Europe's Broadband Hangover

Too much Oktoberfest beer leaves plenty of Germans nursing hangovers at this time of year. For many of the country's bandwidth-thirsty broadband users, such overindulgence on bits and bytes is not an option, but the headache has been more persistent.

In league tables ranking advanced nations on criteria such as the speed of connections and the penetration of fiber-to-the-home (FTTH) services, Germany performs badly. The UK, whose network operators like to shout about their technological prowess, is an even bigger laggard, according to Graham Finnie, analyst-at-large with Heavy Reading . By 2019, FTTH penetration in the UK will have risen to just 1.7%, he estimates.

Figure 1: Flagging Oktoberfest revelers and German broadband users eventually adopt the same haggard demeanor.

Germany and the UK may be standout examples of (true) ultra-fast broadband malaise, but Europe is widely seen to have fallen behind parts of North America and Asia when it comes to the rollout of high-speed networks. While some operators in these regions are now touting gigabit-speed offerings, incumbents in Europe are still, in many cases, unable to provide 100 Mbit/s services.

A lack of funding is often blamed for Europe's shortcomings. Yet that is missing the point, according to Thomas Langer, a finance consultant with the FTTH Council Europe, an industry organization that promotes FTTH technology. "There is no scarcity of capital," Langer told attendees at Light Reading's Gigabit Europe event in Munich last week. "Capital is there and ready to be invested."

Figure 2: Leaders & Laggards The outlook for gigabit enthusiasts does not look promising in several of Europe's biggest economies, according to Heavy Reading.

In Langer's view, the real problem is not a shortage of funds but the "embedded interests" that are blocking progress. Incumbents such as Deutsche Telekom AG (NYSE: DT) are unlikely to welcome competition while their overstaffed organizations force them to maintain high prices for access to broadband networks.

In the meantime, policymakers have shown little interest in shaking up the industry, demonstrating a paucity of ambition (far from thinking about gigabit-speed services, the European Commission is targeting 30 Mbit/s for all and 100 Mbit/s for one half of households by 2020). When the FTTH Council urged Germany's government to think about a national strategy for creating a "gigabit society," the response from policymakers in Berlin was "lukewarm," says Langer.

Next page: Restructuring the market

Restructuring the market
Ultimately, Langer is one of a growing number of industry watchers who would like to see the incumbents carved up into separate retail and access infrastructure businesses through a process known as "structural separation." By forcing incumbents to spin off their network divisions and then rent capacity in the same way (and on the same terms) as other broadband retailers, governments could foster more competitive broadband markets, according to the advocates of this approach. (See BT Outlines Conditional Gigabit Vision for UK, Split BT to Lessen Regulation, Says CityFibre and Ofcom Does Not Rule Out BT Carve-Up.)

But structural separation is not a guaranteed panacea. In Australia, efforts to create a national broadband wholesale network have become bogged down in political and commercial disputes. European telecom executives will be keeping a close eye on the Czech Republic, where Telefónica O2 Czech Republic , the former state-owned monopoly, is currently being structurally separated by PPF, a local investment group that now controls the company. "Structural separation is potentially the way to go but it must be fully supported by the government and the regulator," says Langer. "If you don't do that you run into huge problems." (See Australia's NBN Cost Blowout.)

The rollout of gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

Political apathy or opposition seems likely to frustrate separatists in the UK, where a number of BT Group plc (NYSE: BT; London: BTA)'s rivals have been clamoring for a carve-up of the increasingly powerful incumbent. Last week, Ed Vaizey, the UK's minister for the digital economy, was reported by the Financial Times (subscription required) to have thrown cold water on the case for structural separation, arguing that it would be an "enormous undertaking, incredibly time consuming" and could potentially "backfire." Hopes may be low in other countries, too. "I'm not sure we can split up Orange [France's incumbent]," says Joël Mau, who sits on the board of the FTTH Council Europe. "It is a matter of politics and strong lobbying from incumbents." (See Eurobites: UK Minister Cool With BT/Openreach Relationship.)

Not everyone outside the incumbents sounds convinced of the need for structural separation, either. Mark Collins, the head of strategy and public affairs for CityFibre , a small infrastructure rival to BT in the UK, has previously noted the attractions of structural separation but thinks there is too much focus on the UK incumbent and how much it can be persuaded to invest. As he points out, alternative operators in the market are together spending more on the rollout of high-speed networks than BT. Those companies include cable giant Virgin Media Inc. (Nasdaq: VMED) as well as CityFibre and other gigabit players targeting specific areas, such as Gigaclear (which aims to provide gigabit-speed services in rural communities), Hyperoptic (in multiple UK cities) and Broadband 4 Rural North (Cumbria). (See UK Needs Fiber Infrastructure Rivalry – CityFibre, UK's Gigaclear Raises $46M for Rural Gigabit, Hyperoptic Takes Gigabit to Glasgow and Virgin Media Plots £3B Invasion of BT Turf.)

Figure 3: Infrastructure Rules Mark Collins, the director of strategy and public relations at CityFibre, champions alternatives to BT's broadband hegemony.

Unsurprisingly, Collins believes infrastructure-based rivalry is needed if the broadband market is to flourish. Although it does not prevent competitors from investing in their own infrastructure, structural separation is all about creating one network that can be used by a multitude of players. Paul Ceely, the head of network strategy at UK mobile operator EE , acknowledges there is a risk of high wholesale pricing in a market with just one network operating on open-access principles (EE, of course, is due to become a part of BT next year once competition authorities have approved the incumbent's £12.5 billion ($19 billion) takeover). What's more, with no infrastructure rivals, the owner of that network may have little incentive to invest in higher-speed technologies. (See BT Locks Down £12.5B EE Takeover Deal.)

Next page: The difference engine

The difference engine
The open access model might also give service providers limited scope for differentiation. Richard Jones, the chief commercial officer of Ventura Team , which has developed an open-access network in Sweden, says that asset-light players are forced to think more about marketing and product perception, citing the example of the UK's Virgin Mobile, which runs a mobile virtual network operator business on EE's network. "Virgin was ranked number one on customer reputation when it was running on T-Mobile [which merged with Orange UK to create EE]," he says. "T-Mobile was number six and yet they were really no different apart from in name." Figure 4: Open Up Richard Jones of Ventura discusses the open-access model during Light Reading's Gigabit Europe event.

Even so, calls for structural separation seem to have grown louder with the launch of fiber wholesale products that make service differentiation more difficult. In both the UK and Germany, operators that relied on local loop unbundling in the DSL era (sometimes offering higher-speed services than the incumbent) have been driven back towards bitstream products with fiber. Structural separation would not aid differentiation but it should stop network owners from being able to squeeze retail rivals on pricing -- a more critical means of competing in a market of "me-too" products -- through a mixture of high wholesale and low retail charges.

Could regulators and incumbents dodge the complications of structural separation by making bitstream products more attractive? The New IP technologies in which operators are starting to invest, including software-defined networking (SDN) and network functions virtualization (NFV), might hold the key. "The problem with bitstream is that it's been seen as a me-too service and that has limited what the competitive carrier can do," says Robin Mersh, the CEO of the Broadband Forum , an industry organization that develops specifications for broadband technologies. "If you could open up the control plane and create some interesting new services through the use of SDN, you could potentially change the game."

The danger, of course, is that incumbents alert to these possibilities threaten to shelve their spending plans unless granted a "regulatory holiday," concerned that rivals will otherwise reap the benefits of their infrastructure investments. If these arguments sound familiar, a similar debate raged during the DSL era, when many incumbents in Europe were accused of hurling obstacles in the path of local loop unbundling. Getting vested interests to play along while experimenting with an array of new approaches will be the biggest challenge for the purveyors of the gigabit society.

— Iain Morris, , News Editor, Light Reading