There has been a wide range of news around FTTH over the past few days. It is striking to see on how many fronts FTTH is gaining momentum.

• DIY trench digging: already 80% of Lyse's customer base. But that's Norway.
• Emerging markets: fiber coming to Lebanon, India, India again, the Philippines, Iran and Estonia.
• Infrastructure-based competition: Swiss utilities are banding together and Swisscom is abandoning VDSL in larger cities in favour of FTTH.
• Munifiber: UTOPIA is picking up steam. Focus is on businesses now and Integra Telecom is added as a business-oriented service provider. Meanwhile, FuzeCore launched a 100/100 Mb/s service at 147 $/mo in the residential market.
• Business VAS: Eurofiber (a Reggefiber sister company in the Reggeborgh holding) launched a surveillance service with a third-party SP, DIT is beveiligen.
• Separation: Telstra may be allowed to buy into the NBN (capped at 49%), by first contributing fiber assets in exchange for 20%. One condition would be for the company to be functionally (?) separated.
• DOCSIS 3.0: Virgin is testing a 200 Mb/s service, but here is why it stands no chance against FTTH.
• 3-D: Digital Hollywood wants it to come to our homes and indeed one consultancy expects up to 10% of homes to be upgraded by 2012. Meanwhile, the new Pixar film UP opened the Cannes festival.

EU objecting to functional seperation of Telecom Italia?

This is how subtle it gets: AGCOM (the Italian) NRA proposes functional separation of Telecom Italia. Great, isn't it? Only the second time in Europe, after BT/Openreach/EAB. TI would create a network company Open Access, and an independent board to oversee things.
But wait. This time it's the EU that objects. Basically, it fears the terms will be too friendly for Telecom Italia.

"The network is our core business." So far, only SingTel and Bharti Airtel (and a more recent story here) have been as enlightened as to step away from this old-style telco thinking.
Telecom Italia would have all the reasons of the world: it has a heavy debt load, and taking separation even one step further (structural separation) would allow it to attract third-party funding to roll out FTTH.

Update on separation, FTTH and 3-D

Here's a short update on some of the hottest topics around:

• Separation. First of all, the Telecom New Zealand AGM rejected the election of the 'two Marks', put forward by Elliott International, to the board. They were in favor of structural separation, whereas Telecom right now focuses on operational separation and FTTN. A disappointing day, leaving the share price at a 16-year low ... However, good news related to functionally separated BT. The Register reports that it is considering outsourcing Openreach, putting the unit at an even longer arm's length. With Ben Verwaayen's departure to Alcatel-Lucent, it will come as no surprise that his new company could be a candidate for taking care of the job ... Finally, in Australia some people seem to be getting closer to structural separation as well, such as senator Minchin.
  
• FTTH. Julio Linares, COO of Telefonica, spoke at Broadband World Forum Europe. Here are some quotes from Total Telecom: "We will have to measure content in zetabytes. It is difficult to identify future services, but ultra-broadband will facilitate more video, high-definition and 3D content, and more. Consumers are going to need more bandwidth. Demand for bandwidth on fixed and mobile networks will multiply at least by five in the next three years. To support this zetabyte era, we are going to need new infrastructure, we are going to need networks. We need new technology, but technology is not going to be the constraint. Investment is the constraint. To build fixed broadband across Europe, we need to invest €250 billion, but at present the industry is averaging investment of €50 billion per year. It will take 20 years to build just the fixed part of the new infrastructure. Do you think we can afford it? (...) of course, no. (...) We need to speed up. At this time of economic crisis, it is very important to take into account the weight of our industry on the whole economy."
• 3-D. Philips has demonstrated 3-D VoD ('2D-plus-depth') at the IBC conference last month, branded WOWvx. It doesn't require special glasses, it's what they call an 'autostereoscopic display', basically consisting of an LCD display plus a lot of lenses covering the pixels. Both Deutsche Telekom and Orange have trialed the system. Even more recently, Philips showed its new Quad Full TV (thanks dear readers!), basically using the same technology but with everything brought together in a prototype TV.
  

Telco TV: in search of a strategy

Here are some follow-ups to my previous posts. Telco TV is the one common theme.

1. The P2P/net neutrality/broadband incentive problem
A valued reader and analyst at a major research firm pointed me to a solution out of it.

To put it in my own words:
Why not sell a portion of your bandwidth and reserve the rest for your own services? This way, you may sell e.g. 10 Mb/s (best effort) for 30 EUR/mo, and keep the rest for your own www and IPTV services.
I'm not exactly sure where the rub could be. To me it is interesting to see how telcos can learn from cablecos (as I pointed out before), because this is exactly what cablecos are doing: they sell BB, but keep most of the available spectrum for their own broadcast offering.

2. Blog roll
Here are some interesting recent posts out of the Fibre Ring:

Stephen Davies: white papers.
Rudolf van der Berg: on streaming video.
Stefano Quintarelli: on separation.
Kai Seim: on PAN, LAN and WAN (cool graph).

3. Video
There seems to be coming some urgency to the telco TV market.

KPN is raising the price of DTT (in this Opinion piece on Telecompaper.nl it is revealed that probably 1 in 10 of KPN's TV subs is on IPTV, the rest on DTT; 50-60k IPTV subs is far above what I personally had in mind), while HanseNet (the Telecom Italia subsidiary in Germany) is making basic IPTV free of charge (marketing talk of course: for 30 EUR/mo you now get a triple play, which used to be 40).

4. Poll
I intend to do a poll on structural separation.

The one problem I have is this: I have some trouble getting into the heart and mind of an incumbent. Who is willing to play devil's advocate and tell me why structural separation is such a "bad thing"? You can take the above link to Stefano's blog as a starting point.

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.

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.

Roman Holiday: Incufiber to the People!

Off to Rome, for a presentation on incumbent FTTH, at an Economist conference. This is the reasoning:

1. FTTH: fiber to the people
2. Incufiber: now is the time
3. Structural separation: recommended
4. Case

Back on Thursday.

Incufiber: the case for structural separation

On Wednesday I will be in Rome for a keynote speech at a telecoms forum. I will be talking about FTTH, incumbents (can I trademark the term 'incufiber'?) and structural separation.

Digging into the subject, that Paul Budde down-under apparently has been researching also, I was reminded of the perennial complaint KPN has about regulation: there is no symmetry when it comes to regulating copper and coax. (OPTA, the Dutch NRA, defends this position, referring to its approach (market-by-market), but is looking into extended regulation of cablecos at the same time.)

There are plenty of arguments in favor of structural separation, and one of them is symmetry. How can competition ever by 'symmetrical' if there is no symmetry between the incumbent and its wholesale partners? Unless of course there is full structural separation. Go on, KPN, call for symmetry - as long as you realize that it will lead to structural separation of your own company.
(Assuming that the EC will not stear toward a US-style cable/telco duopoly and as long as full network replication is not deemed economically viable.)

New Zealand: another Amsterdam look-alike

It didn't take the New Zealand Institute long to come up with an answer (April 2) to the question ("What investment vehicle", March 12) who should operate New Zealand's FTTH network. (In response, InterNZ calls for a debate.)


What it comes down to is a PPP (public private partnership) for a 3-layer model, that the Institute compares to the Amsterdam (Citynet) solution (page 9), which also seems to be coming to Singapore. Some questions remain, though (see below).


The highlights:

• FibreCo: a regulated monopoly "created by the government" charged with building an FTTP network covering 75% in 10 years time.
• "... because there is insufficient market value to build redundant fibre infrastructure and no technical reason to do so." (page 7) A peculiar way of defending this option. However (page 11) "... the value of fibre infrastructure will increase over time." This can be related to new services, rising demand and decreasing costs over time (page 15).
• Open access: FibreCo will have to rent dark fiber capacity on an equal basis.
• "Owners of existing (copper and fibre) networks can sell these assets to FibreCo on a commercial basis."
• Services based competition (page 20): "FibreCo works closely with appropriate companies to light the network and provide a range of services. (...) A single provider lights the network. May be provided by a service provider or an independent third party." This hooks in to current separation plans at Telecom NZ.
• Breakeven. Total cost of reaching 75% by 2018 is estimated to be NZD 4.0-5.0bn, of which two thirds for passive components and one third for active components (page 12). Assuming ARPU of NZD 50 per home (compared to current Telecom NZ ARPU of 80-100 NZD/mo/home) and other input, the breakeven cost per home is NZD 3,000 (page 13). The private sector would be expected to pay for such homes and the government would have to put up another NZD 1bn to cover homes that are more expensive to cover.
• Stimulating uptake: entry level service at a comparable cost; extended period of free services (here a reference is made to Nuenen in the Netherlands); require a switch from copper to fiber in order to be able to retire the copper wire (page 16).
• Stakeholders: government bodies (who will also be anchor tenants: today's annual spend on telecoms of NZD 200m will migrate completely) and private investors may contribute cash, existing operators contribute assets (existing fibre, ducting) and cash - all for a stake in FibreCo (page 18-19).
• Timeline. Operational separation is underway at Telecom NZ. Chorus, the network operator, should be priced within 12 months. Within another 6 months it should be sold to FibreCo (i.e. structural separation).

My take on this:

• Very much in line with my own preferred solution (single infrastructure, separation, 3 layers, open access).
• A focused, regulated, natural monopoly at the passive layer should be viable (page 11), even for a life at the stock exchange. Check out tollroad stocks (page 19) in Europe, which have done very well. It remains to be seen who the government will be able to attract as passive, private investors, but I am sure FibreCo will be an interesting vehicle for investors who prefer utility style investments. In case of emergency, would the government be ready to step and nationalize FibreCo?
• Chorus is to be sold to FibreCo, but at what price? This must be the toughest part to negotiate. The Institute says 'the value' will increase over time (see above) - whatever that means - so that assessment won't exactly help.
• Also, incumbent telcos are very much network focused, so they may oppose the idea of a monopoly operator. Doing operational separation is one thing, but structural separation may feel like another matter entirely to such a company.
• Some vertical integration would still be allowed (between the active layer operator and one of the the services providers). So, regulation should pertain to both the passive and the active layer, I suppose.
• Could some form of infrastructure based competition be possible by allowing more than one player at the active layer (transmission providers)?

Singpore on the move in the three-layer model

Does it pay to operate the passive layer of an FTTH network? I think it does, but it will be different from both running the active layer and providing services.

Last week I spoke with Marcel Jansink (Wavin) and Niclas Mika (Reuters) on this perennially vexing subject. There is a risk of building 'too wide a highway', so it all comes down to usage. I will try to elaborate in future posting and give actual numbers, using Marcel's input (the TNO model).
Needless to say, I strongly believe in the return of the 'Field of Dreams' ("If you build it, he will come.").

Anyway, one condition must be that we build a single infrastructure. Things look a lot more troublesome, both from a financial and a regulatory point of view (duct access, MDU access, etc.), when everybody starts digging.
This entails three things:
1. Separation, but the natural monopoly at the passive layer requires some form of regulation.
2. The ability to attract state funding for the passive layer, as there is no competitor (at the passive layer) to make objections.
3. Changing insights at operators. They must learn to value all their potential roles (network operator, service provider) and be willing to split them.

As I have written before, things are definitely moving in that direction. Separation is all over the EU; governments are increasingly valuing the benefits of FTTH; operators are saying goodbye to running (parts) of their networks.

Singapore may provide a great example of the above: separation into three layers; state funding; operators voluntarily adopting separation and focus on playing a role in one of the three layers.
Singapore's IDA today has a deadline for RfPs (request for proposals) for building the city's Next Generation National Broadband Network. A consortium of City Telecom, M1 and StarHub plans to submit a proposal for building the passive layer.
We will track who else will reply to the RfP.

Outsourcing leads to sharing (a single infrastructure)

Here is an interesting read on a case of outsourcing. CTO Don Price of Bharti Airtel acknowledges to having been an avid opponent ("I was screeming the loudest about not outsourcing"), but now he sees all the benefits:

What happened immediately was that rather than me getting 30 messages an hour relative to network performance, sites being down, trouble tickets being raised, with my phone ringing off the hook, that was all happening to my managed services partner. We were having dinner together, my phone was relatively quiet and he was on the phone constantly. And I'm saying this model is great!'

There are many interesting topics. As you will see, outsourcing leads to network sharing, even to a single infrastructure! That obviously leads to separation and open access. There you go - all my favorite topics.

• Managed capacity (equipment supply) v. managed services (planning, operations, maintenance).
• The motivation is efficiency ("I have a group of roughly 200 people who are managing a subscriber base of more than 60 million and a base station count of roughly 70,000").
• "When I was building sites I was building 400 a month, now my partners are building 3,000 a month."
• "There's one argument that says your managed services partner should be vendor-agnostic, because he will bring you the best in breed kit. Then there's another argument that says there's nobody better to operate and maintain the network than the guy who designed and manufactured it. But as an operations person having done this for a number of years, I would tend to say go with the latter, because there are benefits."
• About not outsourcing: "The things you would want to retain are things like market planning. I want my business guys to draw my cloud for me in terms of where they need coverage. I wouldn't just leave that up to a third party because ultimately they have to deliver a P&L."
• "This is the most difficult part of the entire exercise because people feel that network is their core competence, their key differentiator."
• "... first of all, the network is important. But if you look at the relative importance today versus a few years ago, it's changing. A few years ago network was a potential delight factor. Somebody got their phone, they pull it out of the box, they make their first call and they are absolutely thrilled. Now if they pull the phone out of the box, pop the SIM card in it and if it doesn't work in the parking garage in the basement, they get pissed off. So network has moved form a delight factor to a dissatisfaction factor because expectations have increased."
• "As a network person I can do very little do drive the top line but I can certainly do a hell of a lot to drive cost out of the middle. So therefore I believe things like passive network sharing, site sharing, co-building of sites and ultimately even the active network sharing is the right path to go down. If you and I are competing in the same market, it doesn't make sense for both of us to do the build out. We have an expense that we can't reduce, you're left with an expense that you can't reduce. You're on the left side of the highway, and I'm on the right side of the highway. What did we do? We crossed the finish line six weeks apart. So as we go forward in the industry, as a network community, let's build one highway, one common infrastructure and let the sales and marketing guys compete on the cars."
• "If you are a managed services partner, you have a business of trying to drive growth in terms of your revenues and profitability. You're getting a fixed amount from me for services. But beyond that you're somewhat limited. So what do you do? You try and figure out ways that you can take cost out of the middle as well. So you start outsourcing to other agencies. So you get double and triple hop outsourcing. All of a sudden I come into a meeting, look across the table at the other people. They're not my guys, they're not NSN guys, they're a third party. The guy's been out of school six months. He can barely spell RF and he's designing my network. (...) But at the same time a part of me says that as long as you're meeting my KPIs and SLAs, why should I be bothered? But the guys I work with, it's an emotional thing, it drives them absolutely crazy. I have to pull them back and say: "Are the KPIs better? Are the site deployments better? Is the customer satisfaction better?" If the answer is yes to all three then there's really nothing to discuss."

The EUR 100 trillion FTTH investment opportunity

FTTH is a hot topic already and it is only a matter of time before investors start realizing the true potential by launching special products or investment funds. The only trouble is, there are few FTTH pure plays in the public realm (unless you count any telco as such, because FTTH is the inescapable way forward). However, direct investments may come into play.

The Swedish Ventura Team recently reported on usage, which provided some reassurance to anybody displaying scepticism over what to do with all that bandwidth. Here is a link to the presentation sans graphics, or mail me for the original PDF.

Their main findings:

• Nielsen's Law (available speed increases at a 50% CAGR) generally holds. The Ventura Team expects it to hold for at least another decade. This means that 100 Mb/s will be available in France in 2008, in Poland in 2012 and in the UK in 2015.
• The mass market lags the high-end user by 2-3 years.
• FTTH customers generate >3x more traffic. Surprisingly, the inbound/outbound traffic ratio seems to be similar to the one for ADSL networks (notwithstanding an expected P2P concentration on FTTH networks).
• P2P and video are the most important applications.
• Operators will need to invest and upgrade (a EUR 100 trillion wave of capital investment).

Here is a short overview of the elements of the FTTH market:

• Benefits: social, economic, environmental.
• Business models: PPP, separation, open access, layere model (netco, opco, servco).
• Revenue models: pricing, revenue sharing, etc.
• Value-added services: ranging from P2P and internet video to e-health, teleworking, monitoring and IPTV/HD/3-D.
• Participants: network operators and service providers, vendors, construction companies, consultancies.
• Technology: active/passive, standards, performance, components, architecture, tools etc.
• Practicalities: plan ahead (or be behind Korea, Japan, Sweden), VDSL for interim, rights of way and construction labor availability are bottlenecks.
• Regulation: open access, wholesale, interconnection.

The interesting thing to me is that the investment opportunities reach far beyond the traditional telco ecosystem of operators and vendors.

Even in the Netherlands, we have a very diverse range of (not all public) companies involved in what no doubt is the most important development for the next few years:

• Operators and service providers: KPN, Reggefiber, bbned (Telecom Italia).
• Vendors: Wavin, Draka, Daily Media.
• Construction companies: BAM, Volker Wessels Telecom (thanks Rudolf).
• Consultancies: Arcadis.

Telefonica: no open access obligation to FTTH

Among this year's main themes, I believe, is sharing. So far we had a few announcements, spanning a wide range of network assets:

• Mobile in Spain: Orange and Yoigo (TeliaSonera) in transmission infrastructure.
• Mobile TV in Hungary: T-Mobile and Vodafone.
• Fiber-to-the-business in the Carolinas: Charter and TWC.
• Duct sharing in Spain: Telefonica has to open up, according to new CMT plans (see also this remarkably readable Google translation).

As to the latter, I have noticed quite some resistance (revulsion is perhaps a better word) against governments getting involved, either through regulation or through direct investment. My personal view is that there is nothing a priori wrong with government bodies taking part, especially when you do not see them as intrinsically bad. They can afford a longer horizon, when public companies cannot. Add to that the view that open access is the way forward, allowing network operators to maximize utility rates of their networks.

By way of reality check: what if you really want to insist on the market taking care - in this case: of building FTTH?

All you have to do is drop one of the two basic assumptions (FTTH = end game; 1 network should suffice). Obviously, it would be the second. This would mean that we would potentially end up with perhaps 3 fibers entering our homes: one telco, one cableco, one (or more) altnet. This is pretty much what CMT (the Spanish NRA) seems to be aiming at, if I interpret the Cinco Dias story on the current market consultation correctly:

• "(...) want competition in infrastructure, not only in services".
• "(...) the abandonment of the idea of a single Spain (...) two types of areas, the competitive and the non-competitive." Alas Ms. Reding: fragmentation seems unavoidable.
• "Telefonica will not be obliged to open its network to rivals whenever a new pure fiber infrastructure that reaches households."
• "But Telefonica rivals have achieved a victory and that the network of copper will maintain its existing regulation. But it is a pyrrhic victory, because this infrastructure is doomed to disappear, and they know it."
• "More real is the obligation imposed on (...) Telefonica to open their rivals pipes - the conduits through which the (fiber runs)." This is the duct sharing part of the CMT plan. In other words, CMT seems to consider the duct network the only real dumb part of the physical layer.
• "(...) encourages investment from Telefonica, which will not have to share its new network with the rest, and force rivals to develop their own infrastructure. (...) But it is a gamble that can go well or not. In the worst scenario, operators alternatives not considered profitable investment and reduce its presence in Spain, or go entirely, which would strengthen Telefonica."
• "Have you ruled out functional separation of the network of Telefonica? (...) remedy of last resort."
• "The rules will not be ready before mid-2009."

UPDATE: see also Quinta's assessment.

Viviane Reding: how do we get to FTTH?

Viviane Reding delivered this interesting speech at a KPN Forum in Brussels, this week. Thanks to one of the leading Communications Breakdown MUVRs for providing the text.

I am very sympathetic to most views and proposals coming out of the EC, even if the new EU regulator (EECMA) could be a stretch (it remains to be seen how bureaucracy and harmonisation will be balanced).

Here are some quotes that I find particularly interesting, but do read the whole thing (it's not very long):

• "(...) by summer in the mid-term review of the i2010 strategy, I will publish a new indicator of broadband take-up in Europe that compares national performance, not only on broadband penetration but also geographic coverage, speed, competition and price." This is important, since penetration only doesn't tell the whole story. Compare the OECD Broadband Portal.
• "Further service development is likely to result in the need for significantly higher broadband speeds of up to 100 megabit per second or more." There is some room for debate - I have shown some scepticism myself, but 100 Mb/s must be the milestone to focus on. Among the many drivers will also be Web 3.0, which may have significant implications for both bandwidth and storage.
• "I found a widely held view that the European regulatory framework and its emphasis on access obligations to open up competition is not at all the impediment to investment and innovation that some market players claim, (...)." Bravo.
• "How we treat next generation access is therefore the single most important policy question in the telecoms sector today."
• "(...) one of the potential attractions of functionally separating access networks is to make this incentive structure clearer and more operational." Mind you: functional, not structural. KPN is a good example of a telco staving off the 'threat' of structural separation by making functional separation really work (transparancy, good portfolio of services, happy wholesale customers).
• "My worry is that such bundling will, de facto, stifle choice and innovation."
• "Let me be very direct: except where the structure of the market has non-discrimination built into it such as in a well designed system of functional or structural separation the incentive of the telecom company is to design new infrastructures in a way that controls or chokes off competition."

Furthermore, she looks at the "three different models of network upgrade":

1. FTTC + VDSL. "In terms of open competition however there are serious concerns that VDSL could be attractive to incumbent telecom operators, because they require competitive market entrants to substantially scale up their investment in switching capacity." But "(...) unbundling requirements at street cabinet would have to continue to allow competitive access operators to stay in business."
2. FTTB + PON. "But the flexibility in the medium term may be more limited, not least because the end user equipment and the equipment in the network have to be compatible. Unbundling these passive fibre networks is therefore more difficult and the incumbent increases control." (...) "It is unclear that passive optical networks can be unbundled in the way that we see today on copper networks. This requires close attention and probably experimentation with novel architectures, using wave division technology to offer virtual unbundling as a more flexible alternative to bitstream access."
3. FTTH. "The difficulty here is cost: existing ducts are often too small to allow multiple fibres to pass through and therefore major construction spending is required. This is by far the most expensive option." (...) "Point-to-point fibre deployment, meanwhile is rarely being deployed by private market investors. Certainly, this is due to its high cost, but it is also probably due to its openness. Where we do see it being used is in open access schemes initiated by municipalities, in cities such as Stockholm and Amsterdam. These schemes are local partnerships that take a pure 'infrastructure utility' approach by building ducts and end to end dark fibre and then leasing access to service providers. Clearly by so doing these cities have created for their business and citizens a future proof network infrastructure and for the investors in the networks a very long term stable return on their investment given that ducts and dark fibre have a potential operating life of several decades. Under these conditions of guaranteed open access circumstances, perhaps, infrastructural competition is less important than an open and high performance platform. However, the municipal solution seems unlikely to be relevant for all of Europe and could lead to a very fragmented landscape." This highlights the fact that the EC is not a friend of munifiber and is very critical about them. "Whichever infrastructure route we take forward, my conclusion is clear: regulation will have a role to play to keep networks open and to guarantee progress, efficiency and choice."

FTTH: Amsterdam v. Singapore

Just a few short postings.

First, I added a few noteworthy documents in the right hand column. Go down to 'Favorite Articles'.

Second, another WSJ story on the Amazon Web Services. Outages will be tackled and QoS added, so large corporates can buy the services also. What makes it so interesting to me, is the strategy of trying to maximize utilisation rates of Amazon's hardware. In telcoland, it is called embracing wholesale services.

Third, a thought on subsidizing broadband: Amsterdam v. Singapore. Assumptions: FTTH is the end game and nobody needs two fiber networks. Here is the reasoning:

1. Politics will put broadband on the agenda for its GDP, environmental and social benefits. As long as (public) companies are not ready to commit, governments will get involved.
2. States could participate (honoring MEIP), which is the basis of many munifiber projects such as Amsterdam.
3. Governments could choose to subsidise a regulated (natural) monopoly, implying separation and sharing. This is what is happening in Singapore.

Key questions:

1. Will Amsterdam put copper and coax based networks out of business? Many are skeptical. Check out these stories on the UTOPIA initiative in Utah, refuted here.
2. Will the NetCo monopoly in Singapore be incentivised to invest?

The Investment Incentive Problem

Do monopolies lack an incentive to invest? I suppose they did in the ‘old world’, where business was guaranteed and a government-based owner didn’t care much about maximizing value.

However, things are different in today’s telco marketplace. Governments have largely backed out and the market has taken over. Monopolies are on the brink of extinction. Add to that the natural monopoly of fiber (which gets to be pushed deeper into networks everyday, until we will finally end up at homes (FTTH) and businesses (FTTB) networks) and the rise of IP (which is indifferent to whatever is inside a packet, be it voice, video or data), and what do we get?

Exactly, new monopolies of all-IP, all-fiber networks – whoever may own them.

Now, does the investment incentive problem still exist? I believe not, as long as owners are sensible and try to maximize the value.

Maximizing value in the first place means, quite simply, maximizing sales and thus the number of clients. This entails the end of the retail/wholesale dichotomy and an appreciation of doing business on the wholesale level, as I have stressed before. Competitors should now be looked upon as partners and clients too.

Of course, investing can also have a different purpose: cutting costs in the long run. This is why investing in NGNs and NGAs makes perfect sense.

Attracting wholesale clients entails expanding your portfolio of services, which implies investing in every aspect of your business. Different wholesale clients will focus on different market segments (which at the same time relieves your retail division of marketing to all those different niches), each demanding a different portfolio of services.

It also entails entering adjacent markets. Take a look at utility companies building BPL networks (run by third party service providers) to capture a piece of the broadband market, but also to cut costs (using the network for monitoring services).

In a word, ‘sweat your assets’, as Telefonica’s Santiago Fernández so eloquently put it.

This reasoning is why I keep being surprised when I read about incumbents claiming that (structural) separation would take away the incentive to invest. Which by the way seems to be the conventional wisdom. In the wake of the new EC regulations, telcos like France Telecom (c. 30% state-owned) and Belgacom (53% state-owned) have been making such statements. No Telco 2.0 points for them, I presume.

(PS: BT is quite explicit over their separation costs. Would it be a weird idea to allow incumbents to pass on any separation cost to the government?)

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.

KPN is pushing all the right buttons

KPN and Reggefiber are teaming to build FTTH in Almere, we learned last week. The importance of this deal is in its size (we are talking the #5 town in the Netherlands, 180k inhabitants), but let me summarize why this is so much up my alley.

FTTH
No need to step on the soapbox over this shiny new fiber stuff.

Sharing
All we need is a single strand of fiber. Nobody would like to get into a land grab for access to ducts, buildings, homes, etc. (as we are seeing in France).

Open access
Wholesale as a sound business model. I defended it recently.

Service provider v. network operator
Sharing implies open access, separation and wholesale. KPN is stepping away from full network control and focuses on services. The network is relegated to Reggefiber, which feels at home in the infrastructure business (Dick Wessels roots are in the building and roads industry).

KPN is beating the cableco (UPC) to the punch, but Liberty Global sees no need to move to fiber anyway. The other large cableco in the Netherlands, Zesko (the merger product of Casema, Multikabel and @Home), just last week refused KPN access to its network.

KPN, not the cable companies, is pushing all the right buttons.

Separation: take a poll

FTTH and separation are hot! Check out the blogs of the Fibre Ring (see right hand column).
Also, Benoit is running a poll on the separation issue (see top right). Click here to take the poll.

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).