Innovative broadband policy is driving investment
By Ken Campbell and Reef Read
U.K. LABOUR LEADER, Jeremy Corbyn recently announced, as part of his election platform, he would nationalise the telecom broadband infrastructure in that country and provide free broadband to all residents.
This sent a shockwave through the U.K. telecom industry.
Planned investments from the many new private fibre companies entering the market were stalled and pending transactions were stopped as investors reconsidered fibre infrastructure investment until after the U.K. election.
For his part, Tory party leader Boris Johnson has announced his government would force an accelerated deployment of fibre to all U.K. residents by 2025. This is clearly an appeal to populist sentiment and the mantra, “broadband for all.”
In Canada, incumbent operators have threatened to slow or stop rural broadband infrastructure investment unless there was a repeal of the CRTCs wholesale pricing decision.
Government intervention has its place, but it should encourage innovation, challenge operators to improve efficiency, ensure customer choice and (most importantly) encourage investment.
French Lessons
Curiously, we can look to the French market as an example where public policy has led to wider broadband deployment, lower prices, innovative financing and continued investment.
One of the largest and most ambitious public sector projects in years, France has planned a 10-year, €3.3B subsidy, FTTH (fibre to the home) project to equip all 34 million French homes and businesses with 30 million planned to be passed by the end of 2021.
Surprisingly, for a public sector project of this scale, the French are currently ahead of plan and under budget on their deployment. How? They call it “Plan Tres Haut Debit” (Superfast Broadband Plan). The plan has involved creating facilities-based competition in certain markets and creating a monopoly wholesale franchise (with government set wholesale rates) in others.
“The French have created an economic incentive for operators to deploy in rural zones while creating the right competitive dynamic to encourage accelerated deployment in higher value urban areas.”
By dividing the country into three distinct zones they have accounted for the economic attractiveness of a standalone FTTH deployment in each area. In effect, the French have created an economic incentive for operators to deploy in rural zones while creating the right competitive dynamic to encourage accelerated deployment in higher value urban areas.
Higher value “private initiative” areas include the very dense areas (VDAs at 18% of premises) and medium density areas (MDAs at 35% of premises) with the remaining defined as low density areas or “public initiative” networks (PINs at 47% of areas). In VDAs, where capex per plug can be €200 to €300, multiple networks compete. In MDAs, where capex per plug can rise to over €450, it’s been determined there is an argument for only one local loop to be deployed (20% will be covered by SFR and 80% by Orange).
The PIN areas, where capex per plug can rise to €1,000, are the only zones where public subsidies are required to ensure profitability and are conditional to a commitment of covering the entire footprint. In these zones, networks are awarded through tenders. Six different operators have competed for these concessions.
Ecosystem Equilibrium
The French Regulator, ARCEP, has stated it is responsible for the “equilibrium of the ecosystem” in order to manage the relationship between ISPs (TPIAs) and the network operators or wholesalers. It set minimum wholesale pricing to avoid price competition with two principles applying: Non-discriminatory access and “reasonable pricing.”
In zones where there is a public subsidy, it set a maximum regulated discount that could be applied for up to seven years. Its objective is to encourage co-investment with IRU (rights of use) agreements being attractive to the ISP in the long run and avoid predatory pricing in the early stages of take-up.
The subsidies required by private players in PIN areas have also decreased from an average of 50% the project’s CAPEX to less than 10% as operators increase their build efficiency, monopolies ensure a comfortable take-up curve and competitive tenders push prices down.
“There is consensus that a unique fibre network open to ISPs in these areas will ensure economic equilibrium.”
The result is a de-facto monopoly system in medium areas, coupled with subsidies in low-density areas. Although infrastructure rollout is an open market, there is consensus that a unique fibre network open to ISPs in these areas will ensure economic equilibrium. Indeed, our economic analysis shows there is no economic space for an operator with less than 50% market share as it could not charge ISPs with fees high enough to finance investments.
ARCEP follows up closely on the system build out in order to ensure efficiency, completeness and fast coverage of each territory. Wholesalers face risks of penalties if they do not meet tight rollout schedules. The result is a project ahead of plan and under budget.
UK: The Wild West
In contrast to the French, the U.K. has promoted an infrastructure based competitive model with no less than sixteen players (including incumbent BT wholesaler Open Reach) targeting between 23 million and 47 million households (according to their various announcements). The number of UK households, incidentally, is 27.8M according to the Office of National Statistics.
We call that overbuild.
There’s little doubt not every “alt net” player will survive. PMP analysis has concluded that in most rural areas and some smaller towns in the U.K. there is only room for one economically viable network. The first to come has a chance. If another follows, both could fail.
The consensus is that Labour’s “free broadband for all” would be a disaster. It would not only undermine the credibility of facilities-based competition, but it could have the effect of slowing down broadband deployment as build-outs are stopped and come at a heavy price for public finances. This is not what the UK needs.
While it would be unlikely for the U.K. to follow a French example, the results indicate France is moving faster. With 16 million households fibred (total HH at 25.2 million) and an additional 4 million being fibred per year, “les Bleus” seem well on their way to be able to provide “a gig in every home.”
In contrast, U.K. fibre penetration has just reached 10% and is growing slowly. Virgin, which covers 15 million households and offers speeds of 300 Mbps is planning to upgrade its cable network to DOCSIS 3.1 to allow 1 Gbps download speeds. It’s also planning on extending its footprint through an FTTH build.
BT Openreach, the largest facilities based provider, has announced FTTP is now at 1.2 million homes passed with 4 million planned by March 2021 and potentially 15 million by 2025 – if an unknown set of conditions are met.
In contrast, the French incumbent, Orange France says its FTTH network already covers 9.3 million households.
Meanwhile in Canada…
Canada is well ahead of the U.K. and making progress, but ambitions are different. High speed internet is considered to 50 Mbps download by the CRTC whereas the European Commission sets it at 100 Mbps. The Canadian government is committed to bringing this speed to 100% of Canadians by 2030 through its Connectivity Strategy. Budgets have been announced.
Are we moving fast enough?
Full fibre broadband availability is higher in other markets (e.g. Japan at 95%, Portugal at 86%) and Canadian operators have made the effort. Telus, for example, has announced that fibre is available to 69% of their broadband footprint and Rogers has upgraded to DOCSIS 3.1 and is offering 1 Gbps in many areas, for example.
Operators understand the first-to-market economics and, although many customers are currently satisfied with lower download speeds, the market will evolve. Rural coverage and how best to optimize government and private sector resources remains a question.
Perhaps we have something to learn from les Français.
Ken Campbell has been CEO of telecom operators in Canada (Wind Mobile), Europe and North Africa. He is also the founder of Mobile Klinik and a senior adviser to PMP Conseil, the Paris-based TMT consultancy. He is based out of their Montreal office.
Reef Read is a Manager in the Telecom infrastructure TMT practice in PMP Conseil’s Paris office and works extensively on issues relating to policy and investment in fibre and wireless networks.
