Detecon Opinion Paper FTTx Roll-out: A Commercial Perspective beyond Technology

8/8/2019 Detecon Opinion Paper FTTx Roll-out: A Commercial Perspective beyond Technology

1/11

Opinion Paper

FTTx Roll-out: A CommercialPerspective beyond Technology

2010 / 11

We make ICT strategies work


2/11

FTTx Roll-Out

Opinion Paper 2 Detecon International GmbH

Table of Contents

1 Motivation ............................................................................................................ 32 Roll-out Levers .................................................................................................... 4

2.1 Demand Drivers...........................................................................................42.2 Competitive Forces......................................................................................52.3 Type of Expansion.......................................................................................62.4 Regulation and State Subsidies ..................................................................7

3 Commercialization ............................................................................................... 84 Conclusion...........................................................................................................9 5 The Author.........................................................................................................106 The Company....................................................................................................11


3/11

FTTx Roll-Out


1 Motivation

Our experience shows that the roll-out of a new network infrastructure is primarily plannedand 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 check-

list 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.


4/11

FTTx Roll-Out


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 atime 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.


5/11

FTTx Roll-Out


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 areand 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 competitors type. Competitors to be considered

include, for example, cable network providers, telecommunication providers and other utilitynetwork 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 LTE-development (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.


6/11

FTTx Roll-Out


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 thereexisting 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 ofFTTC, 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, todays 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 consumers 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 in-

house 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 resellersas 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.


7/11

FTTx Roll-Out


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 islegally 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 interoperabilitys relevance will increase.

Currently it is not guaranteed that the services of a national provider will be available for allnetworks.

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.


8/11

FTTx Roll-Out


3 Commercialization

The future network expansion needs to be linked to a clear strategy. The telecommunicationcompany 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.


9/11

FTTx Roll-Out


4 Conclusion

The roll-out of FTTx pertains to two main topics influencing each other the networkexpansion 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 states subsidization options have an impact on the coverage of a new

network infrastructure and the area in which it is carried out.

FTTx Roll-Out

Expansion

Commercialization

BB Demand

Country/ Regional / Local Demand

Demand Growth

Revenue

High ARPU Regions

ARPU Growth

BB Service Usage

Type of Service (e.g. IPTV)

BB Service Growth

Expansion Types

FTT - C / B / H

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

Competitors type

Competitors Market Position

Make or Buy Analysis

Cooperation Possibilities

BB Services of Competitors

High number of BB Services

Diversity of BB Service offerings

Regulation

Open vs. closed networks

Wholesale prices fixed or market-

based

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.


10/11

FTTx Roll-Out


5 The Author

Dr. Clemens Khler is a consultant within the Strategy & Marketing Practice. His main focusis 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.


11/11

FTTx Roll-Out


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.

Detecons 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 anincreasingly 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 GmbHOberkasselerstr. 2

53227 Bonn

Telefon: +49 228 700 0

E-Mail: [email protected]

Internet: www.detecon.com

Documents

Detecon Opinion Paper FTTx Roll-out: A Commercial Perspective beyond Technology