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Our Fiber-Fed Future

Heavy Lifting Analyst Notes
Heavy Lifting Analyst Notes
Heavy Lifting Analyst Notes
1/27/2006

After several decades of false starts, FTTx is finally on its way in Europe – with potentially momentous implications for Europe's incumbent telcos.

Fiber to the home, the office, or the building is the endgame for European wireline access networks, as it is throughout the developed world. If incumbents make the wrong decisions here, they face at best a radically reduced role in telecom, and at worst extinction. It may already be too late for them to survive in anything like their current form, at least on the wireline side of their business.

At the FTTH Council Europe 's annual convention in Vienna this week, there was a palpable sense that the atmosphere had changed, generating more buzz than any event I've attended in the past year.

But the agents of change in Europe are not the incumbents, but the public utilities and municipal authorities, which have been busy creating an alternative blueprint for Europe in which a fiber-based, open-access next-generation network (NGN), equally available to all citizens and service providers, replaces the current model of vertically integrated or imperfectly unbundled networks and limited facilities-based competition.

Although only a few hundred thousand households are connected to these networks to date, there are ambitious plans for big new networks in Amsterdam, Paris, and Vienna, and scores of smaller initiatives right across the continent. And the more that emerge, the stronger the impact on potential stakeholders – not just municipalities, but also the vendors that are actively encouraging this trend. Indeed, the arguments for such networks are starting to look more and more compelling, and are attracting the attention of more and more politicians, regulators, and operators.

The new players enjoy four key advantages over incumbents:

First, because they are built from the start as open-access networks in which the builders and operators have no interest, they lead to a far broader palette of services and more choice for consumers – building on the model already created on the open Internet, and attracting people to connect.

Second, because they are usually building from scratch, builders can take full advantage of the very low operating costs that are now becoming possible. One of the most mature municipal networks in Europe – in Vasteras, Sweden – currently serves 50,000 ports with just four operations staff.

Third, utilities and municipalities are taking a long-term view of payback and return on investment – something that most incumbents can no longer do. One builder at the Vienna FTTH event said that investors saw the opportunity as akin to real estate, not the conventional telecom market. Indeed, as noted by Richard Jones, a partner with Ventura Team LLP, there is no shortage of investors lining up to take a share in these new fiber initiatives: Money, he said, is not one of the problems for fiber network builders.

Fourth, but not least, local politicians are waking up to the central importance of high-bandwidth networks for their economies, for their citizens, and even for that most sacred of totems, the value of the houses they live in. Fear of being left behind is a powerful motivator.

But what of Europe's incumbents? Shouldn't they be in the best position to construct fiber networks, given their heritage, customer base, and financial resources? On its face, yes. (See France Telecom Plans FTTH.) Yet there are plenty of holes in the incumbent model. In particular, how can they persuade investors that FTTH is a necessary investment for the long term – especially in view of Verizon's difficulties in persuading its shareholders? (See Verizon Gives Update.) Most are choosing instead to work their sunk copper assets as long as possible and focus investment on creating triple-play retail models that perpetuate the existing model as far as possible into the future.

Indeed, incumbents were notable in Vienna largely by their absence. To our knowledge, not a single European incumbent has set a clear timetable for a large-scale fiber rollout, and that is only encouraging alternative providers to move into the empty space.

All that's really missing is strong regulatory backing – and here there were significant developments in Vienna, too. Viviane Reding, commissioner responsible for Information Society and Media in the European Commission (the European Union's legislative arm), dropped the broadest of hints that she is ready for a radical rethink of the basic principles on which Europe's telecom rules are built.

Since the EU broke open telephone monopolies in 1989, those rules have been based on access-network technology neutrality; unbundling of the access networks of dominant providers; and encouragement of facilities-based competition. But Commissioner Reding made it clear in Vienna that while she didn't believe those principles were wrong, she is concerned that Europe is now falling out of step, and that she is ready to change the rules if they are holding back construction of higher-speed broadband networks. "I really fear that Europe is being left with a 20th-century network to meet 21st-century challenges," she said.

Commissioner Reding faces some extremely difficult decisions. Not only must she decide whether to offer stronger backing to fiber-based broadband in the teeth of fierce opposition (from some of her own staff, as well as from powerful vested interests, including both incumbents and cable MSOs), but she must also decide on what terms to allow incumbents (including cable MSOs) to construct their own fiber networks. Should they be forced to unbundle them? Is it time to revisit the structural divestiture of access networks and service provisioning? These are momentous decisions, not just for the industry but also, as Reding said, for the European economy as a whole.

To be sure, not everyone thinks that municipalities are up to the job, and the utilities ready to act now reach only a minority of households in Europe. Questions that loom large, among many others, are: Do they have the expertise to purchase the right equipment and services at the right price? Will they just construct networks, or will they also run them? Who will be responsible for CRM? And can they scale their deployments from thousands to millions?

Yet the debate that they have begun is here to stay. Because modern NGN technology allows very high-capacity, open-access networks to be built, and because those networks are clearly in the interests of consumers, they will eventually be built – by someone.

Myles MacBean, international VP for technology and operations for Walt Disney Internet Group, told FTTH Council delegates that Disney's "imagineers" would be able to use whatever bandwidth they got. "My dream is that we can do in Germany what my [fiber-connected] colleagues are already doing in Tokyo," MacBean said.

Regulators like Reding are listening to that kind of commentary and beginning to draw conclusions that are uncomfortable for incumbent telcos. Are they and their investors also listening? And if so, are they ready to act to head off the emerging threat? That will be one of the most fundamental questions for the industry over the remainder of this decade.

— Graham Finnie, Senior Analyst, Heavy Reading

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