Business Concept MetroFibre Building up fibre access infrastructure by a new joint approach of telco, utilities and finance partners 1. Executive Summary The business goal is to set up MetroFibre a fibre access provider, which builds up optical fibre infrastructure for high-speed access in the first mile to buildings and end customers (FTTH). The new venture is based on strong cooperation with the utility sector, municipalities, real estate companies and financial investors. There are a large number of new applications and services under development, which require big broadband infrastructures for their delivery. Optical fibre provides the only long-term alternative and complementary to mobile and radio networks. Fibre optic cables don t interfere with each other, exhibit a character of longevity and are the only medium for the integration of heterogeneous telecommunications networks (TV, telephone, video, file transfer). Our business concept is build on the assumptions that Several fibre access networks to the same building are to expensive one street for all cars should be enough The construction process needs to start now in Europe to generate sufficient regional coverage in the next ten years Incumbent operators seem to be not willing to implement new fibre access infrastructures without grant of a new monopoly. We believe that sophisticated fibre access infrastructures attract new applications and services as well as development centres for them. Support creativity at home and in SoHo environments! FTTH enables flexible changes for new applications without dependencies of network upgrade. Creative developers are less dependent from less creative operators. The new telecommunications utility will operate in a neutral, independently position for the marketing of the passive fibre to all real estate companies, content-, telecommunications service providers as well as to individual homes to ensure full, competitive utilisation of the created fibre infrastructure. Municipalities and utilities are essential partners to reduce building costs, to accelerate construction rollout and coordinate the digging process. 2. Business Opportunity & Market Environment Currently the IT and telecommunications industry are going through massive changes. The vertically integrated business models of many incumbent telecoms as well as those of large mobile and cable operators cannot cope with the fast changes of these industries. Deutsche Telekom has lost 6% of its Income generated and more than a million customers from its fixednet business in 2005 as competition is getting stronger and traditional business models for telecom operators are not coping with new technologies such as Voice over IP and broadband access. 1 With IPTV, triple-play/ quadruple-play and rich-media services the residential broadband market currently going through a transformation form a communications market to a media market. Fibre access networks do not only provide the needed bandwidth but also provide QoS and Page 1 of 8
symmetric (download/ upload) transmission capacities that are needed for many of the new media-style broadband services. Furthermore fibre access with its symmetric nature is the basis for new business models, where a growing number of network users become content providers themselves and offer narrowcast services within their respective communities. Generally, beside some local or regional specialties, the physical fixed networks access market in Europe can be described as shown in Fig. 1. Figure 1: Current structure of communications access infrastructure High competition on infrastructure level and parallel infrastructures does only exist in the backbones and within cities especially in the access to large office buildings. In contrary, the residential market is dominated by hybrid-, largely copper-based connections offered by the incumbent and through infrastructure offered by cable operators. Fibre access to end-users only exists in certain cities and specific regions. All alternative carriers, even though they own the end customer relationship do heavily rely on their biggest competitor for providing the access of the last mile. Incumbent Telco s, which are still dominating most of the European telecoms markets, currently show only limited interest in FTTH deployments as this could potentially harm their DSL resale and their copper based unbundled local loop business. Therefore it seems likely that the European incumbents will rather focus on FTTC and VDSL deployments than on building up end-to-end fibre access networks within the next two to three years. The VDSL technologies are based on complex active components and space consuming street cabinets. Building up open access end-to-end fibre networks now provides the advantages of seamless network coverage in key areas and establishing a shared business model. On the demand side Europe is by now a fast growing broadband Internet market and already shows a very strong demand for triple play services that are very bandwidth hungry. Furthermore many next generation TV formats (HDTV, itv, 3DTV, VRTV ) have been developed by media companies and are already being distributed in the more developed broadband markets of south-east Asia. European broadcasters and Internet companies will use Page 2 of 8
these new content formats to differentiate themselves form the me-too TVoDSL providers. As adequate end-customer services are already available, it seems likely that FTTx adoption will be high. Moreover the production process of the new media content less centralized than before and many small companies perform special tasks (digital postproduction, special fx etc.) for the large media companies. Therefore the mass market FTTx networks in the media hubs of each European country will become an essential production facility for the fast moving content and media markets. Due to the nature of the existing copper access networks, DSL upgrades to VDSL in many parts of Europe will not generate enough bandwidth and QoS for mid to long term. Moreover even VDSL networks are not capable of delivering high and symmetrical bandwidth that enables each user connected to the network to become content provider. Fibre access networks are able to provide the needed high and symmetric bandwidth for those new services over the next decades. Furthermore a seamless fibre network offers operating cost reductions of up-to 50% for the service operators. 2 As the DSL-providers will be facing the upcoming competition by CATV providers in triple play, they will need to upgrade their networks to higher and symmetric bandwidth. Otherwise there would be a strong danger for all DSL-providers to loose substantial amounts of customers. Moreover the margins on broadband access would decrease even faster than currently experienced. If alternative fibre access networks would already be in place at this point of time, it is likely that even incumbents would use these networks. First movements in this direction can be experienced in Sweden, where TeliaSonera started to use fibre from some open access platforms, Italy, where Telecom Italia is renting fibre form Metroweb and the US, where RBOCs start to use fibre infrastructure form companies like OnFibre. 3. Regulatory Conditions Today, FTTH are not regulated in Europe, as these kinds of access networks are almost not existent. Under the current EU and national communications regulation there is a strong likelihood that fibre optical access lines build up by incumbents, or in discriminating non-openaccess manner will be regulated. Even so that the regulatory authorities did not comment on that topic officially, it is most likely that in case of an incumbent investment in fibre optical access infrastructure, SMP (significant market power) regulation would be applied. Network Economy did already discuss in detail a new pricing model that stimulates investment in new access infrastructures with the national regulatory authorities ARCEP (France), BNetzA (Germany), Ofcom (UK) and BIPT (Belgium) as well as with the EC DG Competition. Goal of this ongoing communication process with the regulatory authorities is to reach a long-term agreement on the calculation method and parameters for wholesales prices of fibre optical access infrastructure (lease). This new pricing model generates a fair risk sharing among all market participants. With more assumed marketing risk, network usage prices will be lower, and product margins higher. Price determination of the access network usage will be based on financial market dynamics. The higher the fixed off-take volume the lower the network usage price will be. Besides the magnitude of financial commitment (in form of off-take agreements) of each telco operator the duration of the contracts, credit rating of the customers (carrier, operator) as well as the supplied service levels will parameters of the pricing scheme. 4. Business Model On the operational level, part of a new value creation strategy will be to separate infrastructure assts and network operations form service operation and sales to end-customers. The business Page 3 of 8
model of the investments will be based on the separation of the vertically integrated business model of full service triple play operators in different entities, as shown in Fig 2., Telco-services and infrastructure can be developed by the different entities in a focused manner, each as core business. Figure 2: Separation proposal for telco value chain The different business entities of our business model are: AssetCo: buys local backbone network as core network. Based on the homes passed of the local backbone network the building access network will be build as well as fibre in-house networks where appropriate. Access lines will be terminated in the basement of the connected buildings. From fibre terminal to individual households new fibre in-house network or other inhouse networks will be used. NetCo: lights the dark fibre and supplies level 2 Ethernet services from PoP to individual households or businesses as fibre-based bit-stream access. The Ethernet connections will be terminated on media converters. NetCo will sell two products: dark fibre and lit fibre access and provides basic billing and SLA monitoring functions. ServeCos: delivering complete packages of end-customer services and supply/ operate CPEs (Customer Premises Equipment). These are the already existing as well as new providers and therefore ServeCos are not part of MetroFibre s business plan. In case ServeCos will be acquired in connection with a platform acquisition, the goal is to dispose the ServeCos as soon as possible to other operators. An overview is shown in Fig. 3. Page 4 of 8
Figure 3: Layered business model AssetCo s target customers for its dark fibre products are public service organizations, housing/ property companies, media companies, carriers and Internet & telco service providers. MetroFibre will concentrate on the AssetCo and will implement NetCo where it is appropriate to do so in order to speed up the network utilization and to grow the number of customers. On the NetCo business MetroFibre will cooperate with 3 rd parties that will act as open access carrier s carriers on AssetCo s fibre access network. MetroFibre s business concept is open to have more than one NetCo on its fibre infrastructure. This will help to avoid conflicts of interest with the disaggregated former owners of the fibre network assets. NetCo s lit fibre services are important for addressing non-captive market segments like the real estate, new media and broadcast companies. Especially for media and content companies lit fibre based bit-stream access provides new ways to their customers independently of traditional Telco s that are increasingly becoming integrated triple play operators. Therefore NetCo needs to offer basis accounting/ billing and SLA monitoring functionalities to their customers on top of the pure transmission service. Media and content companies will require those services as they do in most cases not operate communications networks but need those features in order to set up their proper broadband business 5. Operations Management We propose to create fibre-access assets in different European cities through a buy-and-build strategy. The identified cities are first tier cities within major European countries and can be the platform for the planned further rollout into other national cities. The different local network entities shall be managed by a lean holding organisation, which will be responsible for business strategy (rollout strategy, standardisation of business models and processes), financing, product marketing & regulatory affairs. With the holding company Network Economy takes over an entrepreneurial role to create the maximum synergies between the different investments. The local network operation will be built as, open access platforms in partnership with municipalities and local utilities (public private partnership). Furthermore MetroFibre will cooperate with construction and housing companies, where appropriate. The fibre assets will be separated from the communications network operation and other telecom services to eliminate Page 5 of 8
technology risk and to avoid competitive situations with potential customers. Network Economy is already in negotiations with partners in Germany, Austria, Italy, France, Sweden, the Netherlands and Great Britain. MetroFibre will focus on big media oriented cities, to keep the demand risk low. In those cities the demand for big broadband is already high with a large up-selling potential from currently used xdsl to fibre access. Furthermore those cities or metropolitan areas represent a good starting point for further rollouts in the respective countries. In each region, the objective is to reach target coverage of 50% within 3-5 years and to establish a broadband infrastructure that cannot be replicate economically. Public private partnerships are the suitable to accelerate the development of competitive infrastructure in and for major European metropolitan areas. Only coordination and a joint development of massive fibre rollouts with the municipalities, their organisations and utility companies guarantee efficiency and effectiveness of the fibre implementation process. 5.1 Buy-and-Build strategy MetroFibre s local operations will be based on the acquisition of already existing fibre networks. The fibre networks MetroFibre is aiming at often belong local utilities or their daughter companies (city carriers). These networks will be subsequently build-out form mainly backbone/ backhaul type of networks to real fibre access networks. Furthermore the local MetroFibre companies will take on existing duct networks (local backbone & MDF-curb) from 3 rd parties through lease as well as sub-contracting. A key element of MetroFibre s business model is to reduce the cost of network build and maintenance by a wide reaching and close cooperation with local/ regional utility companies using their know how, competence and resources in construction of physical infrastructures and network asset maintenance. In addition this approach speeds up network roll out as well and therefore generates shorter time to market. This cooperation consists of the following main activities: Active pre-coordination of network planning, Sharing network planning resources, Co-trenching, Rights of way, Acquisition or rent of already existing duct and fibre infrastructures, Joint volume purchase agreements. Key target of the fibre network build-up is to cover a high number of homes passed. In combination with a flexible and scalable network concept this enables MetroFibre to build the access (from the street to building) on demand when it s customers order the lines. This approach will reduce lead-times, investment of fibre access infrastructure and generates faster cash return. Standardization, automation and documentation of processes as well as process-integration will be OSS based from day one on, as the FTTH approach aims at the mass market. 5.2 Local Operations Build and operation of the infrastructure will be managed on a regional level with European coordination to ensure homogeneous network standards and processes across all local access networks. Relationship management & marketing of physical curb access will be at level of the holding company (key account management). The local networks will connect media hubs (TV, video and all kind of visual media content libraries) for content distribution into the mass market. Next generation broadcast applications as HDTV, D2 or D3 are ready to be pushed to the mass market. The same importance will have ehealth libraries, medical centres and hospitals as well as the government initiatives to connect pharmacies, medics and patients in the long run. Page 6 of 8
5.3 Central coordination The operational model of MetroFibre is very focused. The company is only responsible for management of physical access, network planning, construction, documentation and field service for the passive network layer. These tasks will be executed in close coordination with the municipalities, local utilities, real estate management companies and key customers from the carrier and service provider segment. A small team of central resources will set-up for M&A, business & financial planning, accounting procedures, product development & marketing strategy, regulatory affairs, purchasing and special network know-how, which will be shared across the different locations. The local management will handle the customer business and operations. Identification of local management skills will be key and will be organized through local partners. Central functions on the local level such as network build, documentation, maintenance or purchasing would be managed jointly with the local utility partner. 5.4 Sales & Marketing concept MetroFibre s local network companies will let their fibre access connections mainly to companies and organizations addressing the mass market. This wholesales model uses the value of established brands of companies that are already targeting the media, content, public sector, real estate and telecoms markets. Many brands on the fibre infrastructure of MetroFibre will generate many customers on the respective networks. Furthermore, MetroFibre will also provide dark and lit fibre for companies or groups of individuals that do want to connect their own locations. MetroFibre targets customers that value the long-term nature of fibre access infrastructure, such as real-estate companies or local authorities, as well as customers that already have a large customer base with their communications or media services that can be upgraded to fibre. The main target customer groups for MetroFibre are: Real-estate & housing companies Public service institutions Media & content companies Telco network operators (fixed & mobile) CATV network operators About Network Economy Network Economy was formed in 1995 and is a partnership of successful entrepreneurs, finance experts and academics with focus on infrastructure projects in telecommunications, utilities and information technology. Its goal is it to develop new businesses by leveraging assets of strategic partners and implement the concepts successfully. To this end, companies are set up, acquired and restructured as appropriate. Network Economy combines outsourcing, spin offs as well as merger and acquisitions activities with operational management involvement. The skill-set of the Network Economy team covers areas such as Company Startup & Turn-around, Financial Engineering, Business Development, Outsourcing and Operations turning innovative ideas into successful companies or executing strategic changes in existing enterprises. Since 1995 the company has build up 12 fibre based network operators in Germany and a telco service company as well a telehousing company. Beside the pure investment business the company has performed several strategic consultancy projects to support customers and investors with its industry expertise. Lobbying on EU level Economic impact of broadband Internet Study for German Government (BMWi) 3 Interims management of an infrastructure company Rose Kabelmontage Strategic Network Planning - Vodafone Page 7 of 8
Technical Facility Management Swisscom Software and Hardware Platforms - SAP, Siemens, IP VALUE Business Development - Vodafone, T-Mobile, Swisscom, TDC, Belgacom Fibre project evaluation with France Telecom and Deutsche Telekom Author: Tim Braulke Network Economy Group, Rue Berckmans 109, B-1060 Brussels, Belgium Tel: +49 172 617 58 08, Fax: +32 2 536 12 12, E-mail: tim.braulke@network-economy.com References [1] Deutsche Telekom AG Geschäftsbericht 2005, March 2006. [2] Heavy Reading FTTH Report, Graham Finnie, July 2006 [3] Dr. M. Fronefeld, P. Oefinger, T.Braulke Gesamtwirtschaftliche Auswirkungen der Breitbandnutzung, BMWi Studie, March 2006. Page 8 of 8