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Can DT, Regulators Find Common FTTH Ground?

Iain Morris

"We do not want to build a network for United Internet," said Timotheus Höttges, the boss of Germany's Deutsche Telekom, during a phone call with analysts this week. It was a familiar refrain. Europe's biggest telco is prepared to splurge on new superfast broadband infrastructure, but only if it does not have to open this network to its rivals.

Regulators have refused to acquiesce. And so the German incumbent, like some of Europe's other leading players, has been upgrading its ageing copper lines with the latest bandwidth-boosting technologies. Using vectoring, which cuts out noise interference between lines, it aims to provide 100 Mbits/s services across 80% of its footprint in the next couple of years. Software enhancements could even see top speeds rise to as much as 250 Mbit/s.

This is certainly more economical than rolling out fiber. In 2012, Deutsche Telekom AG (NYSE: DT) estimated that a vectoring deployment covering 65% of households would cost about €6 billion ($6.7 billion). Connecting every home in Germany to fiber would cost between €60 billion ($67 billion) and €80 billion ($90 billion), according to experts. But will vectoring do the job?

Until quite recently, 250 Mbits/s would have seemed more than sufficient for the future needs of the average household. But the bandwidth-gobbling technologies that succeed Ultra HD TV and augmented-reality gaming could be too much for any copper line. Even if these services do not become mainstream for many years, Deutsche Telekom will eventually have to replace its copper wiring with fiber to satisfy customer demands.

The best-case scenario for the German incumbent is that regulators become more conciliatory. Concerned that vectoring could stifle competition by making it harder to "unbundle" networks, authorities are currently forcing Deutsche Telekom into some awkward compromises on copper, including the introduction of new wholesale products. In the meantime, the operator has flatly ruled out any major investment in fiber-to-the-home (FTTH) technology if regulators make it unbundle lines and grant competitors access to the network. (See Eurobites: Vodafone Livid as German Regulator Approves DT's Vectoring Plans and DT's $1.1B Vectoring Plans Thrown Into Doubt After New Ruling.)

"If the regulation is a ULL [unbundled local loop] regulation… we have to say what is an incentive for us to build this infrastructure, and there is none," said Höttges, according to a Seeking Alpha transcript. "The prerequisite even to think about FTTH would be a change of the ULL… regime."

This does not mean Deutsche Telekom would oppose any FTTH wholesale obligations outright. But the operator seems unlikely to overcome its resistance to investing in FTTH without some assurances on the pricing of wholesale products, and the conditions attached to their sale.

Even so, market and economic realities might drive Deutsche Telekom and regulatory officials to find common ground. For one thing, more than certain other "Tier 1" service providers, the German operator has given up trying to compete against web players in the market for consumer applications. Instead, it has focused on developing a world-class set of networks that can beat rivals in all respects.

In the speed stakes, however, it has fallen even further behind its cable competitors, some of which are now touting 400 Mbits/s offers. This could be having an impact on customer growth. Deutsche Telekom's share of Germany's retail broadband market has been dropping, falling to 40.4% in the April-to-June quarter from 41.3% a year earlier. According to its own data, cable operators grew their share from 20.8% to 22% over the same period. (See Tele Columbus to Launch 400Mbit/s Service.)

Continued reliance on copper is proving costly in other ways too. Because broadband signals travel poorly over long distances on copper networks, Deutsche Telekom has to maintain facilities that are just a few hundred meters from customer premises. These could be phased out in an FTTH environment. Indeed, Sascha Vorbeck, Deutsche Telekom's head of network development core, reckons the introduction of FTTH and greater automation would allow the operator to reduce the number of German sites from about 10,000 to just 3,300. (See DT Eyes FTTH Solution to German Opex Issue.)

Speaking at the recent Next Generation Optical Networks conference in Nice, Vorbeck also suggested that investment in FTTH might aid the transition to all-IP networks and retirement of older PSTN-based technologies. Some 43% of Deutsche Telekom's fixed lines were IP-based at the end of June, but the operator will need to speed up its activities if it is to complete the all-IP transformation by a self-imposed deadline of 2018. (See DT's Pan-Net Picks Up the Pace.)

Next page: The threat of structural separation

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