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Prospects for FTTH in Britain: considered slow

So, with two major US carriers rolling out fibre to the home, a string of European cities doing the municipal-fibre thing, Iliad fibreing-up their own network in France, and Japan and Korea having long started wiring up whole apartment buildings, how soon will the UK get cracking? Telco 2.0 went to the Broadband Stakeholder Group’s conference to find out.

Background to the issue

The broadband incentive problem tells us how there’s little incentive for network owners to invest in networks when they can’t capture much of the incremental value of the traffic. One way out would be to make a radical cut in the underlying incremental costs of bandwidth, and to stretch budgets further. And that’s precisely what we’re seeing all over the world, as operators upgrade in order to substitute new CAPEX for old OPEX.

There are many ways of doing this: deploying fibre, DOCSIS 3 cable systems, and advanced wireless in the access loop; moving to technologies like Carrier Ethernet inside their networks; and substituting peering for transit whereever possible. Mobile operators are increasingly pulling fibre to their cell-sites in order to cope with a rising tide of data traffic encouraged by the arrival of megabit-plus radio links.

Verizon estimates that it saves up to 70% of OPEX on every link it converts to FiOS. So you’d think the pressure would be on to get the fibre out there in Britain, a country criss-crossed with high-maintenance copper in a damp climate. The UK is also perhaps the guinea pig for the broadband incentive problem. But FTTH is further behind in the UK than almost anywhere else in Europe. So far there is literally no SOHO fibre access anywhere in Britain. What’s going on?

Correlates of Success

The first problem with a UK national FTTx roll-out is that nothing like that has been done before, so no-one really knows what is going to happen, who will benefit, or how much it costs. The BSG, however, has commissioned some research into experience from the existing fibre deployments. You can draw a number of conclusions from this, although it’s worth noting they didn’t include the major PON deployments in Japan, Korea or the US. So it was handy that Benoit Felten was around - we’ve included some slides from his presentation at the event.


For a start, it seems clear that locally-owned fibre is more likely to succeed. Relatedly, the crucial variable in the success or failure of a deployment is take-up; there is a strong link between community ownership and adoption.


Secondly, open access is correlated with success. The most successful fibre builds are the ones that practice open or shared access at a low level in the protocol stack. Thirdly, Ethernet is to be preferred to GPON, etc. — it’s not clear whether this is inherent in the technology, or whether it is because the successful open-access, locally-owned builds chose it for other reasons. And finally, layer zero is king. Perhaps the defining factor is how easy it is to get access to civil works, which represent around 70% of costs. It’s easiest to deploy fibre by linking up apartment blocks, especially new buildings where the infrastructure can be put in during construction.


Unfortunately, this is much more helpful in Paris or Amsterdam than it is in a sprawling British suburb. Here, it’s unavoidable that anyone deploying fibre will have to cover a lot of trench mileage - so who’s going to pay for that? The owners of the existing infrastructure are of course BT and Virgin Media. BT has been politicking with the government for years about the fibre question, and we’ll come to that later. But first, let’s put on record that Virgin didn’t come to the BSG. With their own infrastructure, and no annoying open access requirements, plus a permit from OFCOM to call their co-axial network “fibre optic” in adverts, their plan appears to be simply to ignore the issue. So much for that option. And to be fair, the Virgin Media network seems to be excluded from the options considered in the Plum Report commissioned by the BSG.

The Politics of Openreach

The other national network is of course that of BT Openreach, chartered steward of the copper wires. In their role as wholesaler to all the ISPs and alt.nets, they are the obvious choice. But Openreach, and BT more broadly, is in a very strong bargaining position — and they are determined to extract a high price, in terms of regulatory concessions, State funding of the deployment, and actual pricing of both the future network and their existing one. BT shareholders would expect nothing less. There is a two-level game in progress, on the upper level of which OFCOM, DBERR (the Department of Business, Enterprise and Regulatory Reform - the former Department of Trade and Industry), and Openreach are negotiating about fibre, and on the lower level of which OFCOM, Openreach, and Openreach’s customers are negotiating about Openreach’s regulated pricing. This obviously strengthens the hand of BT, as it can play the two levels off against each other, by demanding higher prices in exchange for fibre deployment or holding fibre hostage to pricing negotiations.

The good news is that Openreach CEO Steve Robertson, going by his contributions at the BSG, is conscious of the telecoms industry’s crisis. Openreach (and BT Wholesale) face a complex optimisation problem in the lower level of the game. They quite reasonably want to maximise their revenue, and doing so requires first of all that they square the regulator. But if they push the price up too far, they will kill the ISPs, even if they don’t fall out with OFCOM first. So Steve Robertson has to simultaneously pursue a maximal regulatory goal whilst also persuading OFCOM that if they give him the pricing power, he won’t push it too far. He appears, fortunately, to be aware that there is a significant risk of ISPs collapsing, which would leave Openreach faced with perhaps two national ISPs, and thus be put in a very difficult negotiating position.

Customers, however, much as they would love to have fibre access, are not being heard in the upper level of the game, so they have no other option than to oppose any increase in regulated prices and hope that something will turn up. OFCOM is marginally more sympathetic to them than DBERR. The worrying thing is that unlike BT, neither Government agency seems to be aware that there is anything wrong. Both OFCOM and DBERR representatives at the BSG seemed to believe that the ISP market is currently in a stable equilibrium with genuine competition, rather than its costs exploding (and being substantially determined by a monopolist), while a price war holds down their revenues to unsustainably low levels.

The Broadband Crisis

A British DSL provider can be modelled as having two substantial costs — BT, and everything else — and one source of revenue, subscribers. Under BT there is the cost of IPStream service, which is billed per-bit, or LLU rental, and BT Wholesale backhaul (which also scales with usage). Under ‘everything else’, we have the costs of electricity, salaries, rent, and capital. Given that there is little difference in the CAPEX requirements of any two DSL providers of the same size, that their requirements for premises and power are essentially the same, and there is a free market in network engineers, it’s fair to assume this will be much the same for everyone. Similarly, the BT bill is largely determined by two factors — the OFCOM-regulated price, and usage. (There is potential for some variation due to different cost-structures, for example the proportion of LLU versus IPStream lines, and the fraction of backhaul which is subject to actual competition. However, these are in the nature of a one-off shift.)


With a small number of ISPs in the market, we have the classical conditions for oligopolistic price stability. Whoever raises prices first, or fails to match a price cut, loses customers to the others. Whoever cuts first will gain volume, but only by losing margin. In the absence of collusion, there is no force for rising prices, but there is the temptation to initiate a price war. So the price tends to be a) stable, b) identical, and c) held down by occasional price wars. (This is not a unique phenomenon to telecoms, and is observed across a wide range of network industries from airlines to power generation, and may be an inherent feature.) The low cost of bandwidth to the end-user encourages soaring usage, so the BT bills go up - but revenue doesn’t. Cost and income are diverging like the blades of a pair of scissors. Hence our argument that the only way out of the crisis is to separate out the access layer through shared, community-owned, or structurally separated ownership, and to create new sources of income through two-sided business models.


It was precisely this that was missing from much discussion. The social and economic welfare benefits of fibre remain unclear, despite much research. Solid data is hard to get. There is little or no discussion at all about the fundamental premises of the ISP business model. Discussion of the costs of fibre was more substantial, but we have little or no confidence in any number whose variance spans from £5bn to £20bn. Customers and FTTH advocates have obvious incentives to low-ball the costs, and Virgin and BT have equally obvious incentives to be very conservative. Also, these estimates only cover the cheaper, urban and suburban 80% of the country, and they are based on data from the US, where the relevant law is different and land is cheap.

From Diagnosis to Treatment

The only way to clarify this is to test reality through an experiment — actually lay some fibre and find out. Francisco Caio’s government review, it is said, may conclude that duct sharing could dramatically cut the civil works requirement, but then again no-one really knows. OFCOM is arranging for a sample of BT’s assets to be audited, which should throw some light on the subject but will also raise the problem of the terms on which such sharing would take place.

Unfortunately, the only actual deployment going on is likely to tell us next to nothing. The build at Ebbsfleet New Town is, as the name suggests, part of a new town, so the fibre can be installed while work on other services requires trenches to be dug. Therefore, the civil works costs will be minimal. As always in Britain, though, the vast bulk of the work will require the upgrading of old infrastructure, of the Victorian legacy — which can’t be done without digging up the wires specifically for this purpose. We’ve faced the issue with our crumbling water infrastructure, and the answer has proven to be extremely costly. Emma Gilthorpe of BT pointed out that even the idea of a local exchange is one of these legacies. They were after all created and sited to provide voice service only, as far back as the days of manual frame switches. KPN, for example, are busy getting rid many of theirs, and moving to street cabinets.

The good news is that some people are experimenting — notably the community and municipal fibre guys. Rural broadband activists who successfully pressed for the deployment of ADSL to their areas are now part of an informal coalition with open-access advocates and some of the UK’s city councils, regional development agencies, and devolved administrations. As a Cumbrian community broadband activist pointed out, during the fight for ADSL, it was routine to find that once the equipment was installed in a local exchange originally considered uneconomic, the demand would follow. And further, if you found it difficult to get ADSL, you’re the last person a hypothetical private-venture build would serve. Reasonably large community projects which should provide more meaningful data than Ebbsfleet are now in the works, including South Yorkshire, an EU-funded project covering about 3% of UK lines, and Cornwall, although this one is in the very early stages.

One, Two, Many FTTHs? A Local Solution

This brings us to a major constraint on the debate. OFCOM, DBERR, BT and many other people, mostly in London, are thinking purely in terms of a massive national network managed by one regulated organisation. They can’t decide what its scope-and-scale should be, who should finance it, how it should repay them, or on what terms it should deal with others. The Telco 2.0 solution is to turn away from the idea that the fibre build must be one ring to rule them all; instead, what kind of a solution would work best for an incremental deployment (like this post), encouraging community, public-sector, or independent business actors to contribute?

BT has expressed a willingness to extend backhaul fibre to reach community-owned local access networks, so it shouldn’t be that hard. Perhaps, at a minimum, BT should create the interconnect option for cities, co-ops, ISPs, universities, government, property developers, or indeed anyone else to go further and pioneer FTTH? It might not be an ideal solution — but it might well be the best one on offer.

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A detailed assessment of the situation.

The need to fibre those areas where ADSL is still a non-functioning utility (ie rural and remote, but also in some cases urban - see the ABC/CBN Notspot report http://www.broadband.coop/Reports-Presentations/CBN-Notspot-Report-Summary.html)
must also be mentioned frequently. Thank you to Anna Bradley (Chair, Ofcom Consumer Panel) and Ashley Highfield (BBC) for making this priority public at the BSG event.

Those of us who still endeavour to live, work and play without what could be under any terms considered 'broadband' (and yes, I am the Cumbrian rural broadband activist mentioned in the article, and author of the book - thanks for the link!) are now actively looking to dig where we live.

This is likely to be a solution pursued by many, and as such can be seen as community networks 2.0. The telcos have failed many of us with first generation broadband, as have the gummint departments and RDAs etc whose often short-sighted interventions did not lead to early NGA where they could have done eg Project Access etc.

As consumers, we are now unable to operate in our daily lives without bringing ourselves 'up to speed' as it were, and as others have pointed out since the BSG conference in their blogs (eg Benoit, Dave Brunnen etc), a patchwork of solutions may be what we get, which will include small-scale rural projects as well as muni and urban ones.

However, it is good to consider that finally, as consumers and communities, we may well now be able to JFDI this FTTH lark ourselves (although I think we will see an upsurge of Fiwi - fibre-->wireless - before full community FTTH), and even possibly pre-empt national activity (and hence regulation) by creating successful co-op networks without involvement from telcos, incumbents, RDAs etc.

And the feeling is that we will have to JFDI if we want to watch any of the Olympics in our fair land over anything than a prohibitively expensive mobile connection.

Bring on the Fibrevolution!

What I find annoying about the whole UK FTTH situation is that there is no plan!

Other countries are deploying fibre networks and gaining plenty of customers, whilst we're still waiting for BT to decide what to do. I could understand if deployment was limited to densely populated areas, but having no deployment is just typical of this country.


Very helpful. Is this Keith or Martin writing?
A few bits.

DOCSIS 3.0 really is good, with a likely 50-100 meg in both directions. Another year of bugswatting, but I'm close to the technology and it can be amazing.
I'm pretty confident I can guess what would happen if the government and BT cut a deal to fiber as fast as practical. I've watched Verizon closely, and the Asians with a little less certainty.

Verizon took three years to carefully scale up to the current 3M/lines a year. I believe that was smart, and that it will take two or three years to train the construction crews, get the systems working, and be ready to escalate. By the fourth year, Verizon is now deploying efficiently, and could easily do 4-5M a year if they chose to spend the capex.

There's every reason to expect an efficient UK operator to be able to do similar. That would be a ramp of very slow for six months, a million the first year after that, 2 million the second year, and 3-4M in the third year. That's been Verizon's pace, which is now hitting 12M in year 5. With the technology now much more developed, I'd expect BT would do at least as well. That means you can expect to cover 60-80% of the UK in 4-5 years.

The UK build will have the advantages of everyone else's experience and much lower equipment costs. (100 - 150 pounds for the gear in 2010.) As you note, the U.S. in more spread out, so you probably will require less digging.

On the other hand, Verizon is doing a lot of this with cheap, non-union contractors, something less likely I believe over there. So I'd think the costs of the fibering the first 70-90% over there should be similar to Verizon's results: $1500/home going down to $1000 or a little less.

BT's internal estimate of opex savings was over 80% a while back, although that may have been optimistic. Verizon has proven the savings are big.

We've got 20M lines installed, which gives us a lot of data to make an informed guess.

On the structure of the UK market, I'll let you folks decide if muni/cooperative/local builds are the way to go. I'm an old leftie, myself, but I also admire efficient private companies. If the industry stays about as it is, I think you are on target seeing an vicious cost squeeze on everyone too small to have their own backhaul. That leaves CW, Sky, Virgin, and maybe BT Retail and a group of dwarfs most of whom effectively become resellers, if they survive.
I say that because their incremental bandwidth costs are much lower and headed down. Adding routers to get more capacity out of your fiber is not free, but over the likely range of traffic (Cisco's 46% growth through 2012, etc.) is really small. (1-5% of the price of the service.) While it's not absolutely too cheap to meter - bandwidth isn't quite free - many of the carriers in the states don't meter (Verizon, AT&T, Qwest) or don't meter/cap until 100 gig or higher. (Comcast just suggested 250 gig as the cut point.) Neither do the French, and the actual cost of bandwidth to Iliad or Neuf is so low as not to be an issue.

Which suggests that the problem you're finding is the subscale ISPs in the UK who can't capture the fiber efficiencies. That's exactly what I'm seeing, leading me to think the most likely scenario is the UK quickly drops towards four carriers and perhaps some resellers. I don't like it, but unless the backhaul costs come down substantially (~20-40% per year), it's going to be hard to avoid.
(Not all independents guaranteed to fail, but that's the natural trend.)

That shouldn't be surprising because I can't think of another market that has anything like the number ISPs who expect to pay a role in the future. Most are at 1 1/2 or 2 1/2 (U.S., Canada, Germany, Italy, Spain, China) while the most successful are at 3 1/2 to 4 1/2. (France, Korea, Japan) Competition is a good thing and brings prices down most places.

This is presumably an artifact of structural separation, which worked extremely well at bringing down the retail price. Now that the wholesale cost is the main issue, the weakness of separation is showing. BT has an effective monopoly, and like any monopoly tries to keep prices up as you're seeing.

Which leaves the ironic result of structural separation requiring a very strong and effective regulator, because BT does have enormous market power. Strong and effective regulators are hard to find, of course. Ed Richards isn't tough enough as far as I can see, but I don't know him well. When the conservatives take over, I don't see an improvement here.

Which makes me wonder whether there is any future for smaller ISPs, under 2 or 3M subs. I think their only hope is CW or Sky reselling backhaul and driving down the price including BT, or the regulator forcing BT to do likewise. I haven't seen any reason to expect either, except CW cutting a deal with others two large to avoid. (?Vodafone, 02).

So the interesting question for me is what the market looks like if it mostly reduces to Virgin, CW, Sky and maybe retail, with no one else with the costs to fight in the market. I'm not sure what the resulting analysis will be, but I think it will be very different than the bandwidth cost focus of most in the UK. Bandwidth is only 1-3% of the costs at the largest carriers, and soon less than 10% at CW per their last financial presentation.

Separately, I don't think this will apply.

"The broadband incentive problem tells us how there's little incentive for network owners to invest in networks when they can't capture much of the incremental value of the traffic"

I just don't see the companies and markets working that way, jumping on to incentives. Few companies the size of BT can effectively change their way of doing things to jump into the opportunity implied by "incentives." Rather, everything I've seen in this business is that fear is the only effective motivator. Verizon is doing fiber because Cablevision scared them by taking as many as 30% of the customers. KT did DSL in the first place because Hanaro was taking customers. My friend Pip Coburn wrote a book on the Change Function, looking at who adopts technology. It looks like competition is far more effective than "incentives".

Which suggests the policy that will get fiber is to encourage Virgin to compete well, and scare BT with support of local or new entrants in the other 45% of the country. I'd lay odds the government money will go much further spent on small efforts that "incent" BT to spend their own money on building.

While active ethernet is the best for competition, most of the telcos outside of Europe are on GPON and GEPON. I join Vivianne Reding, the OVUM guys who wrote the report and just about everyone other than the incumbent carriers in preferring competition. Unfortunately, because of economies of scale competition will be very hard to sustain without, again, a strong efficient regulator. We'll see.

I've a few other bits you have me thinking about. I'll be working until around five New York time if you're in a talkative mood. Do touch base.

For those interested, the two reports that the BSG launched at this conference can be found at the following links:

'A Framework for Evaluating the Value of Next Generation Broadband' - www.broadbanduk.org/value

'Models for efficient and effective public sector intervention in next generation broadband access networks' - www.broadbanduk.org/psi

Just like to add a couple of minor clarifications regarding our reports.

First, "And to be fair, the Virgin Media network seems to be excluded from the options considered in the Plum Report commissioned by the BSG."

We do, in fact, consider the cable network in the value report. The report is based on a comparison between the counterfactual of evolution of the current environment, including upgrades to cable and limited fibre to new build areas, and scenarios for wide-area fibre deployment.

In this instance, any cable upgrade is considered in the counterfactual. This does add a layer of complexity to the estimates, as it is difficult to know how much value will be generated in the counterfactual as developments are uncertain. Nevertheless, it is explicitly considered.

Also, "The BSG, however, has commissioned some research into experience from the existing fibre deployments. You can draw a number of conclusions from this, although it's worth noting they didn't include the major PON deployments in Japan, Korea or the US."

In the models report, we were drawing upon projects with public sector involvement, rather than widespread commercial rollouts. We focused our attention on Europe due to the similarities of regulatory environment. We also drew on a couple of US examples that oculd highlight particular characteristics of intervention that could be helpful.

In the value report, we do make use of US data. Appendix C lays out evidence from the US, both from AT&T and Verizon, and our cost assumptions for FTTH (which are provided to give an indication of scale only, and are not accurate estimates for the UK) are based on Verizon figures.

It was good to have the Telco 2.0 team at the conference, and we'd be interested in any further comments you guys had on either of the reports.

While your arguments about the linear scaling of costs holds true for those ISPs which purchase IPStream, unbundled copper lines do not have the same issues with scale - true you still need to backhaul the traffic but this is no longer linear and in metropolitan areas where, by definition, most of the customers are there are many options for cheap backhaul.
In reality what we need in the UK is fewer operators. 2 seems typical in any one area in the USA but seems far too small - 3 or 4 major operators plus a small number of boutique players would allow some sensible prices to be set. At the moment there is zero differentiation between the offerings in the market (free laptops or modems not withstanding) so prices approach marginal cost. We've seen the start with some consolidation and no doubt there'll be a few players who simply vanish shortly - this is a good thing.
As regards the fibre incentive issue, ultimately we need to de-couple speed of access from price. Every operator will want to extract more money for higher speed services operating under the delusion that they're not commodity players but this concept only worked in the 80s and 90s when access speeds grew very slowly - now we see rapid growth and last years premium price product is todays average speed. Most end users know they can simply wait and get all that extra goodness for nothing. Community network players have built networks running as fast as is sensibly possible, something an operator would never do yet which is ultimately the cheapest way forward.

I am a developer of district heating nets. London is planning a major change to district heating from CHP rather than distributed gas, to capture the benefits of combined heat and power.

The installation of district heating provides an opportunity to install optic fibre economically, but how does the DH supplier make any money out of FTTH?

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