Europe Doubles Down on DSL

Europe's incumbent carriers have continued where they left off in 2003 with news of increasing broadband penetration and further investment in their data access networks.

And with their DSL strategies appearing to pay off and their finances in better shape than this time last year, credit rating agency Moody's Investors Service has described the credit outlook for Europe's investment-grade carriers as "moderately positive."

The latest broadband announcements come from several of the continent's big hitters:

• France Telecom SA (NYSE: FTE) plans to invest another €100 million in its broadband access network; it will now spend €700 million in the 2003-to-2005 period. The investment is part of a broader overhaul of the fixed-line network that will cost about €3 billion between 2003 and 2006.
  
  The increased spending on DSL equipment is largely a defensive move. The French government recently passed a law that will allow cities or regions to build their own networks starting this summer, and the incumbent is concerned that it might lose out to such competitors in small communities. The carrier will now reach its target of providing broadband access to 90 percent of the population by the end of 2004, a year earlier than previously expected.
  
  At the end of 2003, France Telecom had about 3 million DSL customers, and had achieved broadband coverage of 79 percent of the population.
  
  
• Dutch incumbent KPN Telecom NV (NYSE: KPN) continues to roll out Alcatel SA (NYSE: ALA; Paris: CGEP:PA) DSL gear throughout the Netherlands (see Alcatel Wins KPN Broadband Contract). The operator has previously announced that it is counting on DSL uptake to be a main driver of revenues in the next few years (see KPN Puts Faith in B'band).
  
  
• Spanish operator Telefònica SA says its DSL subscriber base increased by 72 percent during 2003 to reach more than 1.65 million users by the end of the year, compared with 957,000 a year earlier. Like KPN, it is relying on broadband to help drive new revenues, and it has a self-imposed target of 6 million DSL users by 2006. The carrier says that it's spent €2 billion on its DSL rollout since 2000, and that broadband is currently available to 93 percent of the population.

Demand for DSL service has been one of the main success stories in the past year (see DSL Heads for 60M Users), and analysts believe growth will continue to be strong in 2004. "Broadband is one of the few services, along with mobile, that has captured the public's imagination in the past 10 years," says Chris Lewis at Yankee Group. "Demand is still outstripping supply, and now the European incumbents are investing in the networks that will allow them to offer tiered broadband services." He cites BT Group plc's (NYSE: BTY; London: BTA) 21st Century network plans as an example (see BT Gets Tough With Suppliers).

Meanwhile, Moody's says a significant fall in debt levels and improved cashflow at operators such as KPN, France Telecom, and Deutsche Telekom AG (NYSE: DT) has made the sector less risky.

However, the agency also notes that these same operators will likely suffer further pressure on their traditional voice revenues from "a mixture of wireless substitution and ongoing regulatory pressure," and, while "negative impact on cash flow may start to affect individual operators depending on their cost-reduction ability," it is "unlikely to manifest itself for the sector generally until 2005 or later."

— Ray Le Maistre, International Editor, Boardwatch