The economics are challenging, yet roll-out is evidently gaining pace
Several years ago, any mention of fibre to the home (FTTH) was met with ridicule: “the economics just don’t work, and probably never will.” However, fibre is now being taken very seriously, with numerous fibre projects emerging around the world. Why is this?
The extent of fibre infrastructure and advanced DSL technologies in Korea and Japan – the current leaders of the broadband league table – is widely reported. However, the plans of China are less well known. Here, major policy initiatives have been instituted to promote new fibre infrastructure. The government’s rationale is to assist market development, driven to a large extent by two future high-profile events: the 2008 Olympics in Beijing and the International Expo in Shanghai in 2010. These are both central to China’s ‘digital cities’ strategy, and extensive fibre roll-out has been planned to support both wired and wireless services. In other cities, such as Hangzhou, Ethernet wiring has been installed in all households, thus facilitating the roll-out of FTTH.
In the USA, Verizon, SBC, and BellSouth are all actively investing in fibre. In this market, IP television (IPTV) is the main driver: the incumbents see fibre as a key differentiator from their cable-company competitors. Importantly, there are limited regulatory obligations on incumbents to provide their competitors with access to these networks. Only Verizon is talking about widespread FTTH – a USD3 billion investment for three million homes; SBC and BellSouth are planning shallower fibre penetration, rolling out fibre to the cabinet or node rather than all the way to the customer, and using DSL for the final connection. SBC expects to invest USD4–6 billion on a fibre network capable of addressing 18 million homes.
In Europe, the market dynamics are different again: it is often the public sector that is the sponsor for fibre projects. In these cases, an ‘open-access’ philosophy is commonly adopted. Sweden, in particular, has a long history of such projects: an excellent example is the MalarEnergi network in Vasteras, which has been named the “most advanced (FTTH) network” by Broadband Properties Magazine. It provides strong evidence that open-access networks can and do work in practice: over 20 different service providers provide in excess of 60 IP services to retail customers, and it is claimed by Packetfront – the provider of the open-access software platform for the network – that costs of telephony and high-speed Internet have fallen by 50%.
Public administrations in other parts of Europe are also jumping on the fibre bandwagon. What is surprising is where this is happening. In France – one of the most fiercely competitive broadband markets – President Chirac is apparently backing widespread fibre infrastructure, and the Mayor of Paris has said there will be a public tender in 2006 for the construction of a fibre network covering all of Paris. This is in addition to two existing fibre projects in the suburbs. Perhaps unsurprisingly, France Telecom has very recently announced trials of FTTH in six districts in Paris.
This new trend of public-sector-sponsored fibre projects in Europe is in contrast to previous broadband interventions, where an economic development argument centred around eliminating a ‘digital divide’ has been used. The projects in Paris, and the Citynet project in Amsterdam, clearly do not fit this model. The City of Amsterdam has taken an equity stake, alongside ING and a property company, in a new venture building out fibre, initially to 40 000 homes. In Europe, public sector interventions are subject to close scrutiny, and it is expected that Citynet will seek approval from the European Commission under the market economy investor principle (MEIP) whereby a government invests on ‘market terms.’ This would be a first for a broadband project in Europe. However, the case is still not very clear: if there is any public sector underwriting of the Citynet project – for example, to mitigate demand-side risk in the event of slower-than-expected take-up – it would seem unlikely that an MEIP decision could be justified. This is definitely one to watch – as will be KPN’s reaction.
It is clear, then, that the economics of FTTH remain challenging, yet roll-out is evidently gaining pace. In some cases, competitive pressures are driving incumbents to consider bringing forward plans that may have been on the shelf for years, and to take a much longer-term view in terms of return on investment. In other markets, government support is becoming increasingly important. It will be fascinating to see how this plays out: will the European Commission approve city-based projects in already highly competitive broadband markets? How will European incumbents react – would they ever consider being customers of municipal fibre networks? And how long will it be before China’s policy initiatives start to pay dividends?