FTTx Roll-out: A Commercial Perspective beyond Technology

Opinion Paper FTTx Roll-out: A Commercial Perspective beyond Technology 2010 / 11 We make ICT strategies work

Table of Contents 1 Motivation...3 2 Roll-out Levers...4 2.1 Demand Drivers...4 2.2 Competitive Forces...5 2.3 Type of Expansion...6 2.4 Regulation and State Subsidies...7 3 Commercialization...8 4 Conclusion...9 5 The Author...10 6 The Company...11 Opinion Paper 2 Detecon International GmbH

1 Motivation Our experience shows that the roll-out of a new network infrastructure is primarily planned and implemented with regards to technological- and cost-oriented aspects. Yet, it is relatively simple to achieve better economic results when commercial aspects are considered holistically. This paper gives a short overview of the main market- and cost-oriented levers for an effective and efficient FTTx ( Fiber to the x ) network expansion. It provides a checklist of the essential strategic roll-out parameters and can be used for audits of running network implementations and as a support tool for projects in the early planning phase. The roll-out of a new fiber network infrastructure has to take several aspects into consideration: it is necessary to determine how the network expansion can be cost efficient and increase future revenue. Network operators have to carry out demand and competitor analyses to determine the extent and speed of the new network roll-out. Additionally, operators need to identify potential collaboration opportunities along with possible regulatory requirements for the new infrastructure. A further important question linked to rolling-out a new fiber infrastructure is whether to engage in a pre-launch commercialization. All these principal aspects playing a role in the decisions regarding the roll-out and its commercialization are looked at in the following paper. Opinion Paper 3 Detecon International GmbH

2 Roll-out Levers 2.1 Demand Drivers First, the current market situation and demand for a new network infrastructure need to be examined. Next to the basic demand for broadband access, it has to be determined if a high interest for broadband technologies exists in certain areas, towns or neighborhoods. A strong demand for higher bandwidths could be present for instance in commercial areas with start-up companies. These areas should then be the first to be linked to the new infrastructure. Customers, with a strong interest in broadband access that assist them in developing their business model, tend to be less price sensitive. It also makes greater economic sense to develop the new infrastructures in areas of higher population density; in those areas the development costs per customer are typically at their lowest. Moreover, a close eye has to be kept on the demand growth. For example, if a new residential area for middle- and upper-class families is planned, demand for broadband access will increase in the future and makes the region economically attractive for the operator. A further important aspect is the average revenue per user. The ARPU (Average Revenue per User) and ARPU growth give an indication of the current demand situation. A falling ARPU is a sign that users no longer require the offered services, that the services are in demand only in small quantities, or that the current competitive situation dictates lower prices ( Price war ). This situation will have a negative effect on the build-up of a new fiber infrastructure. A large capital outlay is required to survive in a price war only to stay competitive to the other market players. Hence, the chance of a successful economic network expansion will require even larger investments, which not all operators are willing or able to spend. The probability of a successful FTTx roll-out will be higher if it takes place at a time and in a region where the ARPU is on the increase, since this might indicate an increasing need for broadband access. Furthermore the demand for broadband services beyond access - i.e. IPTV or online gaming services - has to be considered in order to establish their effect on the market. A strong demand for broadband services can favor an FTTX roll-out; this is especially true when specific parts of these services can be offered through the telecommunications service provider like triple pay offers. Additionally the growth potential of these broadband services has to be considered. It needs to be analyzed what new broadband services (e.g. 3D-HD IPTV) can be implemented in parallel to an infrastructure expansion to generate increasing demand for high-speed access products. Opinion Paper 4 Detecon International GmbH

2.2 Competitive Forces One factor significantly influencing the success of a roll-out is the competition. In addition to the number of competitors, it is important to understand how financially strong they are and if there are co-operative relationships between competitors. It is also relevant if the competitors are based locally, nationally or internationally. Local carriers have an advantage in that they can limit their offers to a few attractive areas where they can rapidly expand their networks. However it is possible for financially strong national and international carriers to beat them to this expansion by installing FTTX network in these attractive areas and offering broadband connections to customers before the regional carriers get a chance. In a race for the most attractive regions, it is important to also consider a competitors customer base and market strengths. Another relevant consideration is the competitor s type. Competitors to be considered include, for example, cable network providers, telecommunication providers and other utility network suppliers. Competitors from other industries have possible access to existing infrastructures under the road (i.e. utilities) or within a house (i.e. cable service providers). This cost-advantage for the cable service or utilities provider is a clear disadvantage for the telecommunication company. As the launch of FTTx-networks is highly cost intensive, it makes economic sense to collaborate with other service providers or grow by acquiring other operators (Make-or- Buy). For example an agreement could be reached with an electricity provider that is renewing its networks, to lay down fiber optic cable at the same time, in exchange for an appropriate payment. In some cases it may be economically feasible to acquire an existing network provider instead of building up an own fiber network. In addition, telecommunication providers can benefit from the fact that a fiber optic infrastructure is required for the LTEdevelopment (Long Term Evolution = 4G Mobile Network) to the radio station. Telecommunication companies can therefore either reduce the costs of the infrastructure development of their mobile networks or offer their new infrastructure to other mobile phone providers in exchange for appropriate compensation. Another consideration includes the broadband services offered by competitors. The attractiveness and range of services competitors offer is key. If the various services from competitors are adopted successfully early on, and they gain time-to-market advantages, then an FTTx roll-out from another broadband provider would not be profitable. Opinion Paper 5 Detecon International GmbH

2.3 Type of Expansion FTTx can be rolled-out in several ways. FTTC ( Fiber to the Curb ) forms the first and least expensive option. In this case fiber optic cables are laid to the street cabinet, and from there existing copper networks are used. One of the disadvantages of this option is that the final increase in broadband capacity is lower compared to the other types. Thus, should there be a future increase in usage of broadband services or an introduction of new broadband services, then a bottleneck situation would re-appear. Should several customers try to use various different broadband services simultaneously (i.e. 2 x VOIP and 2 x 3D-HD-TV), this could lead to delays and disruptions, thereby having a negative effect on customer satisfaction levels. A further option would be FTTB ( Fiber to the Building ). In this model, the fiber optic cable is taken into the building, in the majority of cases into the cellar, and from there connected to the internal housing supply. The distribution within the building takes place, as in the case of FTTC, with the available copper lines or existing COAX-lines. The broadband performance is significantly higher in the case of FTTB than with FTTC. In this case, today s broadband services, such as IPTV and online gaming, can be used simultaneously without incurring any service disruptions or decrease in quality. Because the installation of connections into the buildings is expensive, it should be checked if existing lines from other suppliers can be utilized renting or purchasing existing lines is more cost effective as the expansion of own lines. Also to be considered is the use of wireless in-house distribution; projects on this subject are still in the development phase. Another possible option is FTTH ( Fiber to the Home ). Here, the fiber optic connection is connected directly into the consumer s house. FTTH enables the highest broadband capacity; however it is also the most expensive form of all network models for the operator, since approximately 70% of the total investment of this network roll-out would be dedicated to building connections from the street cable to each house and installing the complex inhouse wiring for each house and apartment. Next to the fiber optic network installation in the street, the in-house wiring has to be carried out. For this purpose a fiber access box has to be put in in the building, and in larger buildings additional fiber splitter boxes must be mounted on each floor. Furthermore, a fiber connection must be put in each apartment, including the wiring to close the loop. In some countries like Germany, the wiring within a building can only be carried out with the consent of the building owner(s); in a flat the wiring can only be carried out with the approval of the flat owner/tenant. FTTH has many advantages for broadband services, and these will continue to increase. FTTH-networks not only represent a possible means for revenue in retail, but can also be offered to resellers as wholesale products. This secondary usage can help to recoup the costs of the development of FTTH within a short time frame. A rapid first allocation of FTTH will stop competitors from developing their own fiber optic networks. When, for example, exclusive agreement exists between the network provider who first built the new fiber infrastructure and the building owner, then the network operator has a first-mover advantage. However, it is necessary to check if the company responsible for the initial installation, as in markets such as Switzerland, is also legally obligated for installing several fibers within a flat, which can then be offered at a later date to competitors. Opinion Paper 6 Detecon International GmbH

2.4 Regulation and State Subsidies Besides the economic factors, the legal and political factor regulation plays a key role in an FTTx roll-out. What needs to be clarified is whether a telecommunication supplier is legally obliged to provide his network to competitors for an appropriate payment and whether the parties can agree on the amount of this payment among themselves or if a state authority has a say in the setting of this price. In the EU, the Incumbent Local Exchange Carrier (ILEC) must typically offer competitors the use of their networks at cost-based prices. The regulated prices need to cover the interests of the network provider of return on investments and enable an efficient expansion. In this context, it should also be clarified what sanctions are in place should the telecommunication provider not make its networks available on time, or not at all. Especially in the start up phase of new networks, which are developed by new market entrants (i.e. utilities providers), the services interoperability s relevance will increase. Currently it is not guaranteed that the services of a national provider will be available for all networks. In some countries, it cannot be excluded that a network infrastructure which has been build by a telco might become nationalized. Should this threat exist, then it should be investigated prior to the start of the roll-out whether the high investment can be secured in a fiber optic network. It should always be checked if individual countries, the European Union or United States provide subsidies for the development of a new network infrastructure and what conditions are linked to these subsidies (i.e. Whitespot-development ). Such state funding, for the demand side as well as for the network operators, can make a roll-out possible in otherwise unprofitable regions. Opinion Paper 7 Detecon International GmbH

3 Commercialization The future network expansion needs to be linked to a clear strategy. The telecommunication company must decide if it wants to be a first-mover or a follower. It must decide if it should enter into partnerships or into a strategic alliance and how these should be communicated to the public. A further central point when carrying out an FTTx roll-out is the commercialization. The traditional commercialization follows the principle of build first, sell later : the infrastructure is expanded prior to commercialization. An interesting alternative would be the sell first, build later option, which is for instance applied in the Netherlands. A pre-launch marketing campaign is at the core of this approach. Potential buyers are sought and thereafter the new network infrastructure is rolled-out where there is guaranteed demand. The advantage of this method is that the attractive areas are determined reliably in advance, which in turn increases revenue probability. On a more detailed level, next to the strategy and the commercialization, it is also important to note that when building a new fiber network infrastructure, the public relations (PR) strategy needs to be set. Since the media influences the public opinion, a PR-department should be involved from the beginning of the roll-out plan in order to avoid negative publicity and to encourage positive statements in the press. Opinion Paper 8 Detecon International GmbH

4 Conclusion The roll-out of FTTx pertains to two main topics influencing each other the network expansion and its commercialization. The aim of the roll-out is to be cost efficient and increase future revenue. Several factors will influence how those two targets will be met, and what is particularly relevant is the specific demand and competitors situation. A timely roll-out is only recommended when an increasing interest in higher bandwidths and/or more intense bandwidths has been identified. A pre-launch marketing campaign based on the sell first, build later concept can be a useful tool to expose market demand. In areas where competitors have already established themselves, one might refrain from carrying out a network roll-out to avoid price wars and therefore a longer pay-back period. Alternatively, network providers can seek out potential cooperation partners to gain a footprint in already occupied areas. A roll-out in white spot areas is feasible, when high growth potential has been identified or when other economic or strategic factors make this area attractive. The speed of the expansion is another important aspect. In some areas where FTTx networks need to be present rapidly, it might make more sense to initially choose the FTTC option. However, the future target should always be the expansion of the FTTH network, as it enables the highest bandwidth and represents a source of income in the wholesale business. Currently a full-nationwide fiber optic infrastructure will not be profitable anywhere, thus there will always be a regional mix of several communication networks. The regulatory conditions and the state s subsidization options have an impact on the coverage of a new network infrastructure and the area in which it is carried out. BB Demand Expansion Types Country/ Regional / Local Demand FTT - C / B / H Demand Growth Revenue High ARPU Regions ARPU Growth BB Service Usage Type of Service (e.g. IPTV) BB Service Growth FTTx Roll-Out Coaxial / Copper / Fiber in-home Wireless in-home distribution Expansion Advantages Securing the in-home infrastructure Usage of existing infrastructure Competitors Nr of competitors Co-operation between players Competitor s type Competitor s Market Position Make or Buy Analysis Cooperation Possibilities BB Services of Competitors High number of BB Services Diversity of BB Service offerings Expansion Commercialization Regulation Open vs. closed networks Wholesale prices fixed or marketbased Penalties for non-compliance Risk of nationalization Subsidization Type of Subsidy Conditions for subsidy Figure 1: FTTx Roll-Out In summary, there is not one general approach how to install a new network infrastructure instead the variety of environmental factors discussed above call for an individually optimized approach. We recommend using the presented factors as a checklist to make sure that all relevant aspects have been considered in the definition, implementation and commercialization of the FTTX roll-out. Opinion Paper 9 Detecon International GmbH

5 The Author Dr. Clemens Köhler is a consultant within the Strategy & Marketing Practice. His main focus is on strategy development and creation of business and product models in the area of marketing for fixed and mobile network operators worldwide. Others areas of interest are the development of new product and service innovation, i.e. Augmented Reality and Social Media applications. Opinion Paper 10 Detecon International GmbH

6 The Company We make ICT strategies work Detecon is a consulting company which unites classic management consulting with a high level of technology expertise. Our company's history is proof of this: Detecon International is the product of the merger of the management and IT consulting company Diebold, founded in 1954, and the telecommunications consultancy Detecon, founded in 1977. Our services focus on consulting and implementation solutions which are derived from the use of information and communications technology (ICT). All around the globe, clients from virtually all industries profit from our holistic know-how in questions of strategy and organizational design and in the use of state-of-the-art technologies. Detecon s know-how bundles the knowledge from the successful conclusion of management and ICT projects in more than 160 countries. We are represented globally by subsidiaries, affiliates, and project offices. Detecon is a subsidiary of T-Systems International, the business customer brand of Deutsche Telekom. In our capacity as consultants, we are able to benefit from the infrastructure of a global player spanning our planet. Know-how and hands-on expertise The rapid development of information and telecommunications technologies has an increasingly significant influence on the strategies of companies as well as on the processes within an organization. The subsequent complex adaptations affect business models and corporate structures, not only technological applications. Our services for ICT management encompass classic strategy and organization consulting as well as the planning and implementation of highly complex, technological ICT architectures and applications. We are independent of manufacturers and obligated solely to our client's success. Detecon International GmbH Oberkasselerstr. 2 53227 Bonn Telefon: +49 228 700 0 E-Mail: info@detecon.com Internet: www.detecon.com Opinion Paper 11 Detecon International GmbH