A World of Fiber

By Benot Felten, Chief Research Officer

January 2011

Executive Summary
Fiber to the premises (FTTP) became a major talking point in the first decade of the 21st Century, but its not yet a reality everywhere. Moving from intent to planning and from planning to implementation is complex. The underlying reason for this complexity is that with liberalization legacy telecom operators became ill-suited to the kind of long-term investment that FTTP requires and yet refuse to relinquish their historical role as monopoly network providers. As a consequence, deployment and adoption are slow.
Exhibit 1: Availability of 100Mbps download services over FTTP

Source: Diffraction Analysis, 2011

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Asia is where the market erupted in the late 1990s, more specifically Japan and Korea, both of which now have massive deployment and high adoption. Two more waves of FTTP-enabled countries are now coming to the forefront: Singapore, Australia and New Zealand have chosen structurally separated deployment models with heavy state intervention; China, India and Malaysia are exploring different deployment models better suited to emerging markets. In the Middle East and Africa, deployment is limited with only one country, the United Arab Emirates, with a high rate of deployment (but limited adoption). Other middle-eastern countries are in early stages of deployment as are countries in North Africa (especially Algeria) and in West Africa (namely Kenya). In Europe, the Nordic countries were the forerunners of deployment and adoption with Sweden leading the pack. The Baltic States and many Eastern European countries are now the most dynamic when it comes to FTTP deployment, although again adoption doesnt necessarily follow. Russia is the largest and fastest growing market in Europe. In Western Europe the Netherlands, Italy, France and Portugal are the most advanced markets although in comparison with Northern Europe they are still in the early stages. In most other European countries FTTP is little more than announcements. Verizons FiOS represents the vast majority of North American FTTP deployment and adoption. Other US FTTP initiatives include SureWest in Northern California and a number of municipal networks. In Canada, very little has happened beyond good intentions. In Latin America, Brazil is the only country with significant deployment both through Telefnica Brazil in Sao Paolo and GVT throughout the country. Exhibit 1 shows the availability of 100 Mbps downstream services over FTTP all over the world. While that doesnt perfectly match FTTP deployment since some (including Verizon in the US) dont offer 100 Mbps downstream services despite having launched FTTP, it tends to be a good indicator of dynamic FTTP markets. Drivers for deployment are different for the different stakeholders. While incumbents would seem to be the natural players for FTTP deployment, others have started to look into the opportunity that fiber could represent. Furthermore, the vital nature of communications infrastructure has led local and national governments to examine this space in great detail and, in some instances, to intervene directly. The main reason for patchy deployment across the world is that the key driver for incumbent operators is network competition; only in countries where cable networks have a strong footprint does that level of competition exist. The other driver for incumbents is the opportunity that content delivery offers for increased revenues, but that alone rarely leads to deployment. Competitive operators only move towards FTTP when they reach a critical mass of customers in a given geographical area. At that point, they must decide between continuing to rent access lines from the incumbent or investing in their own network. In some countries, competitive operators are co-investing in new networks in the hope of reaching critical mass faster. New entrants go after opportunities left wide open by incumbents reluctant to invest in FTTP. They are often, but not always, utility companies who see fiber broadband as an adjacent utility market. These deployments tend to be localized but a number of them have been quite successful. When no deployment occurs, local and national governments tend to get involved. They can do so with a light touch, trying to build a context where the investment is easier to bear or more likely to succeed. They can also be more direct, with statefunded deployments frequent at a local level, and a few examples at a national level. How could deployment be accelerated? A mix of external pressure (especially from growing bandwidth needs) and internal shift (as business models and market approach evolve) will probably push incumbents to be more proactive, but those who arent are already facing threats from alternative players. Regulation and policy also need to be more targeted at accelerating adoption and facilitating deployment without sacrificing competitive dynamics.

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I - Introduction
Fiber to the premises (FTTP) has been a hot topic for some 10 years now, but it has only recently become a mainstream idea, and it still generates more heat than light. FTTP is now considered by most players in the market as an inevitability. They know that the copper network that has powered telecom services for the last 50 years or more will not be able to sustain the market for the next 50 years and probably not even the next 10 years. This means that a transformation of the network to next-generation access (NGA) needs to happen in the relatively near future. But the question of how that transformation needs to occur has not yet been fully addressed. Are the legacy players of the copper era necessarily the best placed to lead this transformation? If yes, then why do they seem so hesitant? Does their inaction open up opportunities for other players to move into the network infrastructure business? Can policy and regulation encourage the deployment of FTTP or in some cases substitute public players for reluctant private ones? In this report, we will examine the actual state of FTTP deployment across the globe, and from an analysis of said deployments outline the drivers that have caused them to happen. Only by understanding these drivers can players (both private and public) approach the considerable issue of FTTP deployment with some sense of where to go and how to get there.

Methodology
The material for this report was built up over a considerable number of interviews with access and service providers, telecom vendors and other stakeholders in the FTTP ecosystem: Access and service providers: Altibox (Norway), AT&T (US), BT (UK), City Telecom (Hong Kong), Free (France), Glasvezelnet Amsterdam (Netherlands), Orange (France), NTT (Japan), Radius Infratel (India), Stokab (Sweden), Telecom Italia (Italy), Via Europa (Sweden), Vodafone (Global), Wind (Italy), and more; Vendors: Alcatel Lucent, Cisco, Ericsson, ECI Telecom, Huawei, Nokia Siemens Networks, PacketFront and more; Other entities: Autorit de la Concurrence (France), ECTA (Belgium), ETNO (Belgium), Ministry of Telecommunications (Netherlands), Federal Communications Commission (US), OFCOM (UK) and more;

Unless otherwise stated, all deployment and adoption numbers are sourced from the FTTH Council North America, the FTTH Council Europe or the FTTH Council Asia-Pacific.

II - Worldwide Fiber Deployment

Asia Pacific
Asia Pacific is by far the leading region in terms of FTTP deployment and adoption. While growth in Korea and Japan the early movers is slowing down, a second wave of FTTP active countries is emerging in the region suggesting that the worldwide epicenter of FTTP will remain in Asia Pacific for some years to come. FTTP became a topic in Japan in the late 1990s as incumbent NTT started considering ambitious NGN plans. Wide-scale deployment by NTT, soon followed by KDDI, started in the early 2000s. By March 2010, 91.6% of homes in Japan were connected to either a fiber to the home (FTTH) or a fiber to the building (FTTB) infrastructure, and the number of FTTP subscribers in Japan overtook the number of DSL broadband subscribers in June 2008. In June 2010, Japan boasted over 18.5 million FTTP subscribers, nearly 75% of which are using incumbent NTT for service. FTTP in South Korea (mostly FTTB) emerged in the early 2000s thanks in part to a significant government tax incentive, and was aligned with the explosion of internet usage. As a consequence, South Korean service providers didnt really need to manage a transition from a mature copper-based broadband market to a fiber-based broadband market. With 9 million Diffraction Analysis | www.diffractionanalysis.com

FTTP subscribers, the penetration rate of fiber broadband in the country is close to 55%, the highest in the world. A little under half of the broadband market is still in the hands of incumbent Korea Telecom with challenger SK Broadband holding about one quarter of the market. For a long time the regulatory framework in South Korea didnt allow service providers to offer services other than pure internet access, which explains why the average revenue per user (ARPU) is comparatively low. The over-the-top industry, however, has thrived as a consequence. Now IPTV and IP Telephony are part of the service ecosystem and revenues per subscriber are growing. The other fast growing market for FTTP is mainland China. While penetration remains low, in absolute numbers the market will soon be the most important in the region and will likely dwarf any other market except possibly India. China currently has around 10 million FTTP subscribers, most of them FTTB or highly split Passive Optical Network (PON) FTTH. Split ratios of 256 or even 512 are not unheard of in China. Most of the growth is driven by the demand for Greenfield accommodation in urban China, and the broadband services offered on top of these fiber connections are comparable to the service levels that Europeans and North Americans are currently enjoying over DSL. China Telecom and China Unicom are the main operators deploying FTTP in China today. In nearby Hong Kong and Taiwan, FTTP services have been available for longer and, while much smaller scale in absolute terms than mainland China, deployments and adoption as a proportion of households are significant. Over in Hong Kong, 35% of households subscribe to FTTP and the market has been led and stung by alternative operator Hong Kong Broadband Network (HKBN), a self-described commodity broadband provider who controls over 50% of that market. HKBN is one of the few service providers in the world to offer 1 Gbps broadband. In Taiwan, incumbent Chunghwa Telecom has been leading the way in terms of fiber deployment and currently boasts close to 2 million subscribers, soon to overtake DSL subscribers. In most other markets in Asia, FTTP isnt anything like a mature market yet. Malaysia and India are two countries where things are starting to coalesce. In India BSNL launched commercial service around Jaipur in 2010, and aims to connect 2 million homes by 2012. Neutral access infrastructure provider Radius Infratel is deploying in the Delhi area and aims at 200,000 homes connected by the end of 2011. In Malaysia, incumbent Telekom Malaysia (TM) won a government bid to deploy FTTP to 1.2 million homes in or around Kuala Lumpur. TM will be footing 80% of the bill in exchange for the right to keep the access network closed to competitors until 2015. In Astana, the capital city of Khazakstan, an FTTP GPON deployment of unknown size was recently announced. Incumbent Kazakhtelecom intends to use the infrastructure to deliver IPTV and video on demand services to affluent areas of the city. In the South Pacific, three countries are in the early stages of massive FTTP deployment, all three following similar models of massive state intervention. Singapore was the forerunner with the announcement in 2008 that the government would subsidize a National Broadband Network (NBN) roll-out (which on Singapores scale is 1.5 million households) in a threetiered fully separated business model. OpenNet (a consortium in which incumbent SingTel is a minority shareholder) invests in the passive infrastructure and deploys it, Nucleus Connect (a wholly owned subsidiary of cable operator StarHub) operates the active layer and wholesales it to retail service providers, of which there are five so far, including the aforementioned SingTel and StarHub. Deployment is well advanced and targeted for completion in 2012, and commercial services are now available, although fewer than 100,000 households have subscribed to date. Following in the footsteps of the Singapore NBN, Australia and New Zealand also started exploring separated business models. Australia was the most radical, announcing in 2009 that it would create a fully structurally separated NBN reaching 90% of the Australian population. The state investment is estimated at AUD 27 billion over 15 years, and includes the purchase of incumbent Telstras physical assets. While deployment and commercialization have started in remote and under-served Tasmania, the rest of the process has been slowed down by political shifts. It now looks, however, like the project will genuinely go ahead. In New Zealand, the approach was somewhat less financially heavy since government investment in a separated infrastructure will only be NZD 1.5 billon. Financing will be offered to wholesale operators in 33 different geographical bids covering different areas. The first bids were awarded in late 2010 although the key bid covering the capital city Auckland hasnt been awarded yet. Failure to offer compliant submissions on Telecom New Zealands part explains why none of the bids were awarded to the incumbent, it may also explain why the Auckland bid hasnt been attributed yet.

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Middle East and Africa

With the exception of the United Arab Emirates, the Middle East and Africa werent part of the early wave of FTTP deployment. This is changing, however, as many of the countries in the region, especially in the Arabian Peninsula, are considering or actively deploying next-generation infrastructures. In the United Arab Emirates (UAE), FTTP initiatives go back several years and are essentially split between two players: Etisalat and Du. Both are focusing on a FTTP deployment in and around Dubai; Etisalat is the most ambitious and currently connects around 750,000 homes with GPON technology; Dus footprint is focused on Dubai itself and covers roughly 400,000 homes using Ethernet point-to-point technology. While take-up was very slow coming, the latest numbers from the UAE suggest that subscriptions are finally growing. Etisalat intends to provide full coverage of Abu Dhabi and 90% coverage of the entire country by 2011. The neighbouring countries, Qatar and Oman have announced pilots and intentions, but actual deployment hasnt picked up yet. STC in Saudi Arabia also has some limited pilot programs but nothing definite at this stage. Other deployments in Africa include an ambitious plan by Algeria Telecom to deploy FTTP to 250,000 homes by the end of 2011. While this seems to represent a limited scale in absolute numbers, its worth keeping in mind that Algerias overall wireline footprint is only 3 million lines, so this plan actually represents an upgrade of one tenth of the national network. In Egypt there have been some limited-scale deployments by Telecom Egypt, mostly to high-revenue gated communities in and around Cairo. An FTTP project connecting 100,000 homes in Kenyas capital Nairobi was announced in early 2011 by broadband operator Jamii Telecoms Limited (JTL). Its the first such project in West Africa but could spark other similar projects in the region if successful. In South Africa an FTTP project was announced in Cape Town in 2008, but it appears to have seen little progress.

Europe
FTTP deployment in Europe started in the Nordic countries in the late 1990s. Sweden was at the forefront of the fiber access revolution, in part due to state aids designed to help municipalities connect public buildings. Leveraging these deployments, a number of municipalities extended coverage to all of their constituents. In parallel, the city of Stockholm deployed a dark fiber backbone to public administrations and businesses through a public company called Stokab. Today there are over 150 municipal networks in Sweden, most of them operating under open access models, and a little under 15% of Swedish households are currently subscribing to FTTP services. After the initial wave of municipal deployments, the private players launched their own large scale deployments with incumbent TeliaSonera in the lead, followed by competitive operator Bredbandsbolaget. The Swedish development of fiber led to some emulation in the neighbouring countries. In Norway, competitive operator Altibox (previously Lyse Tele) has successfully deployed FTTP networks in many Tier 2 cities and currently boasts close to 200,000 subscribers. This in turn has pushed incumbent Telenor to counter with its own deployment of FTTP, mostly in Greenfield real-estate developments. In Finland, where the wireline market remains fragmented with different infrastructure and access providers owing different parts of the copper footprint, a number of FTTP initiatives have emerged, particularly around the capital Helsinki and large cities. Overall, adoption remains modest, however, with less than 5% of households subscribing to FTTP services. Finally, in Denmark the utility companies have been at the forefront of FTTP deployment, but adoption hasnt really followed as of yet, and the failure of Dong Energys project Fibernett (and its subsequent purchase by incumbent TDC) seems to have dampened enthusiasm for the time being. In the Baltic countries where Nordic incumbents own stakes in many operations, FTTP has also been expanding fast. The leading country is Lithuania where incumbent TEO has deployed a mix of FTTH and FTTB infrastructure to a little less than 300,000 homes. Take-up has been fast and TEO recently announced over 100,000 FTTP subscribers, which makes Lithuania the European country with the highest penetration of FTTP subscribers. Success is less striking in Estonia and Latvia although the respective incumbents in these countries are actively deploying FTTP infrastructure.

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Eastern Europe is where the growth of FTTP is the fastest at the moment. Early movers were Romania and Bulgaria where a grassroots deployment model was adopted. In Bulgaria, the lack of availability of DSL from incumbent Vivacom led people to take matters into their own hands and deploy micro-broadband operations whose footprints were sometimes as small as a single building block. These grassroots operators precipitated the emergence of fiber and broadband, pushing the incumbent to launch its own DSL services. Today, these FTTB deployments account for 57% of Bulgarian broadband access. In neighbouring Romania, the situation is even more radical as some of the grassroots deployments are grey networks, riding (illegally) on top of existing metropolitan networks. In other parts of Eastern Europe, FTTP has been an important component of the competitive play. Deployment in Slovenia has been very aggressive, led by competitive operator T-2. Incumbent Telekom Slovenje was forced to follow suit. FTTP adoption remains modest in absolute numbers (around 75,000 subscribers) but in such a small country is an increasingly important component of the broadband landscape. In nearby Slovakia, continental European incumbents Deutsche Telekom and France Telecom are waging a proxy FTTP war. Competitive operator Orange Slovensko (owned by France Telecom) launched FTTP services in 2007 forcing incumbent Slovak Telecom (a subsidiary of Deutsche Telekom) to follow suit. Adoption is in the same range as it is in Slovenia in absolute numbers (around 65,000) but carries less weight since Slovenia is a much larger country. T-Systems has also started deployment of FTTH in the Czech Republic in the face of strong cable competition from UPC. Russia is the fastest growing market in FTTP in Europe with over 10 million homes passed in late 2010, principally in Moscow and other large cities. Players at the forefront of the (mostly) fiber to the building deployments are incumbent Vimpelcom (under the Beeline brand) and Comstar UTS. Deployment costs in Russia are extremely low due to a combination of low labor costs, FTTB technology choice and large, rented accommodation complexes with single decision makers. Take-up rates, however, arent great with fewer than 10% of connections actually being subscribed to. Cable operators in Russia, in particular ER-Telecom, are also upgrading fast to deliver high-speed services, which suggests that deployment of FTTP will continue for the foreseeable future. In Western Europe, the leading country in terms of adoption is the Netherlands where the early initiatives of real-estate company Reggefiber precipitated a move from incumbent KPN. Reggefiber started FTTP deployment in 2005 in an openaccess model and in late 2008 KPN acquired a minority share in the operation and in parallel (but in different geographies) launched its own FTTP and FTTC deployments. Close to 600,000 homes had been passed by fiber at the end of 2010, with 220,000 customers subscribing to services over FTTP (Source: Stratix Consulting.) Several local governments, both large and small (Amsterdam, Nuenen), have also deployed open-access FTTP infrastructure, accelerating the competitive play. Italy is another country where FTTP deployment happened early. FastWeb, a Milan-based FTTP operator, aggressively marketed triple-play over fiber starting in the early 2000s. Deployment passed close to 2 million homes in Milan before FastWeb started expanding its broadband offerings geographically via unbundled copper local loops. As a consequence, their consumer service portfolio never really exploited the capabilities of fiber, and FastWebs take-up on its Milan FTTP footprint stagnated at around 10%. The company announced in 2010 that they were shifting gears on their FTTP products, however, and invested in an upgrade campaign to allow a sharp increase in the quality of services delivered. In parallel, faced with inaction on the issue of NGA from incumbent Telecom Italia, FastWeb, Vodafone Italy, Wind and Tiscali formed an alliance to co-invest in FTTP infrastructure. In summer 2010, said alliance launched a pilot project to 10,000 homes in a neighborhood of Rome, but has ambitions to connect 4 million homes if the pilot proves successful. Although the competitive landscape in France led many to suspect that FTTP deployment and adoption would be swift, the market hasnt quite evolved as anticipated. The announcement by broadband competitor Free in late 2006 that they would deploy point-to-point FTTH led another alternative operator, SFR, to announce its own plans for PON deployment. Incumbent Orange (France Telecom) soon followed suit. In addition, cable operator Numricable in that same period underwent a massive network upgrade to DOCSIS 3.0 with 4.5 million homes said to be high-speed broadband enabled (about half of Numricables national footprint). Despite the flurry of announcements however, regulatory battles, execution issues and lack of clear strategic vision on the part of the players involved led to a situation where deployment is

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limited and adoption even more so. The latest figures from national regulator ARCEP indicate 100,000 FTTH subscribers and 350,000 DOCSIS 3.0 subscribers (for respective footprints of 1 million and 4.5 million). Portugal is probably the most active European country in terms of FTTP deployment, a consequence of visionary regulation on duct access and government loans to facilitate the financing. Incumbent Portugal Telecom, cable operator Zon Multimedia and competitive players Vodafone and Optimus have all deployed infrastructure to a greater or larger extent. Overall, 1.4 million homes (about a third of the country) is eligible for service, but only 100,000 customers have actually subscribed so far. Elsewhere on the Mediterranean coast, the ambitious plan to deploy a state and European financed national FTTP network in Greece, announced in 2008, has stalled. The government change and economic turmoil the country has faced explain in part this lack of advancement. In neighbouring Turkey, private operator Superonline is actively deploying FTTP. Present in Istanbul and 10 other major Turk cities, the Turkcell subsidiary connects 600,000 homes and boasts 200,000 customers. In other countries in Europe, various degrees of FTTP announcements have been made but little implementation has been seen yet. Openreach (the functionally separated infrastructure entity of the BT Group) announced an ambitious plan to connect 10 million UK homes with superfast broadband, 25% of which should be FTTP, but the deployment has so far focused on fiber to the cabinet (FTTC). In Germany, Deutsche Telekom has announced a plan to deploy to 4 million homes, but there seems to be little actual deployment yet. Telefnica in Spain has been talking about FTTP since 2008, but again no significant deployment has been seen. In Switzerland, Swisscom has signed collaborative deals with energy companies to build FTTP infrastructure to alleviate the risk of seeing a parallel wireline network emerging, but although deployment has begun, these projects are still considered to be in the pilot phase. In Belgium and Ireland, although there have been talks of FTTP plans, none of the market players have made any significant moves in that direction.

Americas
The largest FTTP initiative in North America is the deployment of Verizons FiOS, mostly on the east coast of the United States. Verizon serves close to 4 million customers with FTTH service for a footprint of 15 million lines. FiOS is very successful financially with ARPUs close to USD 140 per month. Despite this success, Verizon announced in 2010 that they were putting further deployment on hold and focusing on commercializing services over FTTP for the foreseeable future. There are no other such large FTTP players in North America since Verizons largest competitor AT&T has decided to deploy FTTC; however, there are other, smaller, FTTP operations, either private players like SureWest in North California and Kansas, or municipalities like Lafayette in Louisiana or Chattanooga in Tennessee. The biggest question mark for the North American market at this point in time is to understand how Google will deliver on its promise to build a test bed Gbpsenabled FTTP network under an open-access model for one of more communities yet to be announced. Local Governments are waiting for this project to move forward before weighing up their own plans for municipal fiber. In Canada there has been little actual deployment even though Bell Alliant has announced ambitious plans to upgrade its footprint to FTTH in the face of fierce competition and market share losses to cable. In Latin America, actual deployment is only seen in Brazil where Telefnica has an operational large-scale pilot for 200,000 homes in Sao Paulo, and has announced that it would extend that project to reach a total of 2 million homes within the next few years. Competitive operator GVT has a significant hybrid FTTC and FTTH footprint in Brazil as well with over a million customers. In other parts of Latin America, there are deployment projects but no significant commercialization yet. Chile might be the location of the next wave of investment since Telefnica announced in late 2010 a project to fiber up 700,000 homes.

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III - Fiber Drivers

Despite the seemingly impressive overview that forms the first section of this report, there are many more countries and regions with no FTTP deployment than regions where deployment and adoption are booming. In this section, we will examine the differences between these two types of regions and try to assess what the drivers to deployment are for a variety of players. Drivers are, of course, different for different types of organization, and its important to distinguish between drivers that may lead a player to deploy an infrastructure, and drivers that may lead a player to want another player to deploy an infrastructure. For the purpose of clarity, we will distinguish between three types of private players and two types of public players.

Drivers for private players

The positions of private players are essentially determined by whether they own a legacy copper network or not, and whether they have established positions in the market. That leads us to identify the following categories of players: Incumbent operators are players who own a legacy copper network and have established positions in the market. They dont have to be ex-PTT and they dont have to be regulated although they often are both. Examples of incumbents include Orange (France), Airtel (India) or Verizon (US). Competitive operators are players who dont own a legacy copper network but have established positions in the broadband market, generally through regulated access to unbundled copper local loops. Examples of competitive operators include Wind (Italy), Tele 2 (Sweden) or KDDI (Japan). New entrants are players who neither own a legacy network nor have established positions in the market, but may nonetheless deploy an FTTP infrastructure. Examples include Altibox (Norway) or City Telecom (Hong Kong).

Note that there are also drivers for cable operators to migrate towards FTTP, but as these drivers are complex and highly market or player specific, they will not be covered in this report. Exhibit 2 summarizes the drivers for each category of private player.

Incumbent operators
For incumbent operators, there are essentially three drivers (although the case of emerging markets can be somewhat different as highlighted below). The main driver, and the one that has overwhelmingly led to FTTP deployment by these players, is network layer competition. As long as an incumbent enjoys a monopoly position in the provision of network infrastructure, there is very little incentive for said incumbent to deploy a new infrastructure while the old is profitable and functional. However, as soon as such a player starts seeing line switching (i.e. customers disconnecting from its network completely) the situation changes. The competitive threat is most often from cable, and this is what drove KPN in the Netherlands, Swisscom in Switzerland and Verizon in the US, for example, to start deploying FTTP. Another positive incentive for incumbents is the opportunity to enter the TV distribution business. In markets where the addressable opportunity for premium TV is still significant and/or where the existing providers of TV content (cable or satellite, usually) have an image or customer satisfaction weakness, this can be a powerful driver. Its worth noting that this driver is not just one for developed markets, but can be even more relevant in emerging markets where the copper network might not allow for any IPTV distribution and where the addressable market is much more significant. In both emerging and developed markets, content distribution is a high-ARPU potential business and therefore can strongly contribute to an FTTP business plan. This was another driver for Verizons FTTH play, and is also a determining factor in the moves of China Telecom and China Unicom towards FTTP deployment. One would think that meeting customer bandwidth needs would be the first driver for FTTP deployment, but it isnt. In fact at this stage in time bandwidth needs are perceived as a negative driver: since most incumbents havent found reliable ways to monetize the use of extra bandwidth, they see the increase in usage with dread as opposed to excitement. Negative Diffraction Analysis | www.diffractionanalysis.com

driver though it may be, growth in end-user bandwidth will become an unavoidable fact in the next few years as emerging content and applications, and the multiplication of end-devices in the home (especially tablets) continue to pressure the access network. Developed markets have reached a certain level of saturation in broadband subscription, but that isnt the case for many emerging markets. India, for example, only has 10 million broadband subscribers for a population of 1.3 billion. Even accounting for the limitations in purchasing power, the addressable market remains considerable but is limited by the quality of the copper currently deployed. In such countries, FTTP can be a driver not just for IPTV, as seen above, but also for basic broadband connectivity. The overall revenue potential combined with the lower cost of deployment in such countries can make the business case more compelling, which explains in part why players like Telekom Malaysia or Telefnica (in Brazil) have undertaken sizeable FTTP deployments.

Exhibit 2: Drivers to FTTP for private players

Source: Diffraction Analysis, 2011

Competitive operators
Competitive operators find themselves in a strange position as a consequence of the looming access revolution: their current existence and business model are predicated on the capacity to lease a copper network they dont own. As a consequence most of these players dont consider the access revolution as an opportunity to deploy their own infrastructure, but instead see their economics being degraded by less favorable conditions on the new infrastructure and a painful transition from old to new. As a consequence, for them NGA is essentially a regulatory play. There are, however, a number of initiatives from competitive operators in FTTP worth examining. The most important driver for competitive operators to deploy their own FTTP infrastructure is the opportunity to transform access network rental charges into investment. In other words, instead of paying roughly one third of their broadband revenues back to the incumbent as line rental charges, they decide to invest that money into a network that will be their own. The promise is a radical improvement of their economics once the FTTP infrastructure is paid for. Free in France was the first operator to look at things this way and decide on a deployment purely on that economic basis. One of the success factors of this approach is concentrated market share: the model only works if a competitive operator can hope

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to migrate a large proportion of customers in a given area to the FTTP infrastructure. This logic has led competitive operators Wind, Vodafone, FastWeb and Tiscali to join forces in Italy and initiate the deployment of a shared FTTP infrastructure: individually, none of these players could hope to reach the critical mass of customers in a given area, but collectively they do. Other reasons for competitive operators to deploy FTTP exist, but are largely determined by local market conditions and especially the opportunity offered by incumbent failings to deploy decent broadband service. This is just as much an opportunity for new entrants as it is for competitive players, and by and large competitive operators tend to be more risk averse.

New entrants
By nature its difficult to categorize new entrants as they can come from all kinds of backgrounds. Nonetheless, the biggest trend in FTTP is for utility companies to make a lateral move into what they see as an adjacent utility market. For utilities (companies that already own and operate networks and are used to long-term business plans), FTTP can look like a perfect fit provided that it is managed as a utility. This trend, however, seems to be prevalent only in countries where the utility footprint is geographically fragmented. In countries where electricity or water companies are national in scale, the trend is non-existent. Examples abound, from Altibox in Norway to Chattanoogas EPB in the US to numerous initiatives in Denmark and Germany. The propensity of utility companies (and more generally new entrants) to seize the FTTP opportunity is largely determined by the inaction of incumbents, leading to an inability to serve customers with adequate broadband and associated services (especially IPTV). This is particularly true in Tier 2 cities, usually considered secondary markets by incumbents although, as demonstrated by City Telecom in Hong Kong, the situation can also occur in dense urban areas.

Drivers for public players

The trend in public action in the last few decades when it comes to telecoms has generally been one of less involvement rather than more. Decisions to liberalize markets and privatize incumbent players, however, were made at a time where network and services were one and the same and served a single purpose: offering telephony services. The emergence of IP communications and the internet led to a fundamental shift of the network assets to multi-purpose service delivery, but equipment innovation allowed the network to be upgraded in relatively painless ways without necessarily (depending on regulatory context) sacrificing competition. The next step (NGA), unfortunately, isnt without its pains and while governments had largely focused their policy tools on other aspects of the economy and society, the future of national and local networks is again at the forefront of their collective minds. Governments, local and national, are driven to a more or less interventionist approaches based on the market context and their perceived need for NGA. Exhibit 3 highlights the various drivers for governments to either attempt to accelerate NGA deployment and adoption or to directly intervene in making it happen.

National Governments
National governments have many reasons to want to see FTTP develop and become adopted fast in their territories, but essentially all these reasons (at least until now) boil down to one: economic growth. The link between broadband adoption and economic growth has been amply demonstrated by economists, and governments anticipate that superfast broadband as enabled by next-generation access infrastructure can generate a further round of innovation, job creation and thus economic growth. The connection between quality of national infrastructure and attractiveness to foreign investment has also been demonstrated and governments hope that deploying a state of the art broadband infrastructure can be a strong factor to convince foreign businesses to invest in their territories instead of their neighbors. When the above is well understood, governments start to put in place policies to encourage investment, but dont necessarily feel the need to invest themselves, or otherwise intervene in a more direct way. Typically, governments will try to facilitate deployment by: Diffraction Analysis | www.diffractionanalysis.com

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generally easing the administrative burden, for example, by simplifying digging authorizations; pass laws or encourage regulation designed to maximize re-use of existing infrastructure (ducts and poles in particular); pass laws to lower hurdles to penetrate multi-tenant buildings.

The Portuguese regulation on duct access in 2005 or the 2009 French laws to limit the ability of residents associations to block access into multi-dwelling units for network operators are examples of such legal or regulatory measures. There are circumstances, however, when national governments feel the need to intervene directly in getting the network deployment off the ground. Generally this intervention is in itself relatively light and aimed mostly at ensuring that areas where no private business case exists for FTTP can be covered with partial public funding. France for example set aside a EUR 2 billion envelope from its national loan (grand emprunt) to help co-finance fiber network deployment in rural areas. In some instances, especially when the incumbent operator has regularly indulged in anti-competitive behavior, the state can take a more radical stance, as exemplified in Australia. Telstras repeated breaches of regulation and general contempt for regulator AAAC led the Australian government to a massive AUD 27 billion investment over 15 years to deploy a national FTTP infrastructure through a public company (NBN). This will result in the effective structural separation of incumbent Telstra in parallel with the FTTP deployment. New Zealand has gone down a similar route and for similar reasons. Similarly, in countries that have a perceived or real lag in terms of broadband infrastructure and usage, the willingness of politicians to intervene might be higher. This explains why Washington goes abuzz every time the OECD releases its international broadband rankings: the US is slipping, and incumbents are quick to point out that the numbers are wrong, that the rankings are wrong and that there isnt a broadband issue in the US. They are fully aware of the risks: if the rankings become too low, political will might be mustered to enforce some structural changes that the incumbents want to prevent at all costs.

Local Governments
The needs and expectations of local governments in respect of broadband infrastructure are roughly comparable to those of national governments, except that the issues, where they exist, are more acute and that the means of action, being on a smaller scale, are generally easier to mobilize. As a consequence, while examples of direct intervention on a national scale are few and far between, similar examples on a local scale are much more numerous. Local governments want state-of-the-art broadband for all the same economic reasons that motivate national governments, but the consequences of the absence of broadband can be more readily felt: lack of investment means fewer jobs, and fewer jobs mean families move out. In other words, its not just a matter of economic competitiveness; its also a matter of economic survival. Furthermore, with the remote work possibilities offered by good quality broadband, municipalities in rural areas see it as a vital link to enable people to work in places other than where their business is. While no national government has truly embraced the potential of broadband to redistribute the workforce in service jobs on a massive scale, some local governments like that of Amsterdam are trying to tackle the issues of job location and commuting by encouraging the development of FTTP-enabled, decentralized work locations in suburbs. When local governments feel that the available broadband service offered by private players will not allow them to survive in the long term, they take the matters into their own hands. In many countries in Europe and North-America in the last decade municipalities have deployed their own fiber infrastructure, from dozens of Swedish towns big and small to European capitals like Amsterdam to Tier 3 US cities like Lafayette, LA. These projects are complex to set up and usually take time to be deployed and commercialized. They often face legal and political opposition from incumbents and cable operators (as well as the occasional competitive operator) and frequently have to deal with complex financing models, whether fully public (municipal bonds in the US) or public private partnerships (as in Amsterdam). There is, however, a near immediate benefit for local governments deploying their own FTTP infrastructure, and that is a significant reduction in their own internal IT costs as they no longer pay (often) extortionate rates to incumbents for their internal networking. When these costs are too high, that alone can constitute a reason to envisage the deployment.

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Exhibit 3: Drivers to FTTP for Governments

Source: Diffraction Analysis, 2011

IV - Conclusions and recommendations

There is a general consensus amongst governments and operators that next-generation access needs to be deployed in the relatively near future. The drivers for public entities are clear and well understood. However, the main players who should naturally be involved in deploying the next-generation infrastructure only tend to react when faced with a clear and present danger of losing their monopoly or quasi-monopoly in infrastructure. Furthermore, when incumbents embrace FTTP they hope (secretly or not so secretly) to regain market share in the broadband market, as was the case with NTT in Japan. Regulators are often blamed for a relative lack of dynamism in deployment, especially in Europe and North America. Yet what is often called regulatory uncertainty by incumbents is simply regulation that doesnt easily let them maintain or reestablish dominance on the market. Lack of incumbent initiative creates an opportunity for other players (competitive operators, utilities) to deploy their own networks, and regulation, especially in Europe, has encouraged this framework of infrastructure competition. It is becoming clear, however, that there will be very little effective competition since the business potential of most markets cant sustain more than a single FTTP deployment. The issues related to FTTP deployment incentives wont be solved by simply looking at the investment. The solutions are holistic in other words they need to address the needs of (and issues raised by) all players involved, all the way to content and application players and will lead to structural changes in the market. In particular, if the incompatibility between current telecom business models and long-term investment prove irreconcilable, governments and regulators will need to examine the potential roles of other players, public or private, to allow the next generation of network to emerge. Here are some high-level recommendations to the various players in the ecosystem who want to see NGA networks in the not too distant future:

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Recommendations for incumbents

The waiting game is no longer a winning game: Indecision or active stalling are become massive risks for the future of incumbents as the dominant infrastructure players. An incumbent who wishes to retain that role in the market needs to start to upgrade its outside plant fast, or risk losing sections of its territory to public or private initiatives. One way to look at the long term is to separate services and infrastructure: Structural separation may be seen as the big bad regulatory threat, but its also a sensible way to disentangle business models that have widely divergent timeframes. It could allow the infrastructure offshoot to find appropriate long-term funding and the service offshoot to compete on a wider geographical basis. The solution to future service revenues is not in net discrimination: Incumbent policy people often tie investment in infrastructure to the end of net neutrality. This is misguided and counter-productive: revenue-share models on the basis of bandwidth wont allow the internet economy to thrive (which in turn would degrade the value of access products) and would be grossly insufficient to pay for the network investment. Incumbents need instead to stake out their service territories and aggressively build portfolios instead of watching the content and application players slowly replace them.

Recommendations for competitive operators and new entrants

A successful infrastructure project is one where demand grows fast: Successfully entering a market already served by one of more players requires preparation and demand build-up. High initial demand ensures that incumbents and cable cannot easily respond (because their economics are degraded by the smaller addressable market). This points either to pre-sell strategies or commodity approaches to broadband. Collaborative models work: Another way to ensure demand build-up is to have several service providers offer services on top of the infrastructure. This means open access, collaborative builds or both. If service providers can share access to cell towers, they can share access to fiber infrastructure.

Recommendations for governments, regulators and policy makers

Collaboration should be encouraged: Collaborative deployment models also make sense for policy makers and governments. A shared infrastructure is inherently more economical and this will extend the reach of privately funded deployment. Public money can then be injected in such a structure for an even wider coverage. The temptation to protect the incumbent as the sole network player through policy or regulation should be resisted. Facilitate build-up through policy and regulation: Policy and regulation should be geared towards facilitating deployments: ensuring availability of underlying infrastructure like ducts and poles; ensuring that public money spent on digging (typically in electricity network burial and water mains renewal) is leveraged for FTTP roll-out by laying ducts before the trenches are filled; and ensuring that service providers can get easy access to multi-dwelling units for network deployment. Examine how public services and governments can leverage FTTP: If local and national governments, through public services or e-administration can become anchor tenants for FTTP networks they will accelerate demand, which in turn will make the business models look better and accelerate deployment.

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