Preparing the Investment Community for FTTH

Yesterday I met with an executive of a leading European telco. He invited me to exchange views. For me, these are always excellent opportunities for some reality checking.

FTTH once more demanded most of our attention. As I see it, telcos are trying to pursuade the investment community to get to grips with it. Below are my take-aways.

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1. VDSL
My companion strongly believes in the viability of VDSL, mainly because FTTH embodies a difficult business case, but also because FTTH simply cannot be rolled-out quickly enough.

Being a member of the Smiling Fiber gang, I of course have no doubts as to the demand side of the equation. FTTH is the end game. Moreover, a back-of-the-envelope calculation shows that you need at least something like 30 Mbps in the mid term (to support several HD TV sets, BB and voice). In order to guarantee this kind of bandwidth, you really need peak performances of around 100 Mbps. QED. (Buffering a few seconds will also go a long way in raising QoS.)

As to the roll-out speed, I suppose telcos do have a point when they install VDSL – for the interim. Look at Verizon: most of the FiOS assets are built in greenfieldish places, which leaves the company extremely vulnerable in places like Manhattan, where Cablevison (Optimum) et al are upgrading. Who knows how many years before Verizon starts digging up those streets of Manhattan (the potholes could come in handy).


2. FTTH
As I have noted before, no matter what telcos say in public, they are all aware of the necessity to move to FTTH, even if this may be some years away.

Public telcos are very much aware of investor focus on FCF and concern over FTTH. However, I see them working on multiple fronts subtly preparing the investment community for the big leap into fiber. PR-related strategies include:

• Stress the reality of fiber today. Thousands of miles are fiberized already, ‘only’ the local loop remains.
• Talk about greenfields. Both KPN and BT say they will roll-out to new boroughs. Now I happen to live in a big new housing development area (no crisis here), but what I have is … copper. A friend of mine who has recently moved into this area (see Map to the right) hasn’t had her home connected yet, but I am pretty sure it will be copper. In other words, committing to greenfields must be taken with a grain of salt but it is great PR.
• Acknowledge the benefits. Capex may be high, but opex will drop dramatically. And superior services can be delivered.
• Point to international developments. Not only PTT-like companies (Verizon, NTT, KT, Telekom Slovenije), but altnets as well (Iliad, Neuf Cegetel, SoftBank, Orange Slovensko), and even MSOs (Numericable, a Japanese co-op).
• Drive the costs down. Verizon publishes decreasing costs for both passing and connecting homes, benefitting from its scale. Mergers will generate some economies of scale. Further, choose point-to-multipoint (sharing a fiber strand) PON technology (however, sharing fiber up to the OLT location may not be sufficient in the longer term, so you may prefer active ethernet over dedicated fiber all the way to the ONT). Also, make sure you have a sound in-home strategy ready, in order to avoid a costly addition to your opex. There is a variety of wired (HomePNA, MoCA, HomePlug for using copper, coax, PLC) and wireless (WiFi 802.11n Draft 2.0, WiMedia UWB) standards available.
• Try to get state subsidies. This strategy worked well in Korea. Point to the economic and social benefits of a FTTH network.
• Wait until greenfield (and other) FTTH build-outs represent let’s say 5% of your access lines. That will be the time to say: “We are at 5% already, and these homes have double the ARPU and a tenth of the churn of the copper base. And you didn’t even see our FCF suffer!”

3. Separation
We disagreed over the issue of investment incentives. Conventional wisdom is that full separation is, if not unnecessary, expensive and bad for network investments. It is supposed to take away any incentive for the NetCo to invest.

Personally, I do not quite see this. In my view, the NetCo would do wise by investing for the long term, enabling it to offer an extensive portfolio to its (wholesale) customers. Of course, there are the usual investment uncertainties; who could guarantee take-up of your shiny services? But I believe this can be dealt with. There are many new services waiting to be (built or) expanded, including monitoring, eHealth, video telephony, home access to corporate VPNs, etc.


4. Consolidation
We briefly spoke about KPN, and its Telfort, Getronics and Tele2 Belgium deals.

After our meeting was over, I got the idea for the perfect answer for Belgacom. If KPN are not stearing toward a merger with their Belgian counterpart and instead go for head-to-head competition, why not make some acquisitions in Holland? (Not unlike Swisscom buying FastWeb).
Tele2 seems to be committed to the Netherlands (a large scale ad campaign has started in relation to its 10th anniversary), DT is buying Orange NL (but may sell-on the former Wanadoo LLU assets to Tele2, bbned, Scarlet or Vodafone) and even bbned (Telecom Italia) is here to stay (it has just started a campaign for the Alice brand, which is new to Holland).
So what is left? Reggefiber! Perhaps Dik Wessels is ready to sell out of this FTTH vehicle, and with Belgacom funding roll-out could be accelerated. Reggefiber appears to be a very disciplined company, which is making a success out of FTTH. In addition, it would be a nice testing ground for Belgacom.

Comments

[Valueplay98]

Hey Tim, What companies do you think will benefit the most from the future CAPEX spending on FTTH (besides CSCO) ?