There is an ongoing debate in the industry as to whether growth in consumer spending on telecoms and media will slow down during the approaching recession. Voice has become a utility service, and now that the European Commission (EC) is considering recommending a universal service obligation on broadband access, clearly broadband is heading in the same direction. In light of this, established broadband subscribers are unlikely to give up their subscriptions in the near future. Yet it feels somewhat inevitable that ‘value bundles’ – entry-level broadband bundled with ‘all you can eat’ voice services – will become increasingly popular with consumers. Furthermore, some operators had hoped to increase ARPU by offering NGA in the immediate future, but this is looking less likely. The Broadband World Forum Europe 2008, which took place in Brussels, Belgium from 29 September to 2 October 2008, showcased two aspects in which major players are changing their world view.
VDSL2 – suddenly more popular than FTTH
Vendors had been selling the dream of a cornucopia of new services and revenue generated by FTTH and GPON at the Broadband World Forum Europe 2007 event, but were a little more conservative this year. Operators have already been reducing capital expenditure year-on-year and will be even more cautious about investing significantly in NGA in light of the economic downturn. Even if they do invest in NGA they may now find it harder to get credit to fund these roll outs. Incumbents in some countries with short local loops or significant cabinet infrastructure are likely to continue with already-announced plans for rolling out services at bitrates that only FTTH can reliably offer (for example, 100Mbit/s). However, even these operators can be expected to keep their options open, using VDSL as a back up in less profitable areas in the event that their budgets will not allow them to pass the number of FTTH homes that they originally hoped for.
This is not great news for service providers, or for vendors that are now promoting more affordable VDSL2 as a logical stepping stone to FTTH. For example, Nokia Siemens Networks abandoned its GPON strategy early in 3Q 2008, replacing it with a strategy to promote VDSL as an intermediate step. Speaking at the Broadband World Forum Europe 2008, Stephan Scholz, CTO of Nokia Siemens Networks, argued, “For all we know, 20–50Mbit/s is good enough for the normal residential home for now.” Scholz cited a recent report produced by Analysys Mason for the Broadband Stakeholders Group, which sets out the costs of rolling out residential FTTH versus VDSL, when arguing that operators should stick with DSL until the next generation of PON is ready for deployment (Nokia Siemens Networks call their solution in this space next generation optical access (NGOA) technology). I have argued that VDSL is a stepping stone to FTTH, although there are issues with how many VDSL subscribers will be able to get 25–50Mbit/s, depending on the length of their local loop. Speaking at the same event as Scholz, Kenneth Ducatel, Member of Cabinet for Information Society and Media at the European Commission, stated, “There’s a lot of talk about Europe lagging behind compared to, say, Japan. While some consumers use the full 100Mbit/s of their service, many only use 1–3Mbit/s. Let’s not overhype next-generation access.”
Targeted advertising via TV – a significant second revenue source for service providers?
So if growth in consumer spending does slow down for telecoms and there does not seem to be enough revenue to justify investing billions of euros in fibre quite yet, then fixed operators need to find another revenue source to buoy them through the storm. Does targeted advertising potentially offer this lifeboat?
Vendors such as Alcatel-Lucent and Ericsson have recently become keen to promote targeted advertising, arguing that the TV will no longer be a passive device but a gateway into the home (something that has been often claimed in the industry, but that with present R&D lab technology may now be more realistic). Targeted advertising offers the opportunity for more focused and relevant content to be aimed at unique consumers. If well executed (there are plenty of issues to contend with), then it has the possibility to benefit:
- consumers by keeping advertising impressions more relevant and also potentially saving them money through content subsidisation
- advertising agencies by offering more specifically targeted advertising impressions, providing a significant amount of trackable data for subsequent analysis, offering further insight into consumer behaviour
- operators through potential advertising revenue, positive brand reinforcement and also increased loyalty from customers, which can be achieved in particular if content is subsidised – an advertising strategy that can appeal to the ‘more for less’ consumer mentality.
It has yet to be seen whether such initiatives will generate significant revenue for operators, although advertiser and brand confidence in this medium are likely to be higher than for mobile advertising, because the model is more closely tied to established TV and online advertising models.
Can targeted advertising stimulate consumer spend? Maybe. Can targeted advertising increase revenue enough to help fund those NGA roll outs? Not on its own – the online and TV advertising markets generate more revenue than telecoms as a whole, and the targeted advertising market is still embryonic. Advertising may play a small part in the overall case for NGA, which also includes potential revenue from new services and long-term opex savings. However, FTTH remains significantly too expensive for many players at present and, for most countries, it is prudent that vendors champion VDSL or VDSL2 in order to eke more services out of ageing copper networks. ADSL2+ will not be enough to support more than the basics for homes with HDTV and hence operators will fall into two camps – those that invest despite a declining market in the hope of gaining an advantage on competitors when consumer spending confidence recovers, and those that concentrate on value bundling to control subscriber churn in order to survive the economic downturn.