A lightning-fast jab is futile unless a boxer has the leg muscle to unleash it. Operators pumping up their mobile access networks through 5G investments could find themselves similarly powerless without correspondingly beefy backhaul. Yet the fiber networks that would provide the sturdiest solution are not readily available in some of Europe's biggest markets.
This backhaul black hole has loomed darkly above Europe's mobile markets for several years. In mid-2014, mobile giant Vodafone, armed with data from the Analysys Mason market research group, warned regulatory officials that European mobile consumers would start suffering in the next three to five years unless operators could access the fiber networks owned by the region's incumbents at reasonable prices. Three years later, and as concern mounts, not much has changed in the major economies of the UK and Germany.
The backhaul problem now threatens to plunge Europe's mobile markets into crisis as operators begin preparing for the rollout of even higher-speed 5G networks. If mobile operators cannot obtain access to incumbents' networks, they may have to fall back on sub-optimal technologies that impede their introduction of economically valuable 5G services. Building new fiber networks from scratch would add billions of dollars to the overall 5G budget.
Already, operators contending with saturated markets and zero growth in sales are fretting about the cost of building nationwide 5G networks. While there is still uncertainty over the eventual size of the 5G bill, no one doubts that blanketing whole countries with 5G would entail considerable expense. The European Commission (EC) puts the figure at €57 billion ($68 billion) for the entire region. But Timotheus Höttges, the CEO of Germany's Deutsche Telekom AG (NYSE: DT), reckons Europe could be looking at total 5G expenditure of between €300 billion ($356 billion) and €500 billion ($594 billion). (See DT Plots 5G Across Entire Footprint.)
Moreover, in just-published research, Analysys Mason has estimated that, for an operator with both fixed and mobile networks, 5G will add at least three percentage points to capital intensity (or capital expenditure as a percentage of revenues) for several years. For a mobile-only player, it says, the increase will be "a lot more."
That is likely to reflect rising backhaul demands. As mobile networks shoulder soaring volumes of high-speed data traffic, operators will need capable fixed-line infrastructure to ferry that traffic from basestations to their core network systems. Without access to fiber, backhaul could become the bottleneck that disrupts the 5G experience. Kye Prigg, the head of mobile networks for Vodafone's UK business, says backhaul transmission represents one of the biggest 5G investment hurdles that operators must overcome. (See Vodafone UK Turns Mobile Network Guns on BT/EE.)
The problem is not just a lack of fiber in the ground. Even where it is available, Vodafone Group plc (NYSE: VOD) has not been able to access those networks on terms it deems acceptable. Across Europe, most of the existing fiber infrastructure is owned and controlled by the region's former state-owned monopolies, whose networks were originally built using public-sector funds. In the era of privatization, incumbents in important European markets remain unwilling to open up those networks to their mobile rivals, insists Vodafone. "It's all too easy for them to discriminate against competitors," says a spokesperson for the operator. "Wholesale access is not always made available, it can be extremely expensive and service levels can be very poor."
It is not just Vodafone that is unhappy, either. "In the UK marketplace, fiber availability is still not where it needs to be to make it commercially viable and meet 5G expectations at the appropriate point in time in the future," says a spokesperson for Spain's Telefónica , which operates a mobile-only network in the UK. Hutchison-owned Three UK , the smallest of the UK's mobile network operators, similarly complains that poor fiber availability could have an adverse impact on the economics of 5G.
Next page: Passive aggressive
Broadly speaking, mobile-only players want two things from Europe's fixed-line incumbents. First and foremost, they are demanding access to the ducts and poles that companies such as the UK's BT Group plc (NYSE: BT; London: BTA) and Germany's Deutsche Telekom AG (NYSE: DT) control. If Vodafone could use this "passive" infrastructure, it would be able to make investments in its own fiber networks, it argues. In the absence of a regulatory framework that supports opening up ducts and poles, mobile operators would also like to use incumbents' dark fiber. Another "passive" network product, this promises more control over connections than operators enjoy with traditional "leased line" wholesale services.
Yet in both the UK and Germany, neither ducts and poles nor dark fiber networks are available to mobile operators for backhaul-only purposes. In the UK, that may not be for lack of regulatory ambition. Through a process of market reviews, regulatory authority Ofcom has been trying to find ways to open up the networks owned by BT's Openreach infrastructure division. But its efforts have been "cack-handed," says Barney Lane, the director of UK regulatory affairs for Colt, a rival to BT in the market for mobile backhaul services.
Colt's frustration is understandable. Under Ofcom's rules, an operator can access BT's ducts and poles only if its primary goal is broadband rollout for residential customers. In other words, if the provision of a business service like mobile backhaul is an adjunct to a residential deployment of fiber-to-the-home (FTTH) networks, Openreach's ducts and poles can be used. But if mobile backhaul is the main project, they cannot.
The rules, which effectively bar Colt Technology Services Group Ltd from using BT's facilities, relate partly to the legal distinction that Ofcom has drawn between the residential and business sectors in its market reviews. Instead of examining those markets together, it has set out to regulate each on a standalone basis and avoid taking any decisions about one that would have an impact on the other.
Pricing concerns have also compelled it to maintain a rigorous separation between the residential and business sectors. The pricing methodology for access to BT's ducts is incompatible with the pricing of BT's business services -- or so Ofcom has argued. "They are basically saying they are using different methodologies for pricing business and residential services, and that if you apply one to the other it would cause the whole methodology for that to collapse," says Colt's Lane.
Yet while Lane does not dispute the inherent logic of this position, he says Ofcom has been "quite transparently wrong" in its approach. Colt has fruitlessly urged Ofcom to adopt an alternative methodology and assess the business and residential markets simultaneously. "There is always an alternative cost methodology they could use but they just haven't ever done it," he says. "The French have had duct access for business use since 2006."
As an operator losing out under Ofcom's rules, Colt is hardly an impartial observer. But the EC, which oversees the market reviews carried out by Europe's national regulatory authorities, also takes issue with Ofcom's approach and recommends the same remedy as Colt.
In a clause in Ofcom's business connectivity market review, to which an Ofcom spokesperson directed Light Reading, the UK regulator acknowledges that: "The Commission did not share Ofcom's view that imposing universal duct access would create undue implementation risks (related to correct price differentials along the value chain). The Commission considered that the risks could be mitigated by the use of a uniform costing methodology with consistent asset valuation along the value chain."
Nevertheless, Ofcom is eyeing an alternative solution in the business sector. Instead of opening up BT's ducts and poles, it has been leaning on the incumbent to provide dark fiber services to the likes of Colt and Vodafone. It ran into a major obstacle in July, however, when a UK court ruled that Ofcom had erred in its definition of the market, following a BT appeal. To the incumbent's evident delight, Ofcom is back at square one.
A remittal hearing could leave Ofcom with less flexibility to move ahead. In the meantime, BT's rivals face prolonged uncertainty. "We are disappointed by the recent ruling overturning Ofcom's decision to require BT to provide dark fiber on a regulated pricing basis from October 2017," said a 3 spokesperson. "It seems likely that Openreach, the only provider able to supply dark fiber on nationwide basis, will not provide a dark fiber product in October 2017, either on a regulated basis or voluntarily."
Circumstances are just as unfavorable in Germany, according to Lane, albeit for different reasons. "Ofcom has essentially been hoodwinked by BT's economic arguments on pricing. In Germany it is more about procedural accuracy," he says. Wary of blurring the boundaries separating one telecom market from another, and thereby falling foul of the EC, the German regulator has failed to bring about any improvement in conditions for Deutsche Telekom's rivals, argues Lane. "It has taken a rigidly timid line against the incumbent because it is afraid of crossing a legal Rubicon," he says. (See Vodafone Calls for Broadband Regulation Shake-Up in Germany.)
Ultimately, the situation is the same as in the UK. While the German regulator did not respond to Light Reading when asked for a status update on the relevant rules, there has been no substantive change since 2014. "The Germans will not open up Deutsche Telekom's infrastructure for business operators to use, and so Colt can't use it," says Lane.
Next page: Southern comfort
Not all European markets look equally hamstrung. In France, Portugal and Spain, infrastructure spending has risen as incumbents have been forced to provide duct and pole access to their rivals. Vodafone says the example set by authorities in such markets proves that regulation works. "In Spain and Portugal, Vodafone has demonstrated that a regulatory regime that gives challenger operators access to an incumbent's ducts and poles boosts competition and encourages investment in ultrafast networks," says the operator's spokesperson.
Why have southern European markets taken such a radically different path from those further north? A generous explanation is that authorities in the south have shown greater foresight. A likelier one, says Lane, is that initial protectionism in these markets accidentally led to a situation where alternative operators were prepared to spend money.
Regulators can force open an incumbent's network in various ways. The one that took northern European markets by storm involves giving rivals access to cheap wholesale leased lines and broadband services. Southern European regulators saw that as "rape and pillage" of an incumbent's network, says Lane. Instead, they agreed to open up passive infrastructure if investment was forthcoming. "It just so happened that the market evolved to a point where more than anything else you need investment in fiber," says Lane. "They acted with a protectionist instinct and got lucky." (See Fiber Sizzles in Spain as Orange Targets Jazztel.)
Whether fortunate or foresighted, regulators in France, Portugal and Spain have also interpreted EC guidelines in a more "imaginative" way than authorities in Germany, adds Lane. "In France they have bent the EC definitions to fit market reality," he says. "They have recognized that no way of slicing and dicing the market is perfect and used imagination to get around the constraints they have. They are not directly following the EC's approach but they are not incompatible with it, either."
Of course, opening up an incumbent's network does not guarantee that investors will pile in. BT CEO Gavin Patterson has previously tried to justify his opposition to regulation by insisting there is limited appetite for passive network products, which would carry greater upfront costs than leased lines for BT's customers. Introducing those new products would also prove fiendishly complicated, he argues. (See Eurobites: Sky Prefers Openreach to Ducts, Says BT CEO.)
Critics say his real concern is that the take-up of those services would eventually cannibalize revenues from leased lines. Far from having a limited appetite for them, several of BT's mobile and wholesale rivals sound ravenous. And the southern European experience suggests that regulatory moves would attract investment. "Regulated access to civil infrastructure (ducts and poles) grants mobile operators access to fiber for mobile backhaul," said Spain's Telefónica in comments emailed to Light Reading. "Mobile operators have used ducts and poles intensively for connecting mobile base stations."
Without change, one possible scenario is the development of a two-track Europe, with more progressive broadband markets like Spain and Portugal speeding into a sunny 5G future while the UK and Germany screech to a halt. "Will regulatory failure to deal with this issue impede rollout? Of course it will," says Lane.
Next page: New order
Concluding that Spain and Portugal have somehow arrived at a magic formula would be a mistake, though. The investment needs of 5G may be so great that regulatory authorities and operators throughout Europe are forced to look at radical new measures.
With the use of higher spectrum bands, in which radio signals do not travel as far, operators may need to build many more cell sites. Deutsche Telekom says the move from 4G to 5G could double the number throughout Germany, to between 44,000 and 50,000. Building new ones will prove costly. And connecting more sites to fiber backhaul would add to that expense. (See FTTH Pressure Grows on Deutsche Telekom.)
What's more, unless operators make similarly eye-watering investments in edge-computing facilities, which shift processing power much closer to end users, the distances over which information is sent would rule out services requiring low "latency," or network delay. "Physics matters," said Marcus Weldon, the chief technology officer of Finnish equipment vendor Nokia Corp. (NYSE: NOK), during the Digital Futures 2017 conference hosted by analyst firm Ovum Ltd. in London last week.
Given these investment demands, some commentators have argued that building a multitude of 5G networks in each European country, including parallel backhaul systems, is a grossly inefficient use of resources. An analogy is sometimes drawn with railways, which are also in the transportation business, shifting people and things rather than bits and bytes. "You wouldn't build parallel railway lines to the same place. It would be suicidally stupid," says David Wright, an independent consultant currently advising one of Europe's national regulatory authorities on 5G matters. "So why have multiple mobile operators with parallel infrastructure doing the same thing?"
While the "neutral host" model that Wright advocates is not new, it could be especially pertinent if 5G turns out to be astronomically expensive. Taking this approach, a policymaker would oversee the rollout of a single wholesale network open to all retail players. Service providers would differentiate themselves on the basis of their retail offers instead of on network capabilities. Many claim to be moving in this direction anyway.
Not everyone is a fan. One-upmanship on the infrastructure side has fueled improvements in network technology, opponents argue, and could reduce the need for pricing regulation in future. Notorious for its poor levels of customer service and long record of under-investment, the UK's rail industry is hardly an example worth following. But Wright thinks a neutral-host system can work effectively as long as it is carefully designed. "You need a deal where you build the network based on selling future capacity at fixed prices to three or four big players," he says. "You use that to generate the investment stability."
Even so, the highest-profile experiences to date are not always encouraging. The most famous example of a neutral-host model is to be found in Australia, where it remains a major source of controversy. Through a process known in industry parlance as "structural separation," authorities there have forced incumbents to relinquish their broadband infrastructure role. Taking ownership of their network assets, a government-sponsored entity called NBN Co Ltd. is building a nationwide high-speed network that all retail service providers can use. A drag on public-sector funds, NBN has been accused of overcharging and underperforming. After a new administration reined in its plans, it is also far less technologically ambitious than when it started out. (See NBN Must Speed Up to Hit 2020 Targets, Says Senior Exec.)
Concern that structural separation would lead to years of upheaval and be a nightmare to execute has dampened any enthusiasm for it in Europe. Trying to wrest Openreach from BT's grip would inevitably meet strong resistance from BT shareholders. "This would go to court and it would stay in court for years," says Lane. "It would lead to more uncertainty in the market."
Next page: Medicine for backhaul pain
Medicine for backhaul pain
Any infrastructure-related uncertainty would hardly be conducive to creating an investor-friendly environment for 5G operators. Yet elements of the neutral-host model can now be glimpsed in Europe. While derided by critics as a fudge, Ofcom's "legal separation" of Openreach makes it an outlier in the BT Group, with its own management team and decision-making process. The regulatory intervention might just go far enough: There is currently speculation that Vodafone and BT are in talks about co-funding an FTTH rollout using the Openreach network. That could help to address the mobile backhaul needs of both operators. (See Vodafone UK Boss Slams Openreach 'Stranglehold' and Only BT's Dismemberment Will Sate Rivals.)
Other companies are also positioning themselves as a neutral host. In the UK, the most prominent is the hugely ambitious CityFibre, which is building fiber networks in many cities and towns. Selling dark fiber to retail service providers, it frets that pricing regulation of Openreach could undermine its own investment case. But it regards the mobile backhaul market as a lucrative opportunity and has already landed Vodafone and 3 as customers. (See CityFibre to Raise £200M, Ramp Up FTTH Challenge to BT.)
Elsewhere in Europe, backhaul anxiety has already spurred some network consolidation as mobile operators have grabbed attractive fixed-line assets. Vodafone's €7.7 billion ($9.1 billion, at today's exchange rate) takeover of Germany's Kabel Deutschland in 2013 is particularly noteworthy. Besides giving it a huge broadband weapon with which to clobber Deutsche Telekom, that deal brought backhaul assets whose importance may grow with the introduction of 5G services.
So far, Vodafone Germany appears largely to have self-serviced its backhaul needs using wireless "microwave" technology. But Analysys Mason reckons backhaul requirements will eventually "exceed the capabilities of microwave." The aim of a €2 billion ($2.4 billion) investment in fixed-line improvements, announced last week, might partly be to ensure Vodafone has a much better backhaul alternative to microwave in future. The downside is that Vodafone's coax-fiber cable network covers only 12.6 million German homes, about 30% of the country's total. (See Vodafone to Pump €2B Into German Gigabit Networks.)
One neutral-host possibility is the emergence in Europe of the "towercos" and "fibercos" that have flourished elsewhere. In the US, companies like Crown Castle International Corp. (NYSE: CCI) have been acquiring both fiber and "small cell" assets that are leased to consumer-facing telcos such as AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). Fueled by mobile data demand, Crown Castle's revenues were up 8% in April-to-June quarter, to $869 million, compared with the year-earlier period. The UK's Arqiva, which has recently been snapping up spectrum assets in London, is a "baby version" of it, says Wright. "It makes sense for operators to share things like towers" as they concentrate on services, he says. (See Crown Castle Sticks to Fiber Diet With $7.1B Lightower Deal and Arqiva: 5G FWA Can Shine in London.)
Such network-sharing arrangements may be necessary to keep 5G capital expenditure in check, said Bruno Jacobfeuerborn, Deutsche Telekom's chief technology officer, during a conversation with Light Reading earlier this year. The European telecom industry will consequently become more like the US market, he predicts. "If you look at the US, where tower companies are buying fiber to connect sites, that is a trend I see happening [in Europe] in future," he said. (See The Growing Pains of 5G and DT CTO: Costs Must Fall or 5G 'Won't Work'.)
Europe's overriding problem, its operators insist, is "too much competition" on the network side. Profit margins and spending budgets are in a constant squeeze, they grumble, and yet watchdogs have kyboshed several big merger attempts in the last three years. Unless authorities are willing to change their tune on national and even regional consolidation, Europe could drop even further behind the high-flying nations of the US, Japan and South Korea, telcos argue.
A long-time critic of regulators for blocking takeover activity, Bengt Nordström, the CEO of the Northstream consulting group, now thinks 5G in Europe could be a long time coming. "The most likely scenario is that we'll have a very gradual introduction of 5G in Europe," he says. "The main barrier is that operators' revenues are flat or declining, and so that will be the trend for capex as well."
Operators' complaints typically meet with guffaws from European officials and consumer groups, who note that mobile phone markets across the region are still thriving. Yet the unlikelihood of any change in sentiment about takeover activity means other forms of regulatory support are even more urgently needed to make 5G fly. Relieving the backhaul pain would be a good place to start.
— Iain Morris, News Editor, Light Reading