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.