if connected

Today’s government report into the development of the digital economy in Britain is wide ranging. But I’m going to focus on one area, broadband.

There are two key initiatives, plus lots and lots of talk:

A universal service obligation of 2Mbps for all by 2012. An USO for broadband is long overdue. But for those living in rural areas unserved or poorly served today, this speed will prove unsatisfactory. Already, average broadband speeds are over 3Mbps in the UK. By 2012, speeds will have risen again. The best that 2Mbps will do is reduce the height from which people fall when they live outside the peaks of urban broadband excellence. Nothing more. 2Mbps by 2012 is yesterday’s speed tomorrow.

A tax of 50p a month on all fixed line telephones to support rural broadband development. This is controversial and in my view will prove ineffective. The argument in the report is that fibre roll-outs to one third of the UK are uneconomic and this tax will deliver a subsidy that will hasten fibre infrastructure builds nationally. I see several flaws:

1. BT aims to spend £1.5bn to reach 40 percent ish of the population that live in relatively cheap and easy to reach urban areas. By comparison, the total return on £6 per annum for each of the 34m or so fixed telephone lines will not go far given the scale of costs for fibre indicated by BT’s plans.

2. Fibre deployment has barely started in the UK’s cities. BT’s network kicks off early 2010. It’s far too early for anyone to make significant deployments in rural areas where the number of people that would benefit are far less. I suspect either the £6s in tax will stockpile somewhere in the interim, or the monies will be used to support the more modest target of 2Mbps rural broadband (ie the universal service obligation).

3. Given the best will in the world, it will take much time to install fibre networks. Roads must be dug. New equipment must be given to consumers for their homes. New network links must connect exchanges and central offices to central national backhaul infrastructure. It’s inevitable that the initial deployments will be in the cities, even with this additional economic sweetener. And, fibre will take years and years to do.

For the forseeable future, cities will enjoy markedly faster broadband than rural areas. The advent of fibre, regardless of this government initiative, will increase that speed difference. Two tier broadband is coming whether or not this government likes it.

This is massive news: BT has finally announced its fibre plans.
Key points:
- Availability to 10 million homes by 2012. This is fast.
- Mix of fibre to the home (FTTH) for new builds with peak 100Mbps speeds, and FTTC/VDSL2 for existing homes (peak speed of 40Mbps). Exact split between the technologies has not been announced.
- Dependent on regulatory response from Ofcom.
- BT will offer its fibre on a wholesale basis to other operators and ISPs.
- High definition TV cited as one of the key drivers.
- “Demand led” rollout indicates BT plans to revive the success of the community-led broadband campaigns of the DSL roll out to prioritise locations that receive fibre first.
Initial thoughts, ahead of the analyst briefing in five minutes time:
This is a game changer for the UK broadband market. The larger ISPs that have unbundled local loop networks (O2, Sky, Carphone Warehouse, Be, Tiscali) suddenly face the prospect of their copper DSL services becoming obsolete in just a few years. The small niche ISPs that have struggled to remain in business in the face of higher speeds and thin margins offered by the LLU players, now have a lifeline with BT’s proposal to wholesale fibre.
However, there will be devils in the detail. 1.5 billion pounds is a suspiciously small sum to reach 10 million homes if BT were to achieve a high proportion of consumer uptake in the areas passed by fibre. I suspect the higher wholesale prices that BT plans for fibre, compared with DSL, will slow the uptake of fibre and so help BT save capex. Also, this announcement appears to be led by BT Wholesale, its uncertain how Ofcom will react given the division of the copper telephone line network into semi-independent Openreach. Ofcom may also choose to intervene to protect the copper/LLU investments of other operators, which could raise BT’s costs and slow their roll out (for example by continuing to insist that new build developments receive copper as well as fibre). It’s going to be extremely interesting to see if the LLU players choose to invest in fibre themselves.
More to follow.

Free plans to buy Telecom Italia’s French ISP business, Alice.
ISP markets across Europe continue to consolidate. In the past, Free has focused on organic growth rather than m&a, the main exception was the purchase of niche operator Citéfibre.
Fibre is a scale business. In areas covered by fibre, Free intends to migrate all its existing DSL customers onto the new network. This saves operational costs and maximises the ability of Free to sell value adds to its customer base.
Free’s fibre profitabiliy depends on the percentage penetration of households, and businesses, in those areas reached by fibre. Alice is valuable to Free as it will help it gain the critical mass of customers in city areas that Free needs to achieve sufficient penetration.
This purchase is about Free’s fibre roll-out. It isn’t, as some have written, a vanity project to regain the position as France’s number two ISP. I’m sure Free will enjoy being number two, but the financial bottom line is more important.

BT’s launch of ADSL2+ with 21CN yesterday isn’t going to make a vast difference to the ISP retail market, or to consumer broadband speeds. Initially, under one million households will benefit, none of which are in London. Even by May 2009, when BT will reach approx half of UK households, its footprint will be largely within the area already covered by the existing LLU ADSL2+ networks of O2 and Sky, and also within VirginMedia’s HFC network geography which offers similar speeds.

BT’s major competitors — Sky, Carphone Warehouse, O2, Orange, Tiscali — have largely switched away from using BT’s wholesale packages in urban areas. So, the main short term beneficiary of this launch, will be BT’s retail division plus the declining mass of small ISPs that lack their own LLU network. For those independent niche ISPs, this launch may be too little, too late. Further consolidation is likely. Ironically, BT may be the purchaser of the small guys, if regulators continue to allow it.

The long term impact is quite different. BT is building the foundations for putting fibre into the last mile, eventually. To gain speed benefits from fibre, the backhaul capacity to the exchanges and BT’s core network capacity needs to be greatly increased. Otherwise, the speed bottleneck shifts from the quality of the copper telephone line in the last mile, to back within the ISP network. (Even now, the UK has seen some issues even with ADSL1 backhaul capacity limiting speeds for users with telephone lines that run at the full ADSL1 speed of 7-8Mbps, i.e. contention.)

BT is playing the long game, and as a result is ceding ground in retail broadband acquisition now. This is a risky strategy given the ability to execute of BT’s ISP competitors, most especially Sky.

BT’s Broadband Connect is late (originally due January), and yet will initially only be available to a tiny fraction of UK households (under one million homes and businesses *).
BT’s launch is even more tardy compared with others:
- BT’s UK ADSL competitors — Sky, O2, Be — have been offering ADSL2+ to a wider footprint than this for a couple of years.
- Similarly, VirginMedia offer ADSL2+ equivalent speeds, to many more households.
- Elsewhere in Europe, ADSL2+ launched years ago: French ISPs starting offering ADSL2+ back in 2004, and are now in the process of major fibre to the home broadband network (FTTH) rollouts.
If this is BT’s 21st century network, then those fibre (FTTH) networks are for the 22nd century.
BT appear to have reverted to the sloth of the Home Highway period, rather than building upon their more recent successes in extending DSL’s UK availability so widely. (Home Highway was BT’s late 1990s ISDN — narrowband — product that launched in the UK at the same time the rest of Europe was rolling out broadband).
I would love to say something more positive about this announcement, but BT appear to have gone very quiet in their analyst communications on 21CN and Wholesale Broadband Connect. So, all I have to go on are the details of the product offer, knowledge of other European markets, and what I hear from UK ISPs that sell BT’s wholesale products… and none of that looks good!
* BT say ‘available from exchanges serving around one million homes and businesses’ therefore, given some of those telephone lines will not support ADSL2+ speeds, the actual number of homes and businesses that will be able to benefit is even lower than one million!

France continues to set the pace on fibre broadband roll outs in Europe. The debate here, is already focused on how to ensure competition between the various under way FTTH network deployments especially with regard to the duct access needed to make deployments efficient and keep costs down.
The alternative operators are unhappy, the incumbent is moving its ground to head off regulatory intervention.
Like the past LLU experience, ARCEP is proving itself to be an savvy and effective regulator in tackling knotty issues, and so enabling both network investment and competition.
Bottom line – the FTTH situation and necessary debate in France is far advanced of elsewhere in Europe.

Moving on from the crazy UK situation on fibre, Orange in France offers real fibre broadband at 100Mbps (download speed), complete with a full IPTV service, and VoIP telephony.
Unlike fibre wannabe’s, Orange’s upload speed is also staggeringly fast at 10Mbps, which makes the service ideal for uploading high quality videos to websites.
This is a commercial service that is already available to 147,000 homes. Full details are published in Orange’s annual results. France has become one of the most interesting broadband markets in Europe and continues to far outpace the UK.