (MDF locations) and buying back others (All-IP) (bbned).
- Should KPN be allowed to sell MDF locations, then we want to share in the proceeds (bbned).

By the way, I outlined here where we are right now. OPTA is due to publish the timing (sometime early 2007) of its findings this week: 1. Policy rules (‘Beleidsregels’) related to the closure of MDF locations. 2. A memorandum of findings (‘Nota van bevindingen’) related to a host of other matters, still to be resolved

What it comes down to, I believe is this.
- The All-IP network effectively means that LLU as we know it is coming to an end. This will happen in all markets, eventually, because fiber will be pushed deeper into networks and because everybody will switch over to IP.
- OPTA (or any other regulator) has to decide on a Fully-fledged Alternative (‘Volwaardig Alternatief’). If none is found, structural separation (to some degree) will be considered.
- The outcome will be the result of (1) creativity on the part of OPTA and politics (see above), (2) market conditions. The latter are comprised of several items: cable reach; FTTH reach; scale economies on the side of altnets, necessary for replicating SDF backhaul; KPN’s lead over altnets, since KPN started building the All-IP network in 2004. Of course, at some point regulators could say (as they did in the US): it is time to end regulation; altnets have had their chance; now if they want to compete, they have to build their own networks, or negotiate a reseller deals with network operators.
- In markets such as the Netherlands full separation will probably not happen, for the simple reason that cable networks have very high reach (as is the case in Belgium, Switzerland, Portugal, etc.).
- Partial separation (Openreach is still part of BT, but at an arm’s length) is a possibility.

It remains to be seen if all market participants can work out a Fully-fledged Alternative; if not, splitting up KPN is unavoidable.