Deutsche Tele Ag Ads (OTCQX:DTEGY) Webinar Vectoring - Technology and Regulation from DT Perspective June 18, 2013 8:00 AM ET
Wolfgang Kopf - Director
Ulrich Rathe - Jefferies & Company, Inc., Research Division
Matthew Bloxham - Deutsche Bank AG, Research Division
Ottavio Adorisio - Societe Generale Cross Asset Research
Timothy Boddy - Goldman Sachs Group Inc., Research Division
Good afternoon, and welcome to Deutsche Telekom Vectoring Webinar. This webinar will be recorded and uploaded to the Internet. Before the presentation starts, please listen carefully to the disclaimer.7
Disclaimer. This presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel-related measures. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom's control. Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures, and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations, and our network upgrade and expansion initiatives. In addition, stronger than expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development. Further, the economic downturn in our markets and changes in interest and currency exchange rates may also have an impact on our business development and the availability of financing on favorable conditions. Changes to our expectations concerning future cash flows may lead to impairment write-downs of assets carried at historical cost, which may materially affect our results at the group and operating segment levels. If these or other risks and uncertainties materialize or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.
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Thank you for your attention. May I now hand you over to Mr. Stephan Eger, Senior Vice President, Investor Relations.
Well, good afternoon, and good morning to all investors and to analysts following us via webcast. And welcome to our first webinar on the subject of VDSL and vectoring. I'm actually here with 2 colleagues who will shed some light on the topic of vectoring and VDSL from a technological angle. Therefore, welcome Bruno Jacobfeuerborn, who is our Group CTIO. And big welcome to Wolfgang Kopf, who's the head of our group, Public and Regulatory Affairs, who will shed some light on the subject from a regulatory perspective. We'll start from our side with a quick introductory presentation on the subject and that you can also follow via Web. And then at around about halftime, we'll move to Q&A session. You can, as always, either hand in your questions by using your touchtone telephone or via e-mail. First questions have already arrived -- or via our Twitter account.
So let's get started with Page 4 of the presentation and a very quick recap of what we have presented at our Capital Markets Day back in December on that topic. At the Capital Markets Day, we have presented to you our integrated network strategy for the next 2 years. Why did we do that? And why did we decide to invest up to EUR 6 billion in the next years into VDSL, vectoring and, longer term, also into LTE? Well, first of all, there is a change in the regulatory environment. The outlook onto the regulatory environment for NGA regulation at the EU level has changed recently. The encouraging announcements of the EU Commission for improvements in the regulatory environment, i.e. in particular, a stable framework and stable ULL prices until 2020 and now its anti-clause regulation for NGA in July 2012, were one of the drivers for the communication of our integrated network strategy in 2012. A major investment then, finally, seemed possible. Secondly, recently in Germany, we saw some first encouraging signs into a new direction and more regulatory visibility and planning security for a recent ULL decision and for regulatory proposals for VDSL flash vectoring we'll be discussing in more detail in today's webinar. The situation in the German market is the second driver. How does the German broadband market look as of today? First of all, we've got the cable competition with a very powerful coax infrastructure. Our own access infrastructure is based on copper, except for the FTTH which we have already built out. With ADSL, we actually have 2 low bandwidth with respect to the competition of cable, in particular. FTTH is something we'll be doing constantly in the next couple of years, but it's not an economic solution for large broadband coverage in Germany for the next decade or 2. Fiber to the curb is not entirely closing the bandwidth gap. And that, for us, it was crucial to find a solution which is closing the bandwidth gap towards cable. And the answer to the solution is our integrated network strategy. And you can see the 4 steps or the 4 ingredients of the network strategy on Page 4.
First of all, maximum LTE rollout towards 85% pop coverage in 2016, which is further increasing the peak bandwidth of my LTE and pushing the broadband experience to new levels. Secondly, a massive fiber rollout to the street cabinet, which means covering the cable footprint of about 65% pop coverage in 2016 with fiber to the curb and further, an option to get towards 80% until 2019, which depends on investment framework we're currently encountering. Thirdly, and that is the new thing about it, the so-called hybrid revolution, i.e. the combination of a fixed and mobile network form access at home, which brings to the customers higher speed through the combination, particularly in upload, which will gain evermore importance going forward, which is also very CapEx efficient through fixed mobile synergies and the prolongation of our copper life cycle. And it provides best service quality due to faster provision and redundant connections.
Now let's shed some light on the 2 ingredients of this integrated network strategy. And moving on to Page 5 of the presentation, which is the rapid LTE rollout. As I said, our vision is to get the LTE coverage up to 85% in 2016, which is the fastest rollout in our domestic history in any of the generations of the mobile infrastructure so far. By that, we'll be increasing the peak bandwidth with a very good spectrum position we have actually bought in the spectrum auction in 2010. And as I said, we'll be pushing the broadband experience to new levels. Speeds up to 150 megabit per second on the LTE 1,800 megahertz on the category are thinkable. End of 2013, we'll be having 4 devices available. And the additional pure fiber backhaul leads to a superior LTE network in terms of speed and capacity. Secondly, compared to HSPA, it is also very CapEx efficient. We only need about 30% of CapEx per megabit per second for LTE. And thirdly, all LTE sites are -- or almost all LTE sites are already based on either fiber or microwave backhaul that leads to the superior network quality.
Moving on to Page 6 and the second key element of the integrated network strategy, which is the investment in fiber coverage and speed, focusing on our first step on the fiber to the curb. Ambitious plan is to expand the fiber network to the coverage of around 65% in 2016, with a third option to reach 80%. But this is, obviously, depending on the investment framework to achieve public co-funding. Fiber to the curb became a very reasonable alternative for us, again, due to the upcoming implementation of the vectoring technology, which is what we are tackling today. And with vectoring, we'll be now able to deliver a very competitive 100 megabits per second download and superior upload speeds of up to 40 megabits per second. For 2 more reasons, the combination of FTTC and vectoring is an attractive access technology for us. First of all, time to market. It allows us to reach a competitive coverage within 3 years. And if we speak about 80%, that would take about 5 to 6 years. Secondly, it is within CapEx of between 250 and 350 for the VDSL side per household, roughly 70% more efficient than fiber to the home would be. And thirdly, fiber to the curb is a "no regret move" towards fiber to the home. 30% to 50% of the investments can be used for further FTTH deployment.
After this quick intro and recap of the overall strategy in Germany laid out at the Capital Markets Day, let me now hand over to Bruno Jacobfeuerborn, who is our German and Group CTO, to shed some more light on the technological details of the INS strategy and vectoring, in particular.
Thank you, Stephan, for giving us a brief recap on the 4 pillars of INS.
So now let's have a total look at FTTC and vectoring rollout plans we are heading for. And as mentioned already by Stephan, the VDSL vectoring enables doubling of downstream speeds compared to VDSL2. The bandwidth gains depends on the length of the copper sub-loops. So when if it comes to Germany, the sub-loops are typically around 350 meters. And we have very positive performance testing result of this length. So we did it in our labs and went through computerized. The results are really good. And the measurement shows that the majority of the households really enjoy an unshared downstream of 100 megabit per second. I think that's the most important sentence if you say it's really an unshared downstream bandwidth of 100 megabit per second. So even better, if it comes to the upstream-wards, as Stephan already mentioned, the performance increased by a factor of 4 to 40 megabit per second, giving us a unique position to enable cloud services, which is in our overall strategy. So the distribution of the user-generated content, like photo and video sharing, et cetera, this gives us a huge opportunity and a competitive advantage to cable. If you look to the upstream cable concept, [indiscernible] is our main operator, it's up to 6 megabit per second. And this capacity is even shared. So to make the long story short, vectoring is a new technology -- or as a new technology gives us a great market opportunity. And from an economic perspective, it allows us to reuse the larger part of our copper network to earn money with it for a long time.
So on the next page, we say vectoring and hybrid prolongates the copper life cycle up to 10 years. Why do we think so? We have analyzed that in our boards in detail how bandwidth demands of different types of households, like singles, families with kids, et cetera, with certain usage patterns will develop over time. With a nodal scenario and relying largely on the ADSL2 infrastructure, which is shown as a gray curve, we would lose traction in the market by not being able to fulfill bandwidth requirement in the long run. However, if we introduce FTTC and vectoring, we shift that line, showing the share of households that we can make happy almost up to 100% of -- for a significant time. So -- and with our innovative hybrid on top of that, we improve even more. By combining ADSL2+ with hybrid, we will serve our customers attractive bandwidth even in regions that FTTC and vectoring doesn't make economic sense for us. So we believe that the ADSL2 and hybrid combination will be sufficient to serve around 90% of the household as late of 2020 in not so densely populated areas.
For the next -- so going to the next page and coming back to vectoring. It gives us the option to monetize on our copper infrastructure even longer but remember for what purpose this infrastructure was originally built. It was basically sold for telephony services only. So for a super high bandwidth, we have to deal with some physical limitations. And that is where the vectoring technology is helping us. What is the major, well, challenge vectoring is holding? Just imagine a copper cable with 130 twisted pairs. Each copper pair conveys an electrical signal, and that is mainly, of course, ADSL signal. The problem is that the electrical isolation to neighboring pairs is not perfect. And hence, the signal in each of the pair interferences with the signal of the other pairs. So we call that crosstalk or noise, and it leads to bandwidth performance losses on each pair. And maybe just as a metaphor, imagine yourself in a group of talking people trying to understand what the person far away is saying. I think you'll get the picture. So compared to ADSL, VDSL and vectoring uses higher frequency spectrums, which are more sensitive to crosstalk. And the question for us is -- as for must of us is still, how does the vectoring technology solve this problem?
On the next page, Page 11, you see a nice picture from a nice lady and next to it, the technical, say, metaphor. And I'll try to just use the metaphor with this nice lady who's wearing a so-called Bose AM. And you maybe know that if you are in an airplane taking this and have a lot of noise around. And if you switch that system on, suddenly, it's quiet. I'll try to explain that now how vectoring works. So starting with the -- on the left side. And firstly, I must say predefined test signals are sent by the vectoring MSAN from the left side via all-copper pairs in the cable. On the other side, and the second point, the customer equipment receives the remaining test signals and determine the difference to standardized test signals. Then in that customer equipment, the measurement result of the modems are sent back to the vectoring MSAN. The vector MSAN determines the crosstalk effect and defines the necessary precoding for signals in order to compensate the disruptive signals. Then the precoded signals are sent to the customer equipment in downstream, similar to upstream. So the modem received a nearly perfect signal. That means a huge bandwidth increase. That's behind the topic or even can say it's -- if you would come from guys who like cars, then we can say it's just a shift tuning. We sometimes use it as well.
But on the next page, you see that we have defined a stepwise approach of rolling out fiber to the customers in an economic way. Today, with fiber in the central offices, we have roughly 8,000. We have ADSL2+ classic, where we deliver around 16 megabit per second. With fiber to the cabinet, which you see now, the VDSL and VDSL vectoring and part of the INS strategy, we can come up to bandwidths from 25 to 100 megabit per second. Our focus is, of course, now on FTTC and vectoring. But doing good for our fiber footprint, we are going to use our long time like we have done with the copper. So we also gain some important experience with FTTB and FTTH, where this will represent our long-term vision, providing bandwidth up to 1 gigabit. So you see the story from copper via ADSL+, via VDSL, VDSL vectoring to fiber that means we are starting this approach, bringing fiber closer to the customers.
On the next slide, I would like to talk a little bit about the economic rationale of our FTTC plans. Vectoring allows DT to build fast and more cost effective than with other topologies like FTTH or FTTB. However, a large part of the FTTC rollout, we can reuse for a later upgrade to FTTB -- to FTTH or FTTB. Already, in 2016, as mentioned, we will have a higher household coverage than our main competitors, the cable network operators. Depending on regulatory conditions, we also have the option to realize a broadband coverage over 80% in the long run.
So last but not least, on the next page, 14, leveraging the potential synergies with other access rollout project is not included, even the business case, so far. So we will also foster our integrative approach to network planning, meaning that besides leveraging our abilities to deploy and combine different technologies for the mass market, we will deploy our network in a synergetic way. For example, what does it mean? By using civil works of connecting business customers to fiber links, where we're doing the INS strategy, or using civil works for connecting our high-end mobile sites for the fiber by avoiding copper layout in new building areas by deploying FTTB or FTTH.
That's the point regarding vectoring. I would like to hand it over now to Wolfgang.
Well, thank you, Bruno. Hello, everybody. What you can see on this slide is a short overview on the current regulatory access regime. Referring to Bruno's technical analysis, the bandwidth optimization of vectoring is only feasible if all copper pairs are within the cable or on the full control of one single operator doing the vectoring. And this means -- and that's very important implication that sub-loop and bundling at the street cabinet level, this is the far left, is no longer possible. And the regulatory problem occur because this sub-loop and bundling in Germany and the EU is mandatory. And that means that this could possibly a big obstacle to have vectoring. So what is the solution? That's what I'm going to present on the next slide.
The first good thing you need to know is that the EU Commission has stated that vectoring is part of next-generation access regulation. And in other EU countries like Belgium, Netherlands and Austria, vectoring has been already allowed. So the sub-loop has been abandoned. In Germany, the situation was slightly different because we had some numbers of sub-loops already let out to competitors. It's about 140,000 sub-loops which went to competitors. And 100,000 of these 140,000 are on VDSL2 technology. So they would really cause crosstalk and make vectoring impossible. What we are also observing in Germany, and that's a general observation, is the stagnation of the local loop and bundling. The local loop is the -- lying between the central office and the household, also on the left of the slide. And what we see is a trend towards more bitstream access. And there, the bitstream access is the entire line from the left to the right to the point of presence at 73 central hubs, just for your understanding.
So let me now go to the Bundesnetzagentur proposal, the German regulator. Again, the same slide and the same overview. The German regulator had to find a balanced solution between telecom interest and competitors who already had some sub-loops. The decision it has taken is based upon a formal application we did for an amendment of the remedies imposed on the market for wholesale physical network infrastructure access. That's for those of you who know the EU regulatory market for.
This slide, as you can see it, provides a solution, the German regulator proposals in its draft decision from April 2013. It looks complicated. But in essence, the German regulator proposes different access wholesale products to substitute sub-loop for VDSL. It might be either layer 2 bitstream access, which can be granted at the cabinet level or at the regional hub level. That's 1A and 2A on the slide. And there might be also another possibility where we are lobbying for, and that's the layer 3 I already mentioned. But I will explain that in a minute.
So let's go to the next slide. And now it gets, unfortunately, a bit complicated. I have to say the decision is really complicated even for lawyers who first read it. So we try to melt it down to 2 alternatives in essence. We have one alternative, and that's areas with a second infrastructure. So the most important thing you got to bear in mind is an area where we have -- from a second infrastructure, means there is either coax networks or cable operators or city carriers which deploy their own network. In subsequent area, if 75% of all buildings are covered by this alternative infrastructure, we have 2 rights. First right is we can terminate existing sub-loops at the cabinet level. And the second right is if we are going to deploy vectoring in this area, we can prevent competitors from seeking access to sub-loop. So those are 2 main rights, and that's described in the slide. What do we need to give them in return? First, as I already mentioned, it's access to the cabinet but on bitstream access levels, so no sub-loop and bundling. So we must provide a bitstream at cabinet level. It's rather unlikely that this is a big demand for such sub-loops in the future because you already need a fiber line to the cabinet. The other possibility is we must provide bitstream access at the regional hubs, 900 regional hubs. And that's, again, a layer 2 product. This layer 2 product will be available in 2016, but this only means that until 2016, we can't prevent them from seeking access. It doesn't hinder us to roll out vectoring. What we are currently discussing with the regulator -- let's see how this goes out in the end. Will a layer 3 product in an interim period under 2016 also be accepted as a solution for access? In conclusion, this is a very positive development because by providing that access, we can abolish the sub-loop and deploy vectoring. And it's also very interesting because it's the first step towards regionalized regulation, where we were arguing for the last 3 to 4 years.
Let's come to the second alternative in areas, mostly in rural areas, where you don't find a second infrastructure. That's Slide 18. There, there is no right to terminate or to prevent the competitor. What you've got there, in essence, is what we call the greyhound racing. But this is not doing a lot of harm to us because the first operator who's rolling out vectoring is privileged, and his investments are protected. So Deutsche Telekom, who is present in all those areas, has the ability to really look for the most lucrative parts and build them out. And then prevent it from termination or seeking on sub-loop level. So we can build out vectoring as well in this area. And the very interesting new regulation here is that for the first time, the regulator imposes a reciprocal open access. That means if a competitor builds out vectoring on one of our lines to the street cabinet, he must grant layer 2 access as well. And this is an unconditional right. So it's mandatory. And that's the first time we have such a reciprocal clause in a decision by the regulators. So it's also a big step towards a more symmetric access regulation we are arguing for on German and European level for some time now.
In conclusion, so that's my last -- no, last slides, we have the necessary decree in regulatory certainty to roll out vectoring, and we have a rather flexible framework for our NGA networks and the investments in such networks, as Bruno has already described this. We have access to sub-loops at street cabinets, which can be refused, priority for telecom in areas where second infrastructure already is deployed. And in other areas, we can be the first in -- to our own rollout, and it's the first step towards regionalization, as I've just said.
My last slide will be on the timeframe of vectoring, and that is another rather complicated slide due to the complicated procedures, which are rather untypical if compared to other EU member states. So what has been done now was a draft decision. This draft decision went into national consultation at May 10. From what we are hearing from the Bundesnetzagentur, they will have their final decision, which is still pre-final, mid of July. The day they have their pre-finals decision, they send it to the EU Commission. And subject to comments of EU Commission, this decision will then get final in August. After that, we start reference-offer procedure on the TAL. It's here the [indiscernible] preparation, sub-loop and bundling. As I said, it's part of this excess decision on sub-loop and bundling. And this reference-offer procedure will then deal with the details of the entire access mode for bitstream access, and that can last, again, 6 months.
I stop here. Thank you.
Wolfgang, thanks very much, and we'll start now with the Q&A part of the session. [Operator Instructions] Additional to that, you can also send in your questions via email to email@example.com or via Twitter, if you include @DTIR tag in your tweet.
So then let's get started, and I'll start with the first question, which already has arrived via email. It comes from Fred Boulan from Nomura. And Fred was asking what we can discuss the implications of implementing vectoring for wholesale access and what the German population coverage milestones would be, when we expect to cover 20%, 50% and 80%. And I'll hand over to Bruno.
Wolfgang, here. I do the first one. So can you discuss the implications of implementing vectoring for wholesale access? As I mentioned, there's overall trend to bitstream access, and the biggest wholesale product we are having in Germany is the substantial -- is the local loop and bundling. We have 9.5 million unbundled local loops, but the number is decreasing. And the reason for that is that many competitors having to make a decision of either investing in more infrastructure and then renting sub-loops or building their own fiber infrastructure or going back in the network and renting bitstream access in order to participate at the technical progress we are doing in our network. And what we are currently observing with agreements with O2 and Vodafone is that the later trend is the prevailing trend. So those companies want from us the latest technology and the latest product as a wholesale product. In vectoring, they have a huge interest in getting access to business -- to bitstream access based on vectoring. So they have an interest in vectoring, and that's one of the drivers of our rollout. Because due to the agreements we are having with them, they partly participate in the financing.
Right, so we have to [indiscernible] with O2 and Vodafone. And compare to your second question, what do we expect to cover 20%, 50% and 80%, so coming from the end, in end of 2016, we'd like to have 65%. If it comes to 2018, we will have them up to 80%. And before we can say roughly 2014, we will maybe cover already 50%. And if you compare to today, we just, early have today covered, 37%, which was shown, I think, at the beginning from Stephan Eger's presentation.
Thanks, Bruno. Thanks, Wolfgang. Then moving over to the phone, and the first one to ask a question is Ulrich Rathe from Jefferies. Ulrich?
Ulrich Rathe - Jefferies & Company, Inc., Research Division
My first question is you said that the majority in trials, the majority gets 100 megabit per second. I'd be interested relates -- really sort of the overwhelming majority or whether we are talking a majority of 60%? So just to get a sense of how these trials really sort of came out. And the second question is given that in areas of no [indiscernible] infrastructure, they sort of do this sort of this first-move advantage here, to an extent, and what is your own anticipation here in terms of the fragmentation that this sort of regulation will incur? Did you -- do you sort of foresee this essentially to be all DT, or do you actually anticipate a degree for fragmentation? And I know I'm only allowed 2 questions, but I have to seek a clarification. What is the basis that when you -- when you talk about these percentages, are you talking about total households in Germany or total copper lines in service? Or what is the denominator in that percentage?
And I think we'll start with the first question with Bruno then, I guess.
Right. We got into majority in getting 100 megabit per second. About 2/3 of the customers really get 100 and -- megabit per second in the covered area. And if I maybe distinguish a little bit more between the existing footprint, where we have 12 million VDSL, which we will upgrade up to end of 2016, 8 million from them will get that and the other 12 million would be a building from now then up to 2016. As I said, they will get 2/3 of it. And from 2016 to 2018, we will build another 8 million households. Does it answer the question?
Ulrich Rathe - Jefferies & Company, Inc., Research Division
Okay. On the second part, rural areas, I mean, what do we expect? We had a different proposal, which, first of all, build out obligation for the ones who go to these areas. The regulator has decided differently. As I mentioned, we're already in all these areas. So this so-called Greyhound race will happen, and of course, we will also first build out the inner part of the village and the commercial area. Much will depend also on subsidies. Because I think for many of these rural areas, neither our competitors nor we have a business case without subsidies. And the lender tend to cluster now areas for subsidies, and there, you need to apply. But as I said earlier, I mean, the basic condition is reciprocal bitstream access. So even if we don't get an area, we get bitstream access in terms of our customers. So I think the overall environment is quite favorable.
Regarding the third part of your question, the basis for percentages, so houses in Germany or total copper lines in service, I would say we have here, taking as a base line, 40 million households, which includes more business [indiscernible], and the percentage is coming from that number.
thanks, Bruno. Thanks, Ulrich. Let's move on to Matthew Bloxham from Deutsche Bank. Matthew, please?
Matthew Bloxham - Deutsche Bank AG, Research Division
Yes. I was just wanting a bit of clarification about the level 3 bitstream access products. I think, as you kind of suggested, that was probably the layer which competitors [indiscernible] would prefer to engage with you. Is that something you're obliged to continue offering even though the kind of vectoring trigger is bitstream level 2 product? And how is the pricing mechanism set for that level 3 product? Is it like a retail minus margin squeeze, or is it a kind of bottom-up cost model?
So the pricing mechanism is suite of mine of -- in the matter of squeeze tests. Well, the lowest calculation point is the sub-loop unbundling and the local loop unbundling. So it's a mixture. But in essence, it's a margin squeeze pricing test. We are obliged to offer that level 3 bitstream anyhow, that's part of our wholesale product, but it's not, as just described, what we call an ex-ante regulated product. So it's -- our pricing is fairly flexible, because it was somehow deregulated some years ago already. With regard to the level 2 bitstream, this is something which very much depends on an operator strategy. I mean, I sense from other operators that they rather want to see a level 2. But for the moment, they're satisfied with a level 3 because they get the bandwidths of vectoring. Level 2, in essence, is an ethernet product, which allows you to deploy quality of service on your own, and that's why it is more favorable in the long run.
Thank you, Wolfgang, and thanks Matthew. Let's move on to Ottavio Adorisio from Societe Generale. Ottavio, please?
Ottavio Adorisio - Societe Generale Cross Asset Research
A couple of questions. The first one I would like to follow up from -- the question from Matthew. And -- is it possible to focus a bit more on the cost side. So the -- you talked about these 2 solution, the L2 and the L3. And at the moment, you don't know if the L3, its maintenance solution, is going to be accepted. So if you can tell us or share with us what sort of cost are you talking to your competitors. And in going for the L3, I reckon -- you were referring to the VDSL IP bitstream contingent model over here, or is this a totally different one? And what the cost will change when the L2 will be available in 2016? The second one, it's referring to the dichotomy or the sort of decision between FTTH and vectoring. I appreciate that vectoring give you a bit more speed and somewhat increase your asset life in terms of the copper, but most of the comparison is made on the competition we have today from cables. I guess, by 2016, when the most of the vectoring will be rolled out and you will cover 85% -- or 60% of the German parts, by then, all the cable will have -- accelerate in terms of their speed through another switch off, improved modulation, increased bandwidth and so on and so forth. So do you reckon that by -- basically, you will still be chasing cables in terms of speed rather than just leading them. And what sort of flexibility you have to basically roll out FTTH, meanwhile, you basically doing all your work on vectoring? And in terms of [indiscernible], I'm referring to -- within your CapEx budget.
Regarding the cost side, as I just described, it's retail-minus approach with margin squeeze. The exact costing is, so far, there's no exact costing. I mean, the price methodology is a different one. What we are doing is we are concluding contingent models that trigger. That's a long-term agreement with our competitors, where prices differ in the long run, and again, they are subject to margin squeeze tests. Many of those prices are not yet fixed because they follow some calculatory formulas depending on the amount of lines requested and some other parameters, which are not public.
Okay. The -- there's a question regarding decision between FTTH and vectoring. So you know that we started with FTTH. We have already filled 400,000 homes path. And if you look into this one, if you like to speed up on the competition path to build 12 million or 20 million homes path in FTTH, it take us years to be able to provide our customers and with the bandwidth they are asking for. So we found out this vectoring, and you see it in the slides, easy compared to the use case our customers are asking for. With 100 megabit included in the hybrid piece, we will be able for the next 10 years to really fulfill the requirements of our customers. If it comes to only speeds, you're right. Then of course, the cable course have an advantage. However, they have shared medium. And if it comes to vectoring, you really get the 100 megabit per second. And on top of that, and as I said, is we have this hybrid approach, so we do LTE plus vectoring plus hybrid. And that gives us then, of course, 200 to 300 megabit on speed, if you would like to say so, and this helps us, of course, to really fulfill all the use cases our customers have. In addition to that, of course, it comes to the flexibility of the rural FTTH for -- in new areas where we get new households. And of course, you always try to find out what is better, to get an FTTH or vectoring. So FTTH is not dead. It will be used in addition to that. But the systematic rollout will be on vectoring. And wherever we can and where it make sense, we will, of course, roll out FTTH as well. So in addition to that, if the use case is getting higher and you need more, then, of course, as I said, it will be then the next rollout going from the street cabinet closer to the households in the pedestrian areas, we can say less than 100 meter, then it comes [indiscernible] fast up to speeds from 500 megabit. That means fiber close to the household in this the distance is less than 100 meter and including copper, then we have 500 megabit per second. So that means what we are doing is it's for the future, right economic approach to use our fiber as much as we can but bringing -- sorry, our copper as much as we can and bringing fiber closer to the households.
And I'd be adding to what Bruno has just said. Ottavio, there's, I think, 2 ways to look at the time to market. Obviously, you can argue that cable by then will also have upgraded their networks. But our approach as we try to present to you early in the presentation was, also, we have to be very quickly competitive against cable. And even -- and that is the calculation we always share with investors. Even if we would be able to plug all the ground-sticking capacities in Germany in order to get to 65% fiber-to-the-home coverage of German population, assuming we would have the balance sheet to do so, it would take us about to 20 years. So that's the other angle of about looking at the time to market right. Then referring to your question on the CapEx budget, I'd like to refer you to Page 39 of our presentation of the Capital Markets Day, of the German presentation, which is exactly giving you the EUR 6 billion accumulated FTCC (sic) [FTTC] and vectoring CapEx and also the split, how that will then differ between the basic CapEx and what comes on top of that. So that has been laid out, and there has been no changes to that at all. With that having said, we'll move on to Tim Boddy from Goldman. Tim, please?
Timothy Boddy - Goldman Sachs Group Inc., Research Division
Yes. I had a question about the use case speeds that underlie the chart you've shown on page -- let's go to find it. The one where you basically show that you think you can meet all the use cases out to 2025. Here we go, Page 9. What are those use cases and what are the speeds you're predicting out to 2025? And then I guess the parallel question is, what are your assumptions about cable's ability to increase speeds? I mean, we've had with DOCSIS 3.1 standard, several cable operators starting to talk about delivering 8 gigabit within the next 2 to 3 years. Is there anything particularly different about the plans of the German cable operators that makes that timeframe unrealistic that you're aware of? And then I just really had a clarification. On Page 20, you talked about a VDSL-vectoring swap happening from 2015. Does that mean that you won't be upgrading existing VDSL areas for vectoring until that timeframe, or is that -- is there something else?
I'll refer to Bruno for the first 2 parts of the question. But VDSL-vectoring swap by 2015 mean -- by 2016 means that, by then, we'll be done with upgrading the existing VDSL coverage with vectoring.
So as you see, if you look at the normal household today, for example, if you look to IPTV, we see that you are looking for one IPTV program and maybe just storing another one. Then you come with the vendors from today up to 25 megabits [indiscernible]. If you do some browsing, you do some telephony, say, maybe between 25 and 50. Taking into account that the codec for HDTV will show us that we don't need 12 megabit per second as we do today, we will decrease it up to 3 to 4 megabit and saying the household is getting bigger and you would like to have much more speed, as you see on the mobile side. In the foreseeable future, and I mean, now to 10 years, that all the -- so the use cases we have looked for together with marketing show that you don't need more than 100 megabit per second if you say 90% of the households, which have realistic use cases in place. That is the underlying assumption behind it. However, and we look, of course, into the development of the increase of the bandwidth, if that change, we could start to see a [indiscernible] faster rollout around 2017, something like that, magnitude to be able then to extend the bandwidth and the throughput we -- so the customers ask for that. So -- but anyhow, what you see with that approach is that we're going closer and closer with realist -- with service and with fiber to the customers and in meanwhile -- and in the end cave. So when I'm maybe not anymore in charge, we will have fiber-to-the-home to every household. But this will take a long time to be there. If it comes to the cable course, yes, we like to refer, if I say so, maybe asking them what they will do in the next 2 to 3 years. They have some opportunities, but they have, of course, to do a lot of investment as well.
Thanks, Bruno. And then we'll switch over to Simon Weeden who has -- provided a question via email. I'll quickly read it out. Can you explain the difference in customer experience resulting from Vodafone's choice of interconnect points versus the other wholesale carriers? Given you have put out the timeframe to 2025, which shows no sign of needing fiber-to-the-home or fiber-to-the-distribution-point, can you give us some sense of when you think those might be deployed even in limited areas? That's also 2 questions for Bruno.
Let's start with the last one. So given we have put out to 2025, it's clearly demand driven. So we are watching, of course, the bandwidth need from the customers. And if we see that there's an uptake in the way that we have to extend our networks, and especially if it comes to limited areas, definitely, we'll do as we've done already with fiber-to-the-home and fiber-to-distribution-point, as I said, from 2007 onwards, definitely. But on request on our customers, together with marketing, because it makes no sense to build a network and nobody is really using the bandwidth which we can offer. So to the first part can we explain the difference in customer experience regarding from Vodafone's choice of interconnect points the other wholesale carrier. While everybody -- what you can have today, get to layer 3 one, but the request is to get to layer 2 BSA, and then, of course, our customers and then the wholesale customer can do whatever ever they like to do with that. And for us, it's important that you use our network because it helps our to utilize our network.
Bruno, thanks a lot. I think we got another question, which came in via email. It comes from Wolfgang Specht from Bankhaus Lampe. Wolfgang asked how will the announce hybrid product look, and what is the timeframe? And that is, again, something for Bruno.
Well, it look like this. You get a router at home, which has a SIM card included. That is the equipment you have at home. And in addition, we put the router in the network that is dealing then with that customer equipment. What happens is that this router at home will have minimum -- or can deal with 2 -- minimum 2 IP addresses and maybe in the future 6. So -- and the point is if we see you use maybe 15 megabit on the fixed line and you need this 25 megabit, you have ID at home, you use another 10 megabit from LTE, then the router in the network and the router at home is the customer equipment deal with that and find out what is the best way to make it happen. So one will go via the fiber and copper and the other route goes by via the airway and LTE. And in the network, we take care that all the packages that you sent out, we will put together at the end in the same way that you really can understand it, what has happened over there. And that is a real unique approach. This is the first as a fixed mobile convergent, not only in marketing, that is in technology. And that helps for you to combine fixed access and mobile access.
And the hybrid routers will be available and marketed from end of 2014 onwards.
I do not see any further questions at this point of time, neither on my iPad nor on my BlackBerry nor on my screen here. So I give you another 5 to 10 seconds.
And having said that, for us, that was obviously also something like a test balloon, and it gives the opportunity to bring our regional management, as well as the management of -- for technology, regulation and so on, much closer to you guys in a much easier format going forward, i.e, without you having to travel, et cetera. So I would be obviously delighted to receive any feedback whether you found it useful, what we can do to improve things going forward. And if you like the format, actually, I can see us kind of firing on all cylinders on different topics in the next 12 months.
Having said that, thanks a lot and speak to you soon. Cheers. Bye-bye.
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