The (Slow) Fiber RevolutionBenoît Felten, CEObenoit@diffractionanalysis.com

Why a Fiber Revolution ?

• 2007 saw the birth of www.fiberevolution.com

• Why is it a revolution?• Abundant supply of bandwidth• Future proof wireline broadband• Opportunity for new entrants in the market• Opportunity to rethink social organisation around

universal connectivity

• In markets with advanced fiber penetration, the online service economy is thriving.

JapanSouth Korea

TaiwanHong Kong

Singapore

New Delhi

France

Portugal Italy Turkey

RussiaNorway

FinlandSweden

Baltic StatesNetherlands

RomaniaSlovenia

Sao Paulo

North-Eastern USA (VZ)

Chattanooga, TN

The reach of 100 Mbps service over Fiber is expanding

Places where 100 Mpbs FTTP service is available with more than 100k homes passed.

The Gigabit Race is On!

ZONEPB Fiber

TeliaBredbands Bolaget & 5 other ISPs

Superonline

NTTKDDI

T2 Slovenia

HKBNPCCW

ZONEPB Fiber

TeliaBredbands Bolaget & 5 other ISPs

SuperonlineNTTKDDI

T2 Slovenia

HKBNPCCW

Places where 1Gpbs FTTP service is available with more than 100k homes passed.

The Reach of Gbps Internet Service Still Limited

Why Gigabit?

Speed Sells

Gigabit Creates Differentiation

Real-Time is Addictive

And yet...

Q42008 Q12009 Q22009 Q32009 Q42009 Q12010 Q22010 Q32010 Q42010 Q12011 Q22011 Q32011 Q42011 -

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Average Speeds per Region(Source: Akamai State of the Internet)

EuropeAPACMiddle EastLatin AmericaNorth America

Aver

age

Spee

d (M

b/s)

1-2 quarter decline accross the board

Is wireline quality of experience degrading?

• Too early to draw definitive conclusions on the basis of 2 quarters of decline, but worth keeping an eye on.

• If there is continued decline, explanations could be: • Akamai’s data gathering methodology has changed• Economic crises causes customers to downgrade their

subscriptions• Quality of experience is really degrading

• Content is shifting to higher standards of quality, the number of devices pulling on set network resources is increasing but broadband access isn’t following suit.

The Incumbents’ Passive Resistance

• Incumbents that are not facing a very serious competitive threat on the network layer (from cable or from another FTTP new entrant) have no incentive to aggressively deploy NGA:• They already own a very profitable (though obsolete) infrastructure• They are no longer structured for long-term investment

• Incumbent resistance to FTTP takes different forms.

Fiber to thePress Release

The incumbent makes numerous announcements,

but doesn’t actually implement much if anything

(France…)

Manipulating Future Needs

The incumbent insists that the broadband needs of users is not so high (and even gets

broadband redefined in that direction…) (US…)

Siphoning Public Subsidies

The incumbent convinces local and national

governments that any public subsidies for broadband

should go to the incumbent (UK…)

Litigate, litigate, litigate…

Mythbusting: There is no FTTH/B “demand issue”

0 2 4 6 8 10 120%

10%

20%

30%

40%

50%

60%

70%

Orange PT

KPN

Superonline

TEO

Verizon

Networx

Altibox

HKBN

Bredbands Bo-laget

Take-up vs years in operation

Years in operation

Take

-up

acro

ss d

eplo

ymen

t

• Despite some variation on a project by project basis, take-up is generally a factor of time.

• Acquisitions strategies aim to accelerate take-up

• Premium strategies tend to slow it down

• Larger projects and incumbents have generally lower take-up

Mythbusting: FTTH/B ARPU on average is 46% higher than DSL

+ 46%

• When comparing FTTH/B Average Revenues Per User (ARPU) with DSL ARPU for the same player (or, in case of FTTH/B only players for the incumbent in the same market), across the sample we see that on average FTTH/B ARPU is 46% higher.

Average DSL ARPU Average FTTH/B ARPU0

10

20

30

40

50

60

38

55

DSL ARPU vs FTTH/B ARPU(normalized USD)

Why FTTH/B ARPU is higher?

• Overall, FTTH/B prices are higher for equivalent service propositions (bandwidth excepted)

• FTTH/B customers tend to subscribe to more services (ie. more revenue generating units for the service provider)

• FTTH/B customers tend to buy more options and pay as you go services: premium channels, VoD movies, multi-screen options, etc.

• Examples:• On average 2.5 VoD per month on DSL and 7 on FTTH/B• 90% of FTTH/B customers have triple play vs. 15% on DSL

Competitive ARPU vs Incumbent ARPU

Competitive

Incumbent

DSLARPU

+ 121%

+ 172%

FTTH/BARPU

• Incumbent operators tend to be more cautious regarding FTTH/B pricing strategies.

• Competitive operators have to reduce the gap with DSL ARPU to develop their customer base.

• Incumbent operators have lower incentives to sell aggressively due to the revenues from copper local loop. They call it “managing the transition”.

Average DSL ARPU Average FTTH/B ARPU0

20406080

100120140160180200

94 114104

178

Competitive ARPU vs Incumbent ARPU(base 100 = average DSL ARPU)

Competitive Incumbent

Original and Compounded Policy Sins

• The original sin of telecom policy makers was not understanding that infrastructure and services operate:• On different timeframes• With different investment structures• With different skillsets• With different market dynamics

• The compounded sin of telecom policy makers is thinking they can find incentives for incumbents to invest in next-generation infrastructure.

• Policy makers need to wake up and smell the coffee: only by encouraging infrastructure renewal through new entrants (municipalities, utilities, new infrastructure players…) can they hope to

The Missing Piece

• Telecom funds don’t want to finance long-term infrastructure.

• Infrastructure funds don’t want to finance telecom players.

• Awareness of the infrastructure opportunity is rising!

The Revolution Will Not Be Television

• Betting on incumbents to drive next-generation access networks is misguided and will not work.

• Policy makers should focus on eliminating all barriers to alternative players – public or private – deploying infrastructure.

• Television is no longer the driver for NGA deployment and adoption. NGA should be viewed as very profitable long term infrastructure investment and funded on that basis, which would ensure: • a competitive landscape (optimal take-up realised through open access)• A universal deployment (if the right compensation mechanisms are put in place)• A future proof technology (as long-term investors seek revenue assurance)