How to create competition on incufiber

Wednesday, at an NGA workshop ('High speed Europe ...') in Brussels, ECTA presented a WIK Consult report on FTTH. Based on case studies for 6 countries (DE, FR, ES, IT, PT, SE), they conclude that incumbents only can do FTTH, on a large and profitable scale.

The main points:

• Incumbents have both the infrastructure (available for re-use or closure) and the customer bases to make it possible in a profitable way (RoC = 10%), through a 30% cost advantage over altnets.
• Large-scale replication is not economically viable for altnets, outside very densely populated areas or in places like Paris (with its famous open access sewer system).
• The network must be open access, because all this implies that rolling out FTTH by incumbents bears the risk of re-monopolizing the telecom market. Duct access is not enough. Unbundled fiber (from Metro Core Locations) could allow for more altnets than unbundled copper. Sharing with altnets right from the start reduces the cost to incumbents.
• Access regulation has to change from 'how to provide access' to 'how to structure new network elements'. A form of 'fiber subloop unbundling' is only possible for point-to-point fiber.

The WIK press release (we haven't seen the report yet) raises a whole range of interesting questions:

• Does the report imply the obvious: we need just a single FTTH network?
• If full replication is not viable, the question remains: at which level do we need competition? (Take the poll in the right hand column!)
• How about cable competition: does that count as network replication? The 6 countries mentioned all have cablecos, but with diverging coverage. What happens once they start rolling out FTTH?
• Does the case still stand in a country like France, where altnets are cherry-picking high-density geographies?

This fits nicely with our 'incufiber' stance, which we were able to present in Rome earlier this month. We proposed structural separation as a way to maintain a proper level of competition. The advantages include:

• True equivalence between SPs.
  
• The ablity to attract (state) funding.
• Avoid more than one FTTH networks being built.
  

And there were more FTTH goodies:

• Viviane Reding (EC) proposed a 15% 'risk premium' for NGA builders in a speech that wasn't all too different from a previous one. So far, it's not clear what this means exactly. However, the message is clear: true infrastructure-based competition is favoured. Now, if the incumbents aren't supposed to re-monopolize the market (since only they have the scale for nationwide FTTH roll-out), there must be open access and true equivalence: all service providers (including SPs belonging to the incumbent) should have identical terms for accessing the network.
  
• Telecom Italia calls for increased NGN investments through PPPs. Partnering is the way to go.
  
• Vodafone considers entering the fiber game. It starts to look more and more as if Vodafone wants to be a full-service provider (integrating Arcor, bidding for Ghana Telecom, launching BB, etc.). Are they, sort of, going the Tele2 way (consolidating some markets, exiting others)?
  
• SFR targets 5m homes passed by 2012. It remains to be seen how France can reach nationwide coverage.
  

Update on FTTH

There has been a large amount of news on many aspects of FTTH this month alone. Here is an overview, using my own classification (details and hyperlinks are in my updated FTTH 2007 & 2008 database).


Deployments

• This month several US muninetworks were announced or reported on: Rosemount (Minn), St. Paul, Glenwood Springs (Col), Smithville (Ind), Salisbury and Wilson (NC), Rutland (VT; hitting a bump), Highland (Ill).
• In the Netherlands, KPN and BreedNet are stepping up their FTTB (business parks) efforts (Huizen, Urk).
• Etisalat has plans for the UAE.

Demand, usage, penetration, VAS

• The FTTH Council North America reported 12m homes passed, etc.
• The World Economic Forum released its 'Global Information Technology Report 2007-2008'. The free web-based version is great to toy around with.
• Wilson (NC) targets a mere 30% penetration to make the business case work.
• Keep an eye on CERN and its Large Hadron Collider (LHC), to be operational this summer. Processing power (and even power supply) are too limited on a local level, forcing the institution to go international. The grid is made avaliable to other researchers. Who knows, in the future it will be the basis of a superfast internet, enabling cloud computing, holographic video conferencing, etc.
• BT is buying Wire One. It appears to be a reseller of all the usual suspects, including Cisco. It will be a while, but I am sure telepresence will be made available to the masses at some point and be a FTTH driver.

Financing: PPP and other

• BT asked for some exemption from USO (united service obligations) in exchange for committing to fiber.
• In New Zealand, Peter Macaulay proposed a Fibre Fund to which investors could contribute and anyone could draw upon. "The fund will enable councils to enter public-private partnerships drawing on a common fund rather than drawing money from ratepayers or telco customers. The investors will want to stay in rather than looking for a quick repayment of a loan." He, as well as the New Zealand Institute, misteriously predict that the value of the network will increase over time. That is a bit funny from a DCF point of view (which implies that everything is discounted to the present day), but what they obviously mean to say is: more fiber can cheaply be blown through the ducts; gear (WDM) can be added; usage will go up.
• In the US, Glenwood Springs and Wilson count among muninetworks financed by bonds to be paid (interest) for by subscriber fees.
• Smithville seems to count on a government grant from the Department of Agriculture.

GDP grab will drive FTTH

Earlier this week I spoke with a colleague who is in charge of providing debt to TMT companies worldwide. FTTH was the main topic.

It was enlightning to notice how much aversion there is in the market against government funding - to any degree. My colleague holds that, after the telco sector was privatized and liberalized, the last thing we should want should be a return of government bodies (‘tax payers’ money’), to the market.
More fundamentelly, he clearly sees the technical benefits of FTTH but believes consumers are solely interested in price and couldn’t care less about bandwidth claims. ‘Timing is everything’, and this is simply not yet the time for large-scale FTTH roll-outs, he contends.

So here is a reality check if I’ve ever seen one.

Still, I think there are largely two reasons for holding a different view on FTTH and munifiber.

First, debt investors have a very short-term focus. Interest payments have to start within a couple of months, so there is no patience for long-term views and lofty strategies. In this respect, telco managers obviously are incentivised in the same way, having to deliver each and every quarter.
If you are building for the future and try to leapfrog cable networks, there is no way you can turn cashflow positive within a few months.

Second, I think there is a whole new dynamic in the markt: governments vying for their share of the world’s GDP growth. Market leading countries, including emerging markets without legacy infrastructure, force established markets into considering FTTH to drive economic growth. Build-out takes years, and in the meantime congestion of the freeway system eats away at GDP growth. Hence the need for a long-term view.

Free markets may provide us with FTTH in the long term, but since telco managers (and debt investors) have a short term focus, government interference could help break the stalemate. Earlier this week I also spoke with a friend at a leading trade journal. He suggested that government interference can take several forms, ranging from PPPs to subsidies or tiered regulation (to bridge the digital divide).

Further, the European Union sets the terms for government participation (MEIP). Nuenen, a small town in the Netherlands, has often been quoted as a prime example of successful government interference in FTTH. It is only fair to stress that the 90% take-up rate was due to getting the service for free for a year. An offer nobody could refuse. However, to say that this is throwing away 800 EUR/sub of tax payer’s money is not completely fair, I believe. Any commercial company could have opted for this sort of aggressive promotion. It may fit very well within a sound business plan – one with a long term focus.

To round off, there are a few more hurdles for telcos to take the big leap to FTTH. First, absolute size (multi billion euros). Second, limited infrastructure-based competition and a high barrier to entry (i.e. limited competitive need). Third, I strongly believe FTTH (the physical layer) is a natural monopoly. This implies open access and the possible need for regulation, things that telcos by nature dislike.