We are on the eve of an evolution that is essential, and somewhat revolutionary in the history of telecommunications – the transition from broadband to very high-speed broadband, made possible by the use of fibre in the access network.
This phenomenon is starting in several regions around the world. However, it is taking shape differently according to existing networks and local factors. In general, however, it’s more than an evolution, it’s a dramatic change in the level of planned investments and expectations on the return, in the new services and in the applications. This transition will have very important consequences for industry, operators, local governments, as well for the development of the knowledge economy and the competitiveness of our companies. What are the stakes, the opportunities, but also the risks of this coming evolution? What role can government take in guiding and facilitating this transition?
A global trend
In Asia, Japan and Korea are the countries where very high-speed broadband is developing quickly. Japan reached 5.6 million FTTH subscribers as of mid-2006, growing faster than cable, and even ADSL, despite strict FTTH unbundling requirements. In Korea, VDSL is gradually replacing ADSL, and the government has set a goal of 5 million FTTH subscribers in 2007.
In the United States (see page 10), rising broadband competition from cable operators is driving FTTH and FTTN network construction by incumbents and even local governments.
In Europe, where northern countries are for now the most dynamic, many projects are being launched by municipalities, and also by private companies, including B2 of Sweden and FastWeb in Italy. A number of incumbent European operators including, Deutsche Telekom, Swisscom, Belgacom and KPN are also developing plans -- mostly FTTN and VDSL.
France is also part of this trend. Over recent months, a number of operators have begun deploying or have announced large deployments. Most have been in Paris, but there are also some local government projects.
The countries that have witnessed the fastest fibre deployments are: those such as the United States, where the quality of the copper infrastructure is poor; countries such as Japan where fibre can be installed on poles, which creates a big saving; areas like northern Europe and the United States where there is a lot of competition from cable and in countries such as Korea and Japan, where the configuration of housing is well suited for fibre.
Residential and enterprise markets have different broadband equipment needs. Residential equipment demand is being driven by the arrival of new content services such as high-definition television, video on demand and growing upload requirements. The enterprise market needs more symmetric bandwidth and guaranteed service restoration time. But France’s residential market, because of its size, will be the main driver for future high-speed broadband networks, just as it was for broadband networks.
Several access technologies can deliver very high-speed broadband to subscribers. In the FTTx family, there is: FTTH (Fibre-to-the-home) and FTTB (fibre-to-the-building). Also, in countries such as the Netherlands and Germany, the network architecture and local copper loop density can justify the deployment of VDSL2 from remote terminals or cabinets (FTTC: fibre to the cabinet).
Cable television networks, which account today for about 6 % of broadband access lines in France, can be upgraded to allow downstream speeds of up to 100 Mb/s for residential subscribers. But the return path, which is shared among subscribers, remains limited to a few Mb/s.
Under these conditions fibre to the subscriber would be a breakthrough technology.
Also, certain wireless technologies such as WiMAX or 4G seem promising, but they will always lag in terms of technological performance and will thus be used to complement wireline technologies.
Stakes and risks of deploying fibre in access networks in France
Before raising the question of government involvement, we need to weigh the stakes of fibre access networks for our country. We are talking about the local loop of tomorrow, which doubtlessly will eventually replace the copper access network. But we are no longer living in the same conditions of the 1970s, when the copper local loop was installed and financed through a state-run monopoly. So it is necessary to devise other investment models, and to anticipate the potential risks they represent for broadband.
High costs mostly in the passive infrastructure
Initial assessments show that the cost of deploying a nationwide FTTH network would require a total investment of several tens of billions of euros, spread out over more than 10 years. It is quite unlikely that one operator could alone build such a nationwide project in a reasonable timeframe.
Passive infrastructure accounts for the bulk – 70 % to 80 % – of network deployment costs. Particularly onerous are civil engineering costs – more than 50 % in urban areas – as well as costs related to cabling buildings. But the cost of fibre is low, and the cost of active equipment will continue to decrease with mass deployments.
Based on the assessments, profitability could be reached not only in very dense zones, but also in cities with a medium density, only if there is a high degree of passive network sharing.
Sharing passive infrastructure is the key
Sharing passive infrastructure appears to be the key to removing entry barriers and favouring an economical deployment of high-speed broadband. There are two ways of implementing this sharing: either by using existing infrastructure or by co-investment and/or coordination when networks are to be built. It would make sense for the first operator installing fibre to use ducts big enough, and in a sufficient numbers to accommodate the fibres of other operators.
Which investment model?
It is necessary to understand that the passive network involves a long-term investment with a long-term rate of return (more than 20 years). This can pose a problem for the private operator who derives his profit from an active network and needs to turn a short-term profit (3 to 5 years). Operators must control and own their active network equipment because it’s only at the active level that operators can differentiate themselves and be competitive. However, private operators can easily share the passive network – ducts and dark fibre.
The ways of implementing network sharing can lead to very different investment models, which might risk in some cases recreating monopolies, even local ones.
In one model, the operator is vertically integrated and installs a closed network, or a slightly open network with only resale offers. This is the preferred model of incumbents in the United States.
In another model, long-term investors, who are associated if necessary with local governments, from the start adopt an open-access model, sell passive network capacity without necessarily becoming themselves operators. The passive network is made available to operators who want to sell very high-speed services. These operators install their active equipment upstream just as operators did with unbundled copper networks to deliver DSL services. This model is used in northern Europe and also by some local government projects in the United States.
A risk of compromising competition and creating new monopolies
Over the past three years, our country has quickly overcome its broadband deployment lag. With 11.1 million broadband subscribers (of which 10,5 million are on DSL), as of July 1, 2006, France has Europe’s fourth highest penetration rate, and is poised to catch up with the United States. This acceleration is due to competition from alternative carriers, who have been able to sell increasingly attractive and varied services. Progressively boosting their investments, alternative carriers went from simple Internet access providers to service resellers and finally service providers using fully unbundled networks. It’s this competition based on unbundling that has allowed a substantial drop in prices and above all some very innovative service offers.
But it is quite possible that with the implementation of certain fibre architectures there is a risk of turning back the clock in this competitive market.
There are basically two major types of network architectures: Point to Point and PON (Passive Optical Network). PON is a point to multi-point (tree-and-branch) architecture in which the same operator manages all the active equipment. Point-to-Point networks, on the other hand, allow several operators to install their own equipment on dark fibre and at a subscriber’s house.
Whatever the choice of architecture may be it is of major importance that it should allow the sharing of passive infrastructure and the implementation by competitors of their own active equipments, in order not to reduce the competitiveness of the market.
What actions can government take?
It’s clear that government – at the central and local level – has a decisive role to play in facilitating the upgrade of the future local loop. Central and local government authorities must first reduce the entry barriers for all players by encouraging the sharing of civil work and the cabling of buildings. They need to encourage long-lasting investments so that our country does not take a step backwards in the level of competition that developed over the past years to the benefit of consumers.
The important role of local governments
By taking an interest in the digital development of their jurisdictions some years ago, authorities – in départements for the most part, but also in municipal agglomerations – discovered how constructive their management of passive infrastructure could be.
Their role until now has mainly involved the connection via fiber of central offices or mainframe cabinets to allow all operators to reach, on a non-discriminatory basis, the unbundled local loop and business parks.
A number of local governments have begun to turn their attention to the access network, where they can play an important role in encouraging the sharing of civil work.
First, they have the important task of gathering information about civil work and the existing telecommunication networks in their territories. Who is better placed than the local governments to collect this important geographic information?
Secondly, they must govern well these public assets and be particularly vigilant that the public ownership of certain infrastructure remains public and accessible to operators.
Lastly, the local governments are the best placed to encourage deployments, by offering their rights-of-way at a fair price, and also by requiring operators to jointly install networks and even to build in reserve capacity for third party operators.
Some have already decided to go beyond a simple policy of leasing ducts and have launched public access networks, similar to those of their American or European counterparts (Vienna and Amsterdam). Their aim is to accelerate the participation of operators, without recreating local monopolies, by lowering the investment burden of private operators in the sharable, non-discriminatory part of the network.
These initiatives are examined in the framework of future study by the CRIP, Comité des réseaux d’initiative publique) which comprises collectivités, operators and the government.
Legislative and regulatory measures for internal cabling
Cabling the interior of buildings is an extremely important subject. An evolution of rules, even legislation, should be considered so that precabling is required in new buildings, and standards are established for infrastructure connecting buildings and for sharing fibre installed in existing buildings. Accomplishing this requires bringing together immediately all the interested operators and players from the housing and telecoms sectors.
Even if regulation is neither the most urgent topic nor the one that needs to be addressed immediately, its effect should not be minimized. Operators need continuity and predictability before committing to the large investments that we have mentioned. It’s important to give them a certain amount of assurance for an equitable return on their investment and to avoid a ‘wait-and-see situation,’ which could lead to the deployment of non-sharable infrastructure.
Isn’t prevention better than cure?
The local context, in which FTTx networks are deployed in the United States, Japan and even in some European countries, can vary greatly and lead to distinct regulatory decisions.
In the United States, a country where operators benefit from a ‘regulatory holiday’, cable operators offer a real alternative local access technology, where the local copper loop is older and generally longer than in France. But Japan leads in terms of dynamism and FTTH penetration even though the unbundling of fiber is obligatory.
As we have said earlier, the dynamic broadband competition in our country is based mainly on the unbundling of an essential access infrastructure – the copper local loop. Based on this experience, it is unlikely that the fibre access network would be duplicated.
Widespread access to civil work
Even though deployments are just beginning, it is unrealistic to think that all operators have an equal start. France Telecom has a large amount of spare duct capacity, dating from when it was state monopoly, which the operator can use to significantly reduce its FTTH deployment costs. This situation makes its possible for these ducts to be made available, on a transparent, non-discriminatory and cost-oriented basis at to all operators deploying very high speed broadband. ARCEP could study the feasibility and the relevance of this type of regulation, in the framework of a market analysis. France would not be alone in studying this procedure. This is one of the subjects brought up in the framework of European regulators.
Of course, there is a lot of uncertainty about the exact availability of these ducts, and hence whether the measures would be sufficient, notably outside the most important agglomerations in France.
Beyond civil engineering
While it’s too early to take a position on long-term ex ante measures, there is nothing preventing us from examining together the conditions needed to maximise the dynamism of the active network and to prevent a monopolistic hold of passive infrastructure that would foreclose the market.
This is why certain countries are contemplating investment sharing by operators in passive fibre networks and even obligations for the deployment of reserve fibre. In France, it is unlikely that a single operator would consider financing a nationwide fibre network in a short time frame. Operators embarking on these investments will realize that they can make money by selling wholesale capacity in their networks.
This subject is too important to become a two sided-debate. Our country has benefited too much from pluralism and cannot risk recreating a monopoly in the name of investment security.
It is completely understandable that those who want to invest require assurances that they will obtain a reasonable return on their investment. But the situation is hardly ‘black and white’. The European framework allows the regulator to impose a whole range of obligations on operators, from access to the commercial conditions that take risk reasonably into account to cost-oriented unbundling, which has never been contemplated for new infrastructure such as fibre.
Over the coming months, let’s calmly open a debate in France and the rest of Europe that will allow us to consider in the best conditions for the important transition to very high-speed broadband.
Member of ARCEP’s executive board
The article written by Gabrielle Gauthey (pdf - 541 Ko), ARCEP's member, for La Lettre de l'Autorité (n° 53, november-december 2006)