BT has at long last announced a major investment in next-generation access (NGA). It plans to spend GBP1.5 billion (EUR1.88 billion) to roll out mostly fibre-to-the-cabinet (FTTC) that will pass around 10 million homes by 2012. Compared with other European incumbent operators, BT is a late mover in NGA, although it has been at the forefront of innovation in core network transformation. Analysys Mason has argued that this is the right order, as the rate of decline of legacy services makes the case for core cost transformation very strong, especially for a fixed-only player such as BT. Moreover, BT’s equal focus on the build-out of advanced IT/service provision infrastructure and of network infrastructure appears strategically astute in a world in which the service layers are increasingly under threat from new players outside the traditional telecoms industry.
In consumer broadband access, BT has recently been facing pressure from Virgin Media, which is playing fast and loose in the marketing for its ‘fibre-optic’ broadband, in reality a DOCSIS2.0 version of its existing hybrid fibre coax networks. (Virgin also promises DOCSIS3.0 roll-out later this year.) But it would be a mistake to see the greatest pressure coming from the ‘fast’ end of the broadband market; in fact, it’s coming from the slow end. Mobile broadband is now enjoying huge take-up, and the signs are very worrying for DSL players. In several other European markets outside the UK, more than 15% of broadband subscriptions (as much as 30% in some) are now on cellular networks – up from next to nothing one year ago. Net additions for mobile broadband are now far in excess of those for DSL, and anecdotal evidence suggests that as many as 50% of customers use mobile broadband as a substitute for fixed. Headline prices for mobile broadband are often lower than those for DSL and users clearly value mobility, even though the quality of experience is lower, compared with fixed broadband. The patterns of broadband usage that are emerging are also deeply troubling for wireline operators. Figures from markets comparable to the UK show that mobile broadband users consume on average over 1GB of data per month. Carphone Warehouse showed recently that its median DSL subscriber still uses under 1GB per month. So if MNOs can keep pace with that level of demand for volume, then some 50% of the consumer broadband market, currently dominated almost everywhere by DSL, is addressable for substitution by MNOs – and wireline operators, such as BT, need to brace themselves for a second damaging wave of fixed–mobile substitution.
The need to differentiate fixed broadband access provision has suddenly become urgent, and BT is right to respond. And new and faster access is, of course, great news for the end user. So is the plan announced today by BT the right move? For three broad reasons, we think that the FTTC solution is disappointing, and substitutes expediency for vision.
Firstly, it’s not such a big deal. The coverage planned is for 10 million homes. This is only about 40% of total UK households. Telecom Italia promises 65% coverage of Italian homes with a broadly similar solution. In the Netherlands, with admittedly much more favourable demographics for access network roll-out, NGA will be practically ubiquitous. Calculated on the basis of the investment per household, total NGA spend works out at about EUR73 for every household in the UK. This is broadly comparable with Deutsche Telekom’s EUR82, but much less than Telecom Italia’s EUR289.
The BT announcement may also be responding in some ways to the need to be seen to be doing something. In the UK, in a political climate coloured by intra-European national rivalry, pressure to be seen to be doing something to match the plans of the likes of Deutsche Telekom, France Telecom, Telecom Italia and KPN has been building for some time. Moreover, BT needed to send out clear signals of its intentions before Ofcom’s statement on NGA regulation, expected in October 2008.
Secondly, FTTC is complex. VDSL MSAN-based FTTC, based as it is on copper networks designed for voice, is not a neat solution. If FTTH is required at a later date, then VDSL MSANs will become redundant, and capex will have been higher than it needed to have been. Opex on VDSL MSAN-based FTTC will be substantially higher than that on fibre access solutions, because of the vast number of remote sites, and this expenditure is likely to hit BT just as the 21CN core transformation promises to lower its opex overhead. Sub-loop unbundling (SLU) arrangements for FTTC are in place in the UK, but co-location in cabinets is practically difficult to implement, and there may not be (m)any other operators with a viable business case to buy SLU.
Thirdly, there’s not much vision apparent, at least yet. Mount Broadband is littered with the corpses of industry soothsayers who declared that there would be no consumer demand for higher bandwidth, because there were no foreseeable services that required it. It is difficult to believe that FTTH will not come to be necessary at some point in the future. While BT’s plans do not preclude further upgrades to FTTH, BT is stressing that it still needs to fully assess what the demand for higher bandwidth services really is. This stands in marked contrast to other Euro-incumbents, such as KPN and France Telecom, which recognise that FTTH is the end-game.
It is not clear what is the retail vision behind BT’s infrastructure announcements. Because of the separation of parts of BT, this cannot be made apparent immediately. But adoption of FTTC, as opposed to FTTH, does send out some signals. BT operates in by far the most competitive broadband market in Europe, and as a consequence its retail market share is low. With Sky and Virgin Media as competitors, BT Vision on its own was probably always going to be a relatively small player in the TV/video market. BT may be avoiding risk by handing the initiative to other service providers, whose access network requirements may be limited. In fact, FTTC works well as a pipe for interactive VoD and niche TV streams, and will be a great complement to the massive downstream potential of DTH broadcasting and the increasing capacity and functionality of PVRs. But it does not look like not a future-proof solution for a telco-delivered full home communications service.
