Vodafone to Pump €2B Into German Gigabit Networks

Vodafone Germany has increased the competitive pressure on incumbent operator Deutsche Telekom by saying it will invest around €2 billion (US$2.4 billion) in gigabit-speed fiber networks serving around 13.7 million German premises by the end of 2021.

Under the plans announced Monday morning, Vodafone Germany is to spend another €200 million ($240 million) on upgrading the cable infrastructure that connects about 12.6 million homes, between €1.4 billion ($1.7 billion) and €1.6 billion ($1.9 billion) to address business customers and a further €200-400 million ($240-481 million) on extending gigabit-speed networks into rural parts of the country.

While the investment will strengthen Vodafone Germany's broadband services proposition, it will also provide it with additional data transport network capacity that could be used for mobile backhaul purposes, an important consideration as enhanced 4G LTE services are rolled out and early 5G services are planned.

The announcement puts a further squeeze on former state-controlled monopoly Deutsche Telekom, which has continued to resist making heavy investments in fiber-to-the-premises (FTTP) infrastructure, preferring to upgrade its last-mile copper connections. (See FTTH Pressure Grows on Deutsche Telekom and Eurobites: DT Defends Vectoring, Slams Vodafone.)

Deutsche Telekom AG (NYSE: DT) executives have repeatedly insisted that copper-based technologies such as vectoring can support Germany's broadband needs, but the operator has continued to lose market share to higher-speed cable networks, of which Vodafone Germany's is now the biggest.

Political pressure on Deutsche Telekom is also mounting. Germany's Free Democratic Party (FDP), which could feature in a coalition government following a general election on September 24, has criticized vectoring as an outdated technology. It wants to sell government stakes in Deutsche Telekom and Deutsche Post and use the proceeds to build a nationwide gigabit-speed fiber access network open to all retail players.

With its latest scheme, Vodafone would spend another €200 million ($240 million) on upgrading cable infrastructure across its entire German footprint of 12.6 million homes, using a next-generation cable network technology called DOCSIS 3.1.

The upgrade should boost connection speeds for customers from a current maximum of 500 Mbit/s, an offer currently available to about 2.5 million homes.

But the lion's share of the operator's investment -- between €1.4 billion ($1.7 billion) and €1.6 billion ($1.9 billion) -- will be used to extend gigabit-speed services to around 100,000 German businesses across 2,000 business parks.

Those plans will build on a tie-up with a German FTTP network provider called Deutsche Glasfaser announced as recently as July. Under that deal, Vodafone said it would connect 18 business parks in the Dusseldorf area to gigabit-speed networks by early 2018.

The more ambitious scheme could also involve other partners "with specialist fiber skills," said Vodafone in its statement. Including Deutsche Glasfaser, those companies will take responsibility for deploying the passive infrastructure while Vodafone focuses on operating the network and providing services to customers.

While in the long term Vodafone expects to take full control of the passive infrastructure, it reckons this approach will limit its upfront cash outflow to about a third of total construction and CPE (customer premises equipment) costs.

In a third component of today's plan, Vodafone is to spend between €200 million ($240 million) and €400 million ($481 million) on deploying new gigabit networks in rural areas home to about 1 million consumers.

It says it will collaborate with local municipalities on a co-investment model for this rural initiative. As with the costlier business-parks scheme, the partner -- in this case the local municipality -- will build and own the passive infrastructure to homes, potentially making use of government fiber subsidies, while Vodafone will operate the network under a rental agreement.

Vodafone says that 40% of businesses in each individual park will have to sign up to services before it can proceed with its investment. Similarly, it will require a third of homes in rural areas to commit to fiber services before it can move ahead.

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.

But assuming it does, the operator reckons its service revenue growth rate will be one to two percentage points higher than under previous expectations, starting in the second full year of the plan (that is, the fiscal year running from April 2019 to March 2020).

It is also now forecasting "materially higher" incremental EBITDA margins than its current figure of 34.1%, but has not provided firmer guidance here.

Because of the co-investment approach, Vodafone expects the annual drag on cash flows during the initial years of the plan to be around €100-200 million ($120-240 million).

The capital investment of €2 billion ($2.4 billion) will be spread across four fiscal years and means capital intensity (expenditure as a percentage of revenues) will remain the "mid-teens" over the medium term, said Vodafone.

In the most recent fiscal year, Vodafone Germany generated €10.6 billion ($12.7 billion) in revenues and invested €1.67 billion ($2 billion) in capital expenditure.

While Deutsche Telekom remains concerned about the costs of building a nationwide FTTP network, it expects to increase spending on FTTP rollout starting in 2019, it told investors during a recent earnings call. (See DT to Ramp Up FTTH Capex Starting in 2019.)

Earlier this month, it also launched a gigabit-speed service for residential customers, priced at €119.95 ($144.20) per month, although it has not indicated how many of its customers are able to receive this service.

— Iain Morris, News Editor, Light Reading

James_B_Crawshaw 9/11/2017 | 12:14:57 PM
Re: This isn't just about retail broadband services.... Agreed. DT may now have to follow suit and roll out FTTH after all. In the long run we know it makes sense. And if Vodafone's payback period of 4-6 years is correct, it makes sense in the medium term too. 
[email protected] 9/11/2017 | 6:43:47 AM
This isn't just about retail broadband services.... This is a model that will surely become the norm in the coming 2 years. Large operators now own fixed and mobile access assets but to remain relevant in ALL areas of the comms business they will need fixed access networks that will support

- high-speed fixed broadband servcies for residentila and business users

- backhaul for cellular and unlicensed spectrum data traffic

In teh past, that was 2 separate networks. In the future, it is the same network. Vodafone is just doing what all major operators will need to do (or are already doing).
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