FTTH - Key for competitiveness
- Fixed and mobile operators are rolling out FTTH/B in developed and emerging markets as video and cloud services drive demand for high bandwidth
- The superior value proposition of 4/5P offers and the drive for futureproof network technologies results in simultaneous, competing rollouts in several markets
- Investment per home connected frequently ranges from US$600 to US$2,000 thus FTTH/B business plans typically suggest a payback period greater than ten years
- Delta Partners’ experience shows that seizing the first-mover advantage and mastering execution across planning, customer value proposition, sales, network rollout and operations are critical for success
The data revolution is pushing fixed and mobile operators across developed and emerging markets to roll-out FTTH/B as customers use video and cloud services across multiple devices.
Fixed operators facing stable or declining revenues and increasing operational costs (driven by legacy services and technologies) have embarked on comprehensive transformation programmes (see Delta Partners’ white paper, “The new era for fixed operators in emerging markets”). One of the key pillars of these transformation programmes is the FTTH/B rollout, which enables a superior value proposition, is future-proof and permits operators to simplify the network and optimise network operations. These rollouts are substantially advanced in China, Hong Kong, Japan, the USA and EU and GCC countries but are also in progress in countries including Brazil, Colombia and South Africa.
Meanwhile, “pure” mobile operators are also considering (and in some cases already rolling out) FTTH/B. In developed markets, the rationale is to defend against incumbents’ 4/5P offers (e.g. Vodafone Portugal). In emerging markets however, the rationale is to capture untapped growth potential in the home and SME segments (e.g. Turkcell, Mobily, Maxis Malaysia and MTN in South Africa and Nigeria) and to optimise investments in LTE networks (reducing macro sites) by enabling a strong converged offer.
Customers are clearly adopting the services with initial rollouts having already achieved healthy take-up rates, with more than 50% of homes passed having been converted into customers in some markets.
However, operators that have embarked on FTTH/B rollouts face significant challenges. The most significant is the business case, which is characterised by high investment, longer-term returns and high sensitivity to ARPL and take-up assumptions. Also, in cases where more than one operator embarks upon rollout at the same time, or where established cable operators exist in the market, meeting take-up expectations can be difficult. Finally, the operator may find itself constrained by its ability to create a strong content and VAS offer supported by an operator-controlled platform.
This is as much a challenge in emerging markets as in advanced markets, where operators find themselves competing not only with each other, but also with OTT players such as Google, Amazon, Netflix, Apple and Samsung who eagerly await a “bandwidth war” to enable higher adoption of their services.
Lastly, operators face a significant execution challenge which requires their organisation to master, often under significant time pressure, a coordinated rollout of network, service portfolio and sales channels.
In this whitepaper we provide a view of the current rollouts of FTTH/B, explore the business plan challenge and elaborate on the seven key success factors that an operator needs to consider in a FTTH/B rollout.
Delta Partners’ experience shows that seizing the first-mover advantage and mastering execution across planning, customer value proposition, sales, network rollout and operations are critical for FTTH success
Operators are rolling out FTTH/B across developed and emerging markets
Fixed and mobile operators are rolling out FTTH/B across developed and emerging markets.
The evidence is clear: FTTH/B is becoming a reality (see Exhibit 1).
Wealthy countries including South Korea, Hong Kong and the UAE already have high FTTH penetration as a percentage of fixed broadband connections, while countries such as China (the largest country by subscribers), Lithuania, Romania and Bulgaria are gaining prominence through the support of strong government incentives.
According to NetIndex1, five of the world’s top ten cities by average downlink speed fall within Lithuania, Bulgaria or Romania, the others being Hong Kong, Singapore, Seoul and Taipei. The top 30 ranking includes cities in Russia, Latvia, and Portugal, as well as from some other developed countries such as the Netherlands, Denmark, Sweden, Japan, France and UK.
Notably, there are no cities in the USA (“the centre of the digital economy”), Germany or Italy. It comes then as no surprise that Google is trying to heat up competition for AT&T, Verizon and Comcast by rolling out FTTH/B in Kansas City and Austin with other cities being announced. Just one week after this announcement, AT&T announced their own 1Gbps FTTH rollout in Austin, suggesting that it is indeed feeling the competitive pressure.
However, even those remaining low penetration markets are following the FTTH/B global trend. Operators in developed countries including Germany and Spain and in emerging markets including most LatAm countries, Saudi Arabia and South Africa have also recently declared their intentions to roll-out.
Furthermore, despite the high investment required, FTTH/B rollouts are not the exclusive domain of fixed incumbents. Evidence shows that simultaneous, competitive rollouts are occurring in many markets, with mobile operators such as Vodafone in Portugal, Turkcell in Turkey, Mobily in Saudi Arabia, Etisalat and MTN in Nigeria, and Vodacom and MTN in South Africa deploying or about to deploy their own infrastructure.
Insight for operators: Both fixed and mobile operators need to deploy FTTH/B to defend against a convergent strategy leveraging FTTH/B.
Customers are signing up for FTTH/B services
There are already more than 100 million FTTH/B subscribers in the world, of which more than 65% are in Asia and more than 7% are in EU27 countries. In Exhibit 3 we present information from some of the reference FTTH/B rollouts. The take-up achieved (customers as a percentage of homes passed) shows that customers are welcoming fibre services. According to our research, early FTTH/B rollouts have secured a take-up rate of 15-30% within four years of rollout (e.g. Verizon, Turkcell Superonline) and 35-70% within eight years of rollout (e.g. Altibox, HKBN).
This high take-up of FTTH/B is despite the ability of VDSL2 and cable (DOCSIS 3.0) to deliver the bandwidth required for most services. This is a function of the superior quality-of-service provided by fibre connectivity (GPON/NG-PON2 and Active Ethernet) which.
Insight for operators: 4/5P convergent offers anchored in FTTH/B will be critical across developed and emerging markets.
Although still in the early stages, evidence suggests that operators rolling out FTTH/B are gaining market share (see Exhibit 4) and, more importantly, growing revenues. For example, Portugal Telecom’s and Telefonica’s Q4’12 results5 in their home countries show positive trends in their respective Meo and Fusion services6: FTTH is a key driver of these services.
FTTH/B business case: Fixed incumbents have an advantage
The economic reality is that FTTH/B investment varies from US$600-2,000 per home connected. For a typical greenfield rollout, the investment ranges from US$800-2,200, of which trenching and in-buildingor in-community cost represents more than 70%. The average FTTH/B revenue per line is only US$17 higher than the average DSL revenue per line (according to statistics from the FTTH Council Europe).
Part of this ARPL increase is due to self-selection, i.e. high ARPL customers migrating to fibre, the remainder from real ARPL increase. If one considers the real ARPL increase to be US$8-9, then the typical rollout would require an investment payback period greater than ten years (in Exhibit 5 we present one emerging market example). However, evidence shows that in the case of very competitive conditions, the ARPL of FTTH/B may actually be lower than the initial DSL ARPL.
Country demographics, housing type, infrastructure conditions (street and in-building/in-community) and rollout extent explain the broad range. Operators rolling out in dense cities and with access to existing ducts (or over the air) face more favourable conditions and can potentially roll-out for as low as US$200-400 per home passed although operators rolling out in cities with low density and requiring trenching will likely face costs above US$800 per home passed (see Exhibit 5).
In situations with low density and unfavourable infrastructure conditions, the key questions for operators should be, “Where should we roll-out?”, and, “How can we accelerate take-up and secure high ARPL?” In the case of competing rollouts in the same geography, the operator should also consider the following two questions: “Should we partner to share infrastructure costs?”, and; “Should we wholesale to discourage competitive rollouts?”
Insight for operators: Carefully select rollout areas, explore infrastructure sharing with other operators and/or utility companies and push take-up to optimise the business case and reduce risk.
Government support can help, but can be risky for operators if not properly managed
Governments around the world are looking to FTTH/B and national fibre backbones as key infrastructure to support economic and social development.
Consequently, governments have intervened in countries including Japan, Lithuania, Malaysia, Portugal, Singapore, South Korea and the UAE. Homes passed in these countries range from 47% in Sweden to 95-96% in South Korea and Lithuania. Such intervention can take multiple forms, from infrastructure funding to market regulation (e.g. duct or connectivity wholesale) or building legislation.
Initial evidence from comparing the above countries with countries where government has provided little or no support (such as Denmark, Germany, Hong Kong, Norway and the USA) suggest that the key benefit of intervention is a much higher percentage of homes passed – the price of 2P offers tends to be very similar and driven by economics in viable areas.
Insight for operators: Government support presents clear benefits from a duct (street and in-building) availability and infrastructure sharing legislation perspective.
Fixed incumbents have a more compelling business case as FTTH/B drives operational efficiency by enabling the decommissioning of legacy services and technologies
Fixed incumbents, alternative fixed operators and mobile operators are all rolling out FTTH/B but the business case for an incumbent fixed operator is much more compelling.
The fixed incumbent business case is fundamentally based on deploying two very efficient and future-proof networks: 1) FTTH/B for residential and SME customers, and: 2) Metro Ethernet (“ME”) for corporate customers and mobile transmission8. This simultaneous rollout allows operators to “right size” their network and operations. Real-world examples have yielded multiple benefits including reducing the number of exchanges by more than 70%, significantly reducing the number of remote sites (especially versus VDSL rollouts which increase the number of remotes) and decommissioning legacy technologies and services. All this reduces network operation costs (e.g. rentals, maintenance, power and – ultimately – operational staff).
The only caveat underlying these improved efficiencies and their bolstering of the fixed incumbent business case is that the benefits can only be fully realised when the operator successfully migrates all their customers within a significant geographical area to FTTH/B, ME or LTE/HSPA+. This gives rise to very aggressive migration strategies, in most cases with a price reduction on FTTH/B and ME services when compared to legacy services. This process must be carefully managed to prevent revenue erosion in the enterprise and wholesale segments.
Insight for operators: Fixed incumbents may need to become very aggressive in migrating customers to FTTH/B and LTE/HSPA+ to realise targeted operational benefits.
FTTH/B rollout: Execution is key.
The programme management office leadership should report into a steering committee including the operator CEO, CFO and CTO/CIO. The heads of retail (Residential and Business) should also be present.
Based on Delta Partners’ experience in supporting FTTB/H rollouts both with fixed incumbents and mobile operators in emerging markets spanning four continents, we have identified seven key success factors on which the programme management office leadership must place particular focus.
1. 4/5P offering with VAS for residential and SME
In addition, content and VAS associated with operator platforms and cloud are essential for maximising take-up by further differentiating fibre services from the competition. Also, bundling with mobile services further accelerates take-up through additional discounts and the enablement of Wi-Fi offloading for tablets and smartphones (see Exhibit 8). It also has the added benefit of locking in the customer as 4/5P offers tend to have lower churn.
Operator set-top boxes - platforms to aggregate content (international and local) and VAS - are a must to further differentiate from xDSL and cable players, with many operators integrating OTT services into their offer and enabling apps. Furthermore, for operators facing difficulty securing access to content, alliances with smart–TV manufacturers and OTTs (e.g. Netflix, Samsung and Google TV) may prove to be effective in combating strong pay-TV players.
For the SME segment, the offer should include cloud services ranging from unified communication services to software as a service (SaaS).
Bundling FBB and MBB is crucial given the consumer demand to offload tablet/smartphone mobile data. A recent report by Bank of America Merrill Lynch indicated that smartphone and tablet users are increasingly using Wi-Fi as a cheaper alternative to mobile data. 5P offers (including mobile voice) are also an option, but are more typically used in hyper-competitive markets when operators need to defend or increase share in mobile voice.
2. Pre-registration and cross-selling to reduce risk
The sales machine is very important in achieving rapid take-up. Given the geographical nature of network rollout, sales channel deployment also needs to be geo-focused and synchronised with the new network rollout. Pre-registration campaigns, door-to-door efforts and cross-selling to an operator’s fixed and mobile customer bases not only help drive sales, but also help validate demand assumptions to better target network deployment. Partnerships with real estate developers and property administrators can also help up-sell to their tenants and greatly expedite final installation once orders are made.
In some cases operators have deployed pre-registration campaigns with trigger targets to decide on go/no-go in specific areas. Apart from reducing risk, this type of campaign also serves to generate awareness and interest ahead of rollout (e.g. Google’s recent pre-registration campaign).
Insight for operators: Minimise the time between any request for information, sales order and activation of services to improve the customer’s first interaction with the fibre services.
4. Network rollout is geographically-focused and considers economics and competitors’ rollout sequence.
Given the high investment per home and the trend for simultaneous FTTH/B rollouts, the selection and prioritisation of the deployment areas is make or break in terms of return on investment.
In a non-competitive rollout scenario, geographical selection is a function of expected customer demand and operational benefits versus investment (whilst also taking into consideration the time required to obtain the necessary permits). However, in a competitive rollout scenario, the geographical prioritisation needs to consider competitors’ rollouts in an attempt to achieve first-mover advantage (see Exhibit 9). Operators should only go head-to-head with major competitors in a given geographical area if either breakeven can be achieved with low take-up or the operator has an operational advantage, e.g. an efficient network process, an enhanced offer or a superior sales process.
Finally, operators need to devise a plan to migrate legacy services to fibre with a view to eventually decommissioning legacy technologies. This may be a challenge as there is usually a significant price premium on legacy services (thus the migration may lead to revenue decline) and customers may oppose the need to change their premises equipment.
6. Network technology/capacity is ready for bandwidth competition
There are multiple efficiency levers that an operator needs to consider: 1) reliable technical solutions (customer premises and network); 2) regularly-updated asset register/database – ideally daily; 3) automated sales and provisioning; 4) 360o view of customer service and self-care; 5) efficient remote fault-monitoring and detection; 6) efficient truck dispatch; 7) in-house skill acquisition and training (e.g. fibre-splicing expertise), and; 8) adequate performance measurement and incentives.
From Delta Partners’ experience, the reduction of network elements and deployment of more reliable technology that can be centrally controlled allows a reduction of more than 50-60% of the network field force (once FTTH/B rollout is completed).
Insight for operators: The network staff (employees and contractors) efficiency plan needs to be driven by the network evolution plan.
© 2021 Delta Partners.