FTTH COUNCIL EUROPE Business Cases for Fiberbbpmag.com/2008issues/april08/BBP_Apr08_ParisBusCases.pdfEPON and P2P solutions on the one hand and less-expensive GPON on the other was

FTTH COUNCIL EUROPE

22 | BROADBAND PROPERTIES | www.broadbandproperties.com | April 2008

In keeping with the conference’s promise this year to cross the chasm to mass-market fiber, a quarter of the

60 presentations were devoted to the spe-cifics of planning the business. Opinions varied on many issues. But consensus appeared on the key leverage points:

• Economies of scale count. Deploy-ments that start slowly to conserve capital must endure much longer periods before free cash flow is posi-tive, because there are not enough customers to generate the cash for follow-on builds. Also, systems with few subscribers have trouble attract-ing content providers, which reduces ARPU. The general feeling was that sizing the initial build to get to posi-tive cash flow in 4 to 6 years usually makes the most sense.

• Public subsidies are necessary forbuilding FTTH in Europe’s ruralareas. Smaller subsidies may be nec-essary in low-income regions as well. The subsidies are justified by the eco-nomic benefits the network provides to the general population.

• VideoisthekeytoARPUnow,butnet work services (renting access to con tent providers and to end users) will probably be the key in the fu-ture.

• Theviabilityofthebusinessmodelisvery sensitive to buildout costs. You have to work closely with your ven-dors. It’s not enough to put a liqui-dated damages clause in the contract – they’ll walk away from the job if they can’t make a profit, said Rich-ardJonesofVenturaGroup.

• Opexwithfiberisoftenlowerthanexpected,inpartbecausetheinher-ent reliability but also because of the opportunity for self-provisioning by customers. That’s despite more com-

plicated customer premises equip-ment.

Jones also said scale is so important that “For zero to 10,000 subscribers your network is worth what you paid to build it, and it ramps up from there.” Large premiumsarebeingpaidforexistingfi-ber networks, although they don’t come on the market often. Networks in the 100,000 to 250,000 size command the biggest premiums, said Mikael Sand-berg,alsowithVentura.

Jones added that competitors cannot beexpectedtostandstillduringaslowbuildoutandthatinEuropesofar,“Fi-berkillsDSLbutnotcable.”IntheUS,Verizon isproving this isn’tnecessarilyso.ButVerizonhasspentheavilyonnewservices to open a large feature gap be-tween itself and traditional cable.

Benoit Felton, senior analyst at Yan-keeGroup,admitted,“Itishardtomakethe models well because we have a new technology projected on to an old busi-ness model. Fiber opens so may new op-portunities.” Heavy users will pay more for a few services they especially desire, for instance. And heavy users often have peer-to-peer needs, so they do not create as much cost for Internet backhaul.

Felton noted that economic benefits are often measurable. In Stockholm, he said, homes with FTTH services sell at a 5 to 10 percent premium “so users will contribute to the cost of the network’s construction.”

At a well-attended workshop he ran, Jones said national policies and local conditions greatly affect decisions on where best to put your money. “What’s going to work where? Don’t put fiberinto the UK.”

Business Cases for Fiber

Panel on business drivers for service providers and operators in Europe. Left to right: Moderator: Hartwig Tauber, Director General of the FTTH Council Europe; Jonas Birgersson, CEO, Labs2 Group AB and Chairman ViaEuropa; Bjørn Netland, Director of Broadband Development, Telenor; Benoît Cosandey, Network Architect, Sierre-Energie; Ulf Larsson, FTTU Project Manager, Energi Randers Tele; Michael Browne, Access Network Strategist, Eircom.

To ensure vendor compliance, it’s not enough to put a liquidated-damages clause in the

contract – a vendor that can’t make a profit will still walk away from the job.

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April 2008 | www.broadbandproperties.com | BROADBAND PROPERTIES | 23

How does a network builder get funding? “You have to impress a banker,” Jones said. “The banker is benchmarking against incumbents” rather than starting from scratch. “I’m seeing bad business cases being funded and good business cases not being funded,” Jones said.

He said that because fiber is hard to get financing for – it costs a lot of money and there’s a long wait for the return – the business case must be:• Flexible. It can’t rely on hard-wired

formulas. Instead, it has to answer “What happens if….”

• Fast. You must be able to produce a new iteration immediately.

• Bulletproof. Because bankers are not expert in telcoms and thus just

Richard Jones, Partner of Ventura Team LLP, London and currently Chief Commercial and Strategy Officer of an NGN in Saudi Arabia, led workshop participants on a rollicking tour of key business leverage points for FTTH buildouts.

Panel on business cases on mass market FTTH deployment, moderated by Karel Helsen, Chair of the Deployment & Operations Committee, FTTH Council Europe. Left to right: Agnès Huet, CEO, Comptoir des Signaux; As-trid Wisse, Manager Ernst & Young Netherlands, Business Advisory Ser-vices; Raf Meersman, Chief Technology Officer, Comsof; Benoît Felten, Senior Analyst, Yankee Group; Graham Finnie, Chief Analyst, Heavy Read-ing; Didier Pouillot, Head of Telecoms Economics and Business Modeling Practice, IDATE.

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benchmark, “You have to have the same knowledge” they do.

• Realistic. “Information is out there. Dosomeresearchandputitin.”

• Investable.• Delivered efficiently.

The model must also take into ac-count these local conditions:

• Affordability of services. Peoplespend 2 to 3 percent of their income on telecom services. Is there enough money in the local economy to pay for the services you are considering offering? Also, what is the competi-tion for entertainment? People may spendmore for Internet andTV ifthere’s nothing else to do. If they go out dancing every night, maybe not.

• Competition: It’s hard to competeif prices are already very low. You have to be lean and mean. You have to know what people are willing to pay, and not charge more than that. You can’t win a price war with an incumbent. They have 1,000 tanks, and you have 3.

Jones raised an important question that few in the audience answered to his satisfaction:Doyoudefendpriceorvol-ume? “If I reduce the price, I’m squeez-ing my profit margin. If I reduce my volume, I’m also reducing my costs, so profit remains the same,” he said. “So, if you have to give up something, it should be volume.” That assumes, of course, thatyou’vecoveredyourfixedcosts.

Where should you invest? Places with higher population density, obviously. Jones advised looking at tourist photos onFlickror lookingonGoogleEarth.“How many homes can you pass with a kilometer of fiber? Target neighbor-hoods within a city – densest areas are the best. On the other hand, you need a critical mass to justify the overhead – so there’s a tradeoff.” In the US, of course, network builders have historically had to build out an entire jurisdiction at once; cherrypicking profitable neighborhoods was not allowed. But with costs of con-struction so high, and under pressure from the FCC, those requirements arenot as firm as they once were.

IDATE model run for the example detailed above the charts. Values are in euros at about $1.50 per euro.

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Should you deploy quickly, or bootstrap? If you have the choice, faster deployment (with a successful busi-ness plan, of course) earns a higher return even though the go-slow approach with low initial deficit in free cash flow cuts capex. The IDATE model in this case assumes GPON.

Build your own network infrastructure, or share? Even without the effect of multiple content providers raising the take rate, sharing gets network operators to posi-tive cash flow a little faster, and to cumulative positive cash flow much faster than going it alone, when calcu-lated using the IDATE model. The example is for GPON in Europe, a region of high population density.

Deployments are least costly in dense urban areas, as long as no substantial digging is necessary; IDATE es-timates a large drop in cost per dwelling unit passed as population density or number of units per MDU in-creases. But Didier Pouillot noted that the bulk of the savings comes early on – there’s a 30 percent drop as density doubles from 4,000 to 8,000 households per square kilometer (10,000 to 20,000 per square mile, typical of older suburbs or large towns), but only another 30 percent as density triples from 8,000 to 24,000. Likewise, most of the savings in MDU deploy-

ments are associated with the increase from 4 to 8 units per building. (Data are in euros per home passed, with each euro roughly $1.50.)

Pouillot noted that the main cost difference between EPON and P2P solutions on the one hand and less-expensive GPON on the other was in the electronics, but that P2P makes it easier to open the network to multiple providers.

Didier Pouillot of IDATE explored costs, profits and free cash flow for several fiber network strate-gies. This illustration summarizes his general finan- cial model.

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In Europe, non-FTTH areas getserved with DSL now, and may getWiMAX in the future. The contrast makes a better case for public subsidy, and lessens corporate opposition to such subsidies in some cases.

Sandberg suggested, “You shouldn’t deploy until after you’ve made your first sale.Getacontract inplacetogetrealprices. Don’t build a speculative net-work; you’ll have to lay out all of the costs before you have any customers, and you’ll run out of money.”

Which is more important, Jones asked, “first-year penetration or long-term penetration?” Usually it’s long-term, Jones said. But Sandberg warned

that you have to consider cash flow: “You might have a great long-term plan, but you could be out of business by the time you get there.” BBP

Bjørn Netland, director for broadband network development

at Telenor Norway, says FTTH penetration is increasing but that rural areas are still served mainly by DSL and wireless technologies.

Electric utilities there are investing heavily in fiber, and passing

30,000 more homes each year.

Don’t build a speculative network;

all the costs come before any revenue.

Martin Thunman, President and founder of PacketFront,

has been an enthusiastic supporter of open access

networks. In keeping with that, he observes a shift in the revenue model to a more

network-centric approach – users pay more for raw

bandwidth, less for content and services delivered over

that bandwidth.

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Fernando Gil de Bernabe Y Varela of Cisco says that while there is plenty of new value creation among network builders, equipment vendors and content providers, competition is increasing.

Fernando Gil de Bernabe Y Varela of Cisco described six plausible broadband scenarios for 2015, but said these two are the most likely – one (“New Order”) is profitable but complex and hard to shape, the other (“Futurama”) somewhat chaotic due to lack of net-work investment.

The development of new services for broadband networks is accelerating,

said Fernando Gil de Bernabe Y Varela of Cisco. Anyone who thinks another monster like

YouTube is unlikely, is simply wrong.

Fernando Gil de Bernabe Y Varela of Cisco sees a new business model for service providers: Cooperation, though not across-the-board, with content providers.

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Defining open access: Graham Finnie of Heavy Reading

says the different degrees should be noted carefully.

Graham Finnie of Light reading notes that in Europe, open access networks generally charge less,

offer faster service, or both.

There’s still plenty of opportu-nity to cut costs, despite the big reductions of the past five years. Draka’s Karel Helsen predicted a roughly 15 percent reduction in fiber deployment cost in 2010, compared to 2006, with the big-gest reductions due in network engineering, project manage-ment, and customer-premises installation due in part to preconnectorized, bend-tolerant fiber. Even fiber cable itself is getting cheaper.

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Consulting firm CH2M HILL’s network modeling soft-ware – a tool for designing the least expensive network once the service area is known – was demonstrated by Raul Fernandez. Costs to build the network can be cut by a factor of three or four in some situations.

Roland Kohler said that today’s broadband business model, tied closely to layers in the network stack, may give way to open access.

The bottom line: Network builders often spend almost all their time wringing an extra 10 to 20 percent out of their network building costs, but give far less attention

to the admittedly more speculative opportunities for doubling or tripling ARPU.

Documents

FTTH COUNCIL EUROPE Business Cases for Fiberbbpmag.com/2008issues/april08/BBP_Apr08_ParisBusCases.pdfEPON and P2P solutions on the one hand and less-expensive GPON on the other was