Has Telefónica over-extended itself? The Spanish operator has indicated its fiber-to-the-home (FTTH) deployment plans are "under review" after the national regulator last week said Telefónica would have to provide wholesale services to rivals in most areas. Yet Telefónica has already passed 13.4 million homes, or about three quarters of the Spanish total, with its FTTH network. (See Eurobites: Telefónica Casts Doubt on Spanish Fiber Rollout.)
Investors would have good reason to be worried. When Telefónica was asked earlier this year how the looming regulatory decision was affecting its rollout, the operator said it was targeting areas that would not be subject to regulation. "What we are doing in 2015, we keep rolling out, but namely on the zones that have been already agreed as having enough competition," said Ángel Vilá, Telefónica's chief financial and corporate development officer, during an earnings call, according to a Seeking Alpha transcript.
That means either Telefónica has failed to restrict itself accordingly or the regulator has simply blindsided it. According to last week's draft ruling from the Comisión Nacional de Mercados y Competencia (CNMC), only in 34 municipalities home to about 26% of Spain's population will the operator be exempt from regulation forcing it to open its FTTH network to rivals.
The CNMC already deems those municipalities to be sufficiently competitive, meaning a minimum of three next-generation infrastructure players offer services to at least 20% of the local population. The number of competitive zones meeting these criteria has risen sharply from just nine in December last year, but the increase has not been enough to suit Telefónica.
How quickly this changes depends on the willingness of Telefónica's rivals to pump funds into their own fiber-optic networks. There are some encouraging signs. Having completed its takeover of fixed-line player Jazztel plc in the summer, Orange Spain recently set targets of extending its FTTH footprint from 5.2 million households to 10 million next year and 14 million by the end of 2020. (See Eurobites: Orange Sets Out Spanish FTTH Vision.)
Vodafone España S.A. has also emerged as a fixed-line force since acquiring ONO , a cable operator, in July last year. Thanks partly to a network-sharing scheme it has with Orange, Vodafone claimed to have reached 8 million premises with fiber when reporting July-to-September results earlier this month. "We're going to build more in Portugal, in Spain, in Italy," said Vittorio Colao, Vodafone Group plc (NYSE: VOD)'s CEO, during the results call. "It depends on the operating conditions."
Existing regulations do give alternative operators access to some of Telefónica's passive network infrastructure, making it easier for Vodafone and Orange to continue deploying their networks. Yet Telefónica will not welcome a surge in infrastructure-based competition any more than it does the CNMC's latest regulatory proposals.
Nevertheless, what seems increasingly clear is that alternative operators throughout Europe are no longer prepared to make do with piggybacking on the incumbent's network, even if wholesale rates are relatively favorable. As a formerly "mobile-only" player, Vodafone is arguably the strongest example of a European service provider that now believes it must own and control its own fixed-line networks if it is to flourish.
Outside its own network footprint, Vodafone continues to demand access to wholesale offerings from the incumbent. But just because those services are available at satisfactory prices does not mean that Vodafone will scale back its infrastructure investments. For evidence of that, look to Germany, where Vodafone spent heavily to acquire network assets -- in the form of Kabel Deutschland GmbH , Germany's biggest cable company -- after having already arrived at a wholesale agreement with Deutsche Telekom AG (NYSE: DT).
All of this will make it much harder for Telefónica to argue, as it has been doing, that regulation will hinder investment. According to its own figures, putting its own spending plans on ice at this stage would deny just one in four homes a Telefónica FTTH service in the future. In the meantime, Orange looks determined to reach 55% of homes with its rival infrastructure next year, and about 77% by 2020. That should spur Vodafone to make good on Colao's assurance that it will "build more" in Spain, too.
Last year, Fernando Herrera, a regulatory economic manager with Telefónica, argued that FTTH competition took root in Spain purely because there was no wholesale option for superfast broadband services. Put simply, rivals had no choice but to invest in their own networks if they wanted to challenge Telefónica in the market for higher-speed connections. That seems like a fair assessment. But the introduction of high-speed wholesale offerings today seems unlikely to stop infrastructure-based competition in its tracks. (See Fiber Sizzles in Spain as Orange Targets Jazztel.)
— Iain Morris, , News Editor, Light Reading