Thursday, December 17, 2009

BPN 1411 KPN misses the broad picture by focussing on FTTC

Yesterday, The Dutch incumbent telco KPN published its mid term strategy on broadband in The Netherlands. The strategy is neither fish, meat nor good red herring and is most concerned with returns in the mid term. The Australian telecom consultancy Budde Comm criticised the strategy, saying KPN’s focus on FttC misses the broader picture.

The Netherlands remains one of the few countries in Europe to have significant FttH networks. Until 2009, the main characteristic of Dutch fibre rollouts was the dominant role played by housing corporations and municipal governments. This focus changed following KPN’s acquisition of a 41% stake in the fibre provider Reggefiber and the subsequent ramping-up of their efforts and investment through their joint venture Glashart. KPN’s large-scale fibre rollouts were also largely based on access arrangements with local councils and housing associations.

KPN was one of the few incumbents to pursue FttH through recognising that doing so was in its own interests, rather than as a result of regulatory or competitor pressure. Its three-stage strategy was to get ready for rollouts (during 2008), trial the technology in several main towns (during 2009), and then decide on a national rollout plan. It had been hoped that the company would adopt a predominantly FttH strategy, leaving VDSL/FttC for other less populated regions, but the opposite is the case.

Its decision to opt for the hybrid model on its national network, and restrict FttH rollouts to select cities, reveals the company’s paucity of ambition, and the fundamental absence of a more wide-ranging approach to the country’s telecom infrastructure, and so of the welfare of its digital future.

KPN currently has about the same number of households connected to FttH and FttC (460,000 against 450,000). The decision to opt for FttC could be construed as purely commercial: the company calculated that providing fibre to 80% of the population would cost some €8 billion, and if take-up of connected homes reached 50% then the government’s contribution would be about €100 million for ten years. Government funding would increase as a greater proportion of the population in rural areas was covered. Rolling out FttH could cost an average €1,000 per home passed, and to cover the whole of the Netherlands would require some 600,000 homes connected per year, amounting to €600 million per annum.

Yet KPN’s initial model has proved to be optimistic: FttH take-up has settled at around 25% - 30%, principally because the consumer price – at €60 per month – is too high for FttH to compete against existing offers from cablcos (Ziggo and UPC) and high-end DSL alternatives, and thus KPN/Reggefiber struggles to reach the economically viable level of 45% penetration. KPN’s FttH ARPU is only €8 per month higher than DSL ARPU, and much of this is derived from IPTV which the company cannot realistically offer on DSL.

Thus for the Netherlands most FttH activity will remain in select cities (currently including Amsterdam, Deventer, Almere, Eindhoven and areas of Rotterdam) and regions (particularly Noord-Holland, Flevoland, Gelderland and Overijssel).

The decision against a national FttH policy in favour of one which empowers cities to take a leadership role in bringing fibre to their denizens is not very conducive to a broader national approach.

Furthermore the decision shows that the country has not yet embraced the trans-sector concept, which requires a national approach for the delivery of national healthcare, education, e-government services etc. These sectors are closely tied to a national IP infrastructure: in December 2009, the OECD published a report showing that governments could justify the costs of national fibre networks by using them to cut costs in sectors such as healthcare, education, transport (telecommuting etc) and energy (through smart grid infrastructure). On average a cost saving of between 0.5% and 1.5% in each of these four sectors over a ten year period would justify the cost of building a national fibre network.

Unless the Dutch government establishes a national policy on these issues it is hard to see companies such as KPN being able to build business models for a national rollout.

Blog Posting Number: 1411

Tags: glass fibre, DSL

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