Emphasis shifts to fibre to the home

MELBOURNE, AUSTRALIA: In countries such as Korea and Japan, the rapid take-up of FTTH/B and subsequent decline of ADSL technologies is nothing new. However, this network evolution is now spreading outside of Asia, and a number of western countries will start to see a rapid increase in FTTH/B, and thus a decline in ADSL over the next couple of years.

Most notable examples are the US, Sweden, Denmark, Finland and the Netherlands. Fig. 1 depicts the ‘global residential fixed broadband access forecasts 2006-2014’.

Fig. 1: Global Residential Broadband Access Forecasts, 2006-14Source: Ovum

Access-fibre deployment is not just confined to ‘developed countries’. A number of emerging markets such as China and Malaysia also have very ambitious FTTH/B projects. “Even if we take into account an element of government and vendor hype for these markets, Ovum still forecasts a rapid take-up of advanced broadband services in those countries,” Michael Philpott, Practice Leader of Ovum’s Consumer team.

This take-up of next-generation access technologies such as FTTH and FTTB will see traditional DSL technologies saturate at around 320 million lines in the residential market by 2014, with FTTH/B still growing fast at over 160 million lines by the end of the same year. In Asia-Pacific, the move to FTTH/B will be even more pronounced, with FTTH/B connections overtaking DSL to be the leading technology in 2014.

It’s not all bad news for DSL vendors
Although the worldwide market for at least ADSL technology will slow over the next five years, there are still significant opportunities for DSL vendors.

Not all countries have yet announced FTTH/B initiatives and so will see significant growth in DSL over Ovum’s forecast period. “Eastern Europe, South and Central America, and Middle East and Africa will still be good growth regions for DSL operators, and thus vendors, for some years to come,” adds Philpott, based in London.

Secondly, not all NGA developments are pure FTTH/B. A number, such as Japan, are actually a good mix of NGA technologies, with the advanced DSL technology VDSL2 often being used in the final few hundred meters to connect apartments and individual homes to the fibre network. Other NGA developments, such as in Belgium and the UK, will be predominantly fibre to the cabinet and then again VDSL2 in the final mile.

Such NGA deployments are actually good news for DSL-based vendors as they signify the upgrade of millions of homes from ADSL line cards located in local exchanges to VDSL line cards located in street cabinets.

Thirdly, although worldwide growth will come to a standstill, there will still be over 360 million DSL lines (including business lines) in operation in 2014, with maintenance contracts running for many years to come beyond that. In Asia-Pacific however DSL connections peak in 2011.

Mobile broadband also applies pressure
The migration to FTTH/B is not the only phenomenon to stall DSL growth. By the end of 2014 worldwide consumer fixed broadband penetration will have reached only 34 percent of households. In theory there should therefore be plenty of growth opportunity for all fixed broadband technologies including FTTH/B.

However, a large percentage of these remaining households do not have a fixed line, and whereas at one time it would have been assumed that investment in broadband would have pushed fixed lines out further, with mobile broadband devices and services becoming more readily available and affordable this will no longer be the case –- at least in the medium term.

Mobile broadband has in effect set a lower ceiling for fixed broadband than what would have been predicted only 12 months ago. Whether this ceiling is permanent or not is yet to be seen.

Although mobile broadband impacts fixed broadband in emerging markets more, it is not completely restricted to such countries. Western Europe, Austria, Finland, Italy and the Netherlands will all saturate at 65 percent of households or lower.

In Asia-Pacific, CAGR of consumer fixed broadband connections are as follows:

Separation key issue in Australian NGN debate

Comment from David Kennedy, Research Director, Ovum

“Telstra delenda est”
MELBOURNE, AUSTRALIA: During the Punic Wars, Roman Senators ended every speech to the Senate -- on whatever topic -- with the words “Cartago delenda est”: Carthage must be destroyed.

This sentiment is evident in the ACCC’s submission, which is reasonably representative of non-incumbent views. The submission calls for:
· Full structural separation of Telstra’s copper access network.
· Forced divestiture of Telstra’s HFC cable network, subject to the nature of any Telstra involvement in the new FTTH network.
· Mandatory undertakings and once-and-for-all access determinations, to replace the current piecemeal negotiate/arbitrate model of wholesale price-setting.
· A new telecommunications–specific regime for facilities access.
· New directive powers for the ACCC to issue binding rules against anti-competitive conduct.

However, there are also some jarring notes amongst the submissions. For example Optus, Telstra’s largest competitor, argues that a national FTTH network is only sustainable in the absence of fixed infrastructure competition. This implies a transition to a statutory monopoly by rolling all of Australia’s access networks into the new NBNCo. This clashes awkwardly with the ACCC’s contention that a divested HFC network would provide valuable competition in the transition period to a national FTTH.

Common ground is still possible
Telstra cannot ignore the groundswell for separation. Under the Government’s FTTH plans, separation is the end game anyway. Its challenge is to manage the process and defend its own financial interests.

However, nor can the Government ignore Telstra’s capacity to damage NBNCo’s business case. If the NBNCO must build its network and fight Telstra to peel away customers (separation takes away Telstra’s copper, not its customers), then the Government’s subsidy costs will be vastly inflated.

The model that is now being widely discussed in the industry is for Telstra’s copper access network to be rolled into the NBNCo. This would achieve structural separation in the short-term, while creating a sustainable access operator with an established revenue stream. In order for this to be attractive to Telstra, it would need to get a lot of equity and some kind of guarantee on the financial return on that equity.

This model reduces the FTTH upgrade from a commercial challenge to an engineering one to be managed by the NBNCo. Customers will be cut over to the new network automatically rather than having to be captured. This will allow NBNCo to focus on growing new revenue as FTTH is rolled out.

If acceptable parameters for such a deal can be found, then the Government will have pulled off a remarkable coup. If not, then a lose/lose scenario seems inevitable.

FTTH networks: no sure bet

Here is an Ovum comment from David Kennedy, Research Director.

UK: A basic policy model seems to be emerging in these three countries:
* A preference for FTTH technology, with a recognition that this cannot be extended to 100 percent of the population. FTTH is supplemented in larger countries with rural wireless proposals.
* A ‘wholesale-only’ operator for the fibre access network. All three countries are aware of the danger of recreating a vertically integrated monopoly.
* In both New Zealand and Singapore, the importance of access to raw ‘dark fibre’ is also clear. This is consistent with experience in other Asian markets such as Japan.
in all three markets, substantial government investment is being committed.

Lessons learned
The key lesson that has emerged from these initiatives is the importance of a thorough policy development process to underpin commercial investment in FTTH networks. Singapore ran a time-consuming but structured process which ensured that commercial and regulatory issues were addressed before tender bids were solicited. New Zealand is also pursuing this structured approach.

In contrast, the Australian government pressed ahead with an FTTN tender process in advance of any public policy development process, and paid a heavy price as the process was aborted in April 2009.

The jump to a full FTTH network will only make the issues harder. A host of complex regulatory issues must be addressed. Should the geographically de-averaged wholesale ULL price be carried over into wholesale access to the FTTH network?

How can the USO be funded on the new network? Will customers in the FTTH footprint be encouraged to move to the new network, and if so how? How will the transition between the old and the new be managed smoothly? Detailed answers will be needed before private investors will be able to make substantial investments.

In particular, the ‘wholesale-only’ model preferred by the Australian and New Zealand governments is still an experimental approach. Incumbent profit and growth have been hit hard by the strict structural separation applied in the UK and New Zealand, and it is still not clear whether incumbents placed in these dire straits will be able to afford to make major investments in FTTH networks.

Finally, the idiosyncrasies of different markets are important. Singapore is a city-state where the cost of FTTH rollout is relatively low. In contrast, Australia and New Zealand are characterised by sprawling low-density suburbs. To make matters worse, both governments envisage public contribution in the form of commercial investments, not the grants being offered in Singapore.