Report for Vodafone UK Ltd Fibre Deployment in the UK's Residential

Report for Vodafone UK Ltd

Fibre Deployment in the UK’s Residential and Business Connectivity Markets: A Single Product Market?

July 2019

SPC Network Chapel House Booton Norwich NR10 4PE United Kingdom

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About SPC Network

SPC Network was founded in 2003 and has worked for over 35 clients worldwide. We undertake Strategic Policy Development for clients in platform and networked industries, by combining the knowledge of our consultants with specific and valuable skills to ensure rigorous analysis and exceptional advice. Our core consultancy team and network of partners have substantial experience in industry and consulting and so we understand the practical issues and challenges facing the market. Through advanced academic training, we have developed the key skills and rigorous approach needed to support our clients win the policy debate. www.spcnetwork.eu

TABLE OF CONTENTS

1 EXECUTIVE SUMMARY 1

2 INTRODUCTION 3

3 OFCOM’S ALL ACCESS MARKET APPROACH 5

4 OUR APPROACH TO RELEVANT ASPECTS OF MARKET DEFINITION 7

5 CUSTOMER NEEDS AND LOCATION 10

5.1 CUSTOMER SEGMENTS AND PRODUCT REQUIREMENTS 10 5.2 CUSTOMER LOCATION 12

6 NEW FIBRE DEPLOYMENT 15

6.1 FIBRE AMBITIONS 15 6.2 CONCLUSION – DEPLOYMENT 19

7 PON VS. POINT-TO-POINT NETWORKS 20

7.1 INTRODUCTION 20 7.2 BROADBAND DEVELOPMENT IN THE UK 20 7.3 PASSIVE OPTICAL NETWORKS: CURRENT AND FUTURE 23 7.4 PON VS. P2P KEY FUNCTIONALITY 27 7.5 ASSETS FOR A PON TO DELIVER POINT-TO-POINT SERVICES 30

8 CONCLUSION: A SINGLE OR MULTIPLE PRODUCT MARKETS? 34

8.1 DEMAND SIDE ANALYSIS 34 8.2 SUPPLY SIDE ANALYSIS 35 8.3 OVERALL CONCLUSION 36

SPC Network | July 2019

1 EXECUTIVE SUMMARY

Several network operators in the UK are starting to roll out fibre to the premises (FTTP) networks, which are gigabit capable. This planned increased penetration of fibre has led Ofcom to set out its proposal to bring together the market reviews covering wholesale local access, business connectivity and physical infrastructure access. Ofcom has also indicated that it foresees a multi-service access network market that is capable of meeting the needs of residential customers, SMEs, large corporates (Including public sector organisations) and data centres.

This report uses a market definition approach to determine whether a multi service access network market encompassing all access products is likely to exist within the period of the next market review (2021 – 2026). It also proposes a test that Ofcom could adopt on a forward looking basis for later market reviews.

We find that:

• In the product market, a distinction can be drawn between “broadband” access products that offer a “best efforts” service on the one hand and dedicated point-to-point leased lines on the other. • There is little need to undertake a formal market definition process for broadband access products. Consumers use standard, superfast and ultrafast broadband for the same purpose and so, under the chain of substitution principle, they are clear demand side substitutes. • However, there is a clear break in the chain of substitution between broadband services and leased lines. This is because, whilst ultrafast broadband may be able to offer gigabit speeds, it cannot offer the other characteristics of a leased line, such as no contention and full resilience. There is a group of customers for whom these requirements are crucial and for which they are prepared to pay a premium price. • Using the hypothetical monopolist test (HMT), it is our view that the service characteristics of leased lines are such that it is highly unlikely that sufficient demand would switch to ultrafast broadband to make a SSNIP1 by a hypothetical monopolist of leased lines unprofitable. • We also consider whether there could be supply side substitution between FTTP based on Passive Optical Network (PON) technology and a point-to-point leased line. We do not consider supply side substitution to be likely for the following reasons: o Existing PONs have inherent limitations that prevent them from providing point- to-point leased line equivalent services. Specifically, they are shared services

1 Small but Significant Non-transitory Increase in Price. 2 “Regulatory certainty to support investment in full-fibre broadband” 24 July 2018, paragraph 3.2 – 3.4

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that do not offer guaranteed routing and bandwidth, and do not provide the level of resilience some customer groups require; o Some new developments will improve the situation but the network architecture limitations will remain, meaning PONs cannot offer resilience or guaranteed service; o Reconfiguration has to be considered but within the revenue constraints of the notional 10% price increase – we conclude that this will not be financially viable; o It is possible to design a PON in a way that it could provide point-to-point leased line services but a) we do not believe that existing networks have been designed in this way and b) there is a significant financial cost to this form of deployment that would increase the average cost of fibre deployment and hence undermine the business case for FTTP for consumers and small business customers.

Whilst we do not expect there to be a significant change in these circumstances in time for the 2021 – 2026 market review, market definition is an empirical matter and Ofcom would need to monitor developments. To determine whether supply-substitution may take place by subsequent market reviews we propose a three-part test:

i) What is the network technology of a potential entrant and how is it configured today?

ii) Have the necessary developments in PON technology been made available in the market at a reasonable price point such that any changes can be made to deliver a leased lines equivalent service?

iii) Can the entrant’s network be reconfigured or expanded at a cost that would allow it to compete with the hypothetical monopolist’s service after it has imposed a SSNIP and reduce the hypothetical monopolist’s profits?

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2 INTRODUCTION

Ofcom intends to review the Business Connectivity and Wholesale Local Access markets as one, alongside the Physical Infrastructure market from 2021. Its justification for doing so is that multifunctional, fibre rich networks can offer the full range of connectivity services for both business and residential customers. Ofcom has recently stated that:

“…operators of full-fibre networks are increasingly looking to offer a range of services to households, small and large businesses, and communications providers, building as far as possible on the same underlying multifunctional, fibre-rich network.”2

Whilst there is some overlap between business and residential use of broadband, Vodafone UK is concerned that Ofcom may determine that there is a single access product market, encompassing the full range of residential and business connectivity products ahead of the actuality of any such convergence. This may lead to an incorrect market definition, an incorrect finding of Significant Market Power (SMP) and/or imposition of wrong obligations on any firm found to have SMP, harming competition and consumer outcomes.

Vodafone has, therefore, commissioned SPC Network to undertake an independent analysis of the market for broadband access and leased lines. The purpose of this report is to examine the validity of Ofcom’s statement quoted above in the light of technology capabilities and customer needs.

It is a fact that more fibre is being deployed in the access network by Openreach and other providers, At the time of writing this report, Openreach has started a consultation on FTTP for business, which they describe as “GEA-FTTP technology meets ‘Ethernet’ service and delivery experience”3. The question for future market reviews is whether the fibre being deployed for mass market broadband using PON architecture and technology can deliver the service requirements of all users on a single network. In particular, whether PONs can address the needs of customers who currently use point-to-point (P2P) leased lines.

This report is structured as follows:

Section 3 reviews Ofcom’s all access market approach.

Section 4 sets out our approach to relevant aspects of market definition.

Section 5 outlines the needs and location of business customers.

2 “Regulatory certainty to support investment in full-fibre broadband” 24 July 2018, paragraph 3.2 – 3.4 3 Openreach 2019 ‘Fibre to the Premises (GEA-FTTP) for Business: Industry Consultation Document’

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Section 6 sets out the known fibre deployment plans of network providers.

Section 7 discusses the characteristics of PON and point-to-point networks and the various developments of PON technology.

Section 8 concludes and explains why we consider that leased lines based on point-to-point networks and mass market broadband, even if based on FTTP, remain in separate markets. It also sets out a three-stage test to determine if this remains the position in future.

In preparing this report we have received technical input from Vodafone in addition to conducting our own research and drawing on our experience and expertise. All views expressed in this report are those of SPC Network and not necessarily those of Vodafone.

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3 OFCOM’S ALL ACCESS MARKET APPROACH Historically, Ofcom has reviewed markets for mass-market access and business connectivity separately in its Wholesale Local Access (WLA) and Business Connectivity Market Reviews (BCMR). However, the increasing rollout of fibre, specifically FTTP, has led Ofcom to plan to review these markets together, along with the market for physical infrastructure access. This intention is clearly set out in its document on regulatory certainty and full fibre investment where it states:

… investors in full-fibre networks are increasingly looking to offer a range of services over a more common underlying fibre infrastructure: ultrafast broadband to households and small businesses; leased lines to larger businesses; and ‘backhaul’ for mobile operators, who use fixed broadband lines to transmit data between mobile sites.4

Since the same underlying fibre network will increasingly be used to deliver a range of different services for business and residential customers, it no longer makes sense to consider residential and business access markets separately. 5

Later in the same document it elaborates on this position:

Historically, the distinction between the review of WLA and BCMR markets has made sense. The technical capabilities and limitations of telecoms networks meant there was a clear difference between the services used by large businesses and those used by households and smaller businesses. While copper and fibre-to-the-cabinet networks could meet the needs of most households and small businesses, large businesses and communications providers often needed high-speed, high-capacity, dedicated leased lines.

Full-fibre networks can deliver significantly higher speeds than copper or fibre-to-the- cabinet networks. Full-fibre networks are also more consistent and reliable than existing copper-based networks. As a result, operators of full-fibre networks are increasingly looking to offer a range of services to households, small and large businesses, and communications providers, building as far as possible on the same underlying multifunctional, fibre-rich network.

In this context, considering WLA and the BCMR markets separately is no longer appropriate. Even where the services may continue to be distinct for certain uses, a holistic consideration of services being operated over multi-functional networks is necessary.6

4 “Regulatory certainty to support investment in full-fibre broadband” 24 July 2018, paragraph 1.9 5 Ibid, paragraph 1.10 6 Ibid, paragraphs 3.2-3.4

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Ofcom also highlights that it will in future be assessing competition at two levels:

Taking a network-focused approach means that we will need to assess competition at two levels. Our first, ‘upstream’ assessment will focus on physical telecoms infrastructure, such as ducts and poles. Our second, ‘downstream’ assessment will consider the need for wholesale regulation depending on where there are competing networks, or where competing networks have a good prospect of emerging.7

The focus on networks is furthered emphasised in Ofcom’s document on geographic markets:

… we propose to assess competition from a network viewpoint, rather than focusing on specific downstream services.8

We also need to think about markets from a network point of view, rather than focusing on specific services. This is because these new ultrafast networks will be capable of providing services in each of the markets we currently review and may also lead to new services being developed. In this context it is no longer appropriate to focus on individual downstream wholesale services in isolation.9

From these statements we understand Ofcom’s position to be as follows:

1) There will continue to be a need for a broad range of wholesale services to meet the diverse needs of retail customers; it is not that there will be a convergence in the needs of customers. 2) However, operators of newly deployed full fibre networks will be capable of meeting these diverse needs by supplying the necessary range of products. 3) There will be a shift in focus and emphasis to the network level. 4) Given Ofcom’s intention to identify geographic areas that differ by competitive intensity, implicitly, an operator must be able to operate the full range of services in each individual geographic area.

7 Ibid, paragraph 1.13 8 “Promoting investment and competition in fibre networks: approach to geographic markets” 11 December 2018, paragraph 1.7 9 Ibid, paragraph 2.10

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4 OUR APPROACH TO RELEVANT ASPECTS OF MARKET DEFINITION

In undertaking this analysis, we are particularly aware of how the European Commission considers two products as belonging in the same relevant market:

NRAs should thus commence the exercise of defining the relevant product or service market by grouping together products or services that are used by consumers for the same purpose (end use).10

Similarly, the Competition and Markets Authority (CMA) states:

Where the objective characteristics of products are very similar and their intended uses the same this would be good evidence that the products are close substitutes [but that] products with very different physical characteristics may be close substitutes if, from a customer’s point of view, they have a very similar use.11

When Ofcom conducts a market definition it uses the well known Hypothetical Monopolist Test (HMT). This seeks to establish whether, in the event of a hypothetical monopolist of the focal product imposing a small but significant non-transitory increase in price (SSNIP), sufficient demand would switch to an alternative product, or a new supplier would start supplying the focal product in the short term, such that the SSNIP would be unprofitable. These are known as demand side and supply side substitution respectively.

Demand Side Substitution

It is our view that if the fundamental characteristics of two products mean that they cannot be used for the same purpose, there appears little need for any economic test to determine whether there is likely to be any demand side substitution in the event of a SSNIP. For example, mobile call termination can obviously not act as a substitute for P2P leased lines as they are used for completely different purposes. There is no need, therefore, to conduct an HMT to establish that they are not in the same market.

There is a range of fixed broadband access products that trade off quality of service characteristics (e.g. contended access, lack of resilience etc.) against price. Access speeds vary from less than 10Mbps up to 1Gbps. Despite these speed differences, there is little doubt these access products fall into the same relevant market, as all can be used for the same purpose and are close substitutes of each other. The detailed analysis to demonstrate this substitutability is, therefore, not included in this report.

10 European Commission ‘Guidelines on market analysis and the assessment of significant market power under the EU regulatory framework for electronic communications and services (2018/C 159/01)’ 7 May 2018. Para. 33. 11 CMA ‘Market Definition’ December 2004. Para 3.7

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However, the increased deployment of FTTP, capable of much higher access speeds, has led Ofcom to consider that there might be a multi-service network market capable of meeting needs of all users, including major corporations, data centres and government facilities.

In this report, therefore, we examine whether FTTP networks could be capable of delivering a P2P equivalent service and so could be used for the same purpose and so whether further economic analysis is necessary to determine whether a SSNIP would be profitable or not. If a SSNIP by a hypothetical monopolist of P2P leased lines would not be profitable due to demand or supply side substitution, then Ofcom’s view that there is a single relevant market would be correct. However, if they meet fundamentally different needs then it would be so obvious that they are not in the same market that an economic test is unnecessary.

Supply Side Substitution

Much of the market definition analysis in the report concerns supply-side substitution. This can occur when an undertaking not currently active in the focal market decides to enter the market in a short time frame in response to a SSNIP by the hypothetical monopolist of the focal market. Two products are supply-side substitutes if the supplier of the alternative product has the means and the commercial incentive to enter the market in a short timeframe12.

An important aspect of supply side substitution is that the potential entrant is not hypothetical, like the monopolist, but a current actual undertaking with its actual set of assets at the time of the market review. This is explained in the European Commission’s SMP Guidelines:

[National Regulatory Authorities] will need to ascertain whether a given supplier would actually use or switch its productive assets to produce the relevant product or offer the relevant service.13

Thus, whether a firm could, in theory, develop a supply side substitute is not the question. What matters is whether an existing undertaking could enter the market in the short term using its existing productive assets.

Supply side substitution occurs in response to a SSNIP, i.e. a price rise of 5-10%. This implies that a “given supplier” would need to switch its existing assets and be able to offer an alternative service within the constraints of such a price rise. If switching of assets results in costs that mean it cannot profitably enter the market for the focal product within the constraints of this price rise then supply side substitution does not occur.

12 Bishop, S., & Walker, M. (2010). The economics of EC competition law. Sweet & Maxwell.(Section 4-012) 13 European Commission (2018) Guidelines on market analysis and the assessment of significant market power under the EU regulatory framework for electronic communications networks and services (Para. 41)

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In this analysis, therefore, we consider whether actual builders of fibre infrastructure could enter the P2P leased lines market using currently deployed fibre networks. Whether a PON could theoretically deliver a leased lines quality service is not the question: rather, the question is whether actual firms supplying PONs could redeploy their actual assets to supply P2P leased lines within the cost constraints of a SSNIP. In the light of this, is there potential for supply side substitution by PONs today to result in a multi service network market definition?

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5 CUSTOMER NEEDS AND LOCATION

A range of different customer groups today use fixed point-to-point leased lines to meet their specialist business needs. In this section we consider what those needs are and whether those needs will persist into the future. We also highlight the types of customers that need these services and outline the characteristics of the services that meet the needs of these customers. Finally, we consider the location of those customers.

5.1 Customer Segments and Product Requirements

Retail customers of communications access products fall into a number of segments: from residential users through to data centres and corporate headquarters. Gartner14 identify ten such segments based on size of office and criticality of access:

• Data Centre • Medium branch non critical • Headquarters • Small branch critical • Large branch critical • Small branch non critical • Large branch non critical • Micro branch • Medium branch critical • Remote employees

Small office/home office (SOHO) and residential customers can be added to this list.

Research commissioned by Ofcom for its recent BCMR market review identified four broad customer segments and their need for access connectivity products. The research found that both headquarters buildings and data centres used leased lines as their most common access connectivity product, as illustrated in Figure 1 (reproduced from that report) below15. Essentially, leased lines are used to connect sites of critical importance or to carry data that is of critical importance to the business.

A proportion of the demand for “FTTC/ADSL Broadband” in regional and local offices can be expected to upgrade to FTTP as it becomes available.

However, a segment of enterprise customers continues to value private, point-to-point services and remains prepared to pay for such enterprise grade solutions. A search for cost efficiency may lead some enterprises to source residential or business grade broadband for low risk applications, but these are likely to be a minority. They would be confined to less critical applications and less critical locations. An example would be branch office access to the public Internet.

14 Source: Gartner “SD-WAN Is Killing MPLS, So Prepare to Replace It Now” September 2018 15 Business Connectivity Market Assessment, Cartesian, 29th March 2018

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Figure 1: Customer Segments and Connectivity Products

Source: Criterion/Ofcom

Ofcom itself has recognised the importance of at least some of these service features in its recent BCMR when discussing the limitations of asymmetric broadband:

In addition, we consider that asymmetric broadband remains a poor substitute for [Contemporary Interface ] CI Access services mainly due to its lower bandwidth (up to 20 Mbit/s) and inferior quality in terms of latency, contention and service reliability. This is consistent with the results from the 2018 Cartesian report indicating that businesses perceive “copper-based circuits (EFM or broadband) […] to be less reliable” than fibre leased lines, as well as with Openreach’s own 2015 migration analysis, suggesting that a small proportion (["]%) of EAD leased lines which have been ceased and identified as possible migrations have moved to asymmetric broadband. While ongoing and future FTTP deployments will narrow the speed and quality gap between asymmetric broadband and CI Access services, FTTP upload speeds are expected to fall short of 100 Mbit/s and our engagement with telecoms providers suggest that FTTP rollout will have little impact on the demand for leased lines over the course of this market review period.16

A proportion of business customers are moving their services to a cloud based solution provided over the public Internet. For this segment, a best-efforts access service may be sufficient. However, there is a also a significant proportion who have mission critical data needs and either need to keep that processing “in house” or need more secure dedicated Internet access to the cloud. For these customers, connectivity would be designed in line with the performance of the

16 Ofcom ‘Business connectivity market review – Volume 1: Market analysis, proposed SMP findings and remedies, paragraph’ 4.34

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systems and criticality of communications. This segment of the market includes financial services, manufacturing, defence contractors, utilities, data companies and mobile operators. The common factor for these users is that communications are mission critical for their businesses. It is likely that some present users of leased lines will shift some of their services to broadband for cost reasons. However, it is clear that when certain requirements are essential, services that have the characteristics of today’s leased lines will continue to be a required option.

The specific features of leased lines that remain of value to a segment of customers are

• Ultra high speed up to 100Gbps. • Symmetric services where upload and download speeds are the same. • Dedicated path (known routing) between A and B ends of the network (rather than a route that is determined by packet based routing such as that provided by broadband/public internet based services). • Dedicated bandwidth avoiding any contention that is a feature of broadband services provided over a shared infrastructure. • Guarantee of low latency and jitter that can only be provided by a point-to-point service with a dedicated path (and therefore known distance parameters and known routing). • Resilience with service availability at as close to 100% as currently possible, with secondary routing being an important factor to ensure service downtime is as close to zero as possible. • Data privacy due to the guaranteed end-to-end connectivity, rather than having to break out and share capacity over a public internet based connection, as well as the known routing of the end-to-end service path. • End-to-end monitoring and management of the service path with associated service level agreements.

We have seen no evidence that these needs will change in the foreseeable future and there is nothing in Ofcom’s recent consultation documents to suggest that it believes otherwise. These critical needs are more likely than not, therefore, to continue to be in place in 2021 and 2026.

5.2 Customer Location

The extent to which a broadband access service could substitute a leased lines service is also dependent on the correlation between the location of supply and demand.

The demand for leased lines is spread throughout the UK, but is concentrated in urban areas. Ofcom data show that 18% of the demand is concentrated in just 6% of postcode sectors17.

17 Ofcom (2018) ‘Business connectivity market review – Volume 1’ Table 5.2

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Vodafone has provided us with an analysis they conducted of the location of business premises in certain cities in response to the BCMR. These are shown below for Birmingham and Glasgow with each blue dot representing a large business location. As can be seen, there is a clear clustering of locations in the Central Business District (CBD) of both cities. A similar pattern can also be seen in other cities for which Vodafone conducted the same analysis.

Figure 2: Postcodes with Business Connectivity Demand - Birmingham

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Figure 3: Postcodes with Business Connectivity Demand - Glasgow

(Source: Vodafone)

This high level analysis demonstrates that demand for leased lines is likely to be nationwide, but concentrated geographically, whilst demand for mass market broadband access will match the general distribution of the population.

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6 NEW FIBRE DEPLOYMENT 6.1 Fibre Ambitions

The UK is behind many of its peer countries in rolling out FTTP, but there is now a significant increase in network build. As of April 2019, some 2 million premises in the UK have FTTP, approximately half of which are provided by Openreach18. The other 50% are provided by a number of companies including Hyperoptic, Virgin Media and CityFibre as well as a host of smaller community providers.

Openreach, and a number of other operators, have made statements about their ambitions to rollout fibre to the premises over the next five years or so. These ambitions are summarised in Figure 4 below.

Figure 4: UK Telco Fibre Ambitions

10 10 9 8 7 6 3 3 5 5 5 4 2 3 2 1 TalkTalk

Households Pased: Millions 1 Openreach 0 Hyperopc 2021 2022 CityFibre 2023 2024 2025

Source: Company announcements.

• Openreach has the most ambitious roll-out plans and so is likely to be the largest provider of fibre access. It claims that work is already underway to upgrade its existing network to FTTP in over 25 locations and is targeting passing 10 million homes by 2025. Their build plan is based on existing telephone exchange areas, using FTTP for the majority of premises. Once 75% of premises within an exchange area are passed it will declare that exchange ultrafast enabled.19

18 https://www.thinkbroadband.com/news/8364-1-million-premises-passed-with-full-fibre-by-openreach-milestone- reached 19 Openreach Presentation ‘Upgrading the UK’s digital infrastructure’ 25 March 2019.

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• CityFibre is currently deploying fibre to 50+ cities. Its residential and business FTTP services are, similar to Openreach’s network, based on a PON topology with up to 32 splits providing the final access to the customer. CityFibre is, however, marketing its products as maximum 1Gpbs and symmetrical (both for residential and business). In addition, a point-to-point Ethernet connection is available from a customer premise to a CityFibre Point of Presence (PoP) up to a distance of about 40km. This suggests that CityFibre is providing a separate product for the point-to-point service.

• Fibre Nation is TalkTalk’s subsidiary building FTTP networks. It was launched in 2018 and is initially building in York, Harrogate, Knaresborough and Ripon. It will offer speeds of up to 1Gbps.

• Hyperoptic’s historic strategy is well known – providing fibre to the building for a multi dwelling unit (MDU) or multi business unit (MBU), either installing its own fibre or using EAD or EAD LA20 from Openreach to connect MDUs/MBUs with fibre. It then installs its own “last mile” infrastructure within the building using a P2P topology rather than a PON21. They advertise speeds of up to 1Gbps symmetric. It currently has about 500,000 customers in 39 cities, normally installed in MDUs and MBUs, but are looking to expand into smaller units and even individual houses during 2019, in part by using duct and pole access22.

• Virgin Media primarily provides access over a hybrid fibre coaxial (HFC) connection utilising DOCSIS software. However, as part of its network expansion plans23 it is rolling out two million FTTP connections. In the majority of customer connections Virgin Media is providing ‘Radio Frequency over Glass’ on the fibre deployed to the premises. This allows existing set top boxes and cable modems to be used on the fibre without having to change out the systems and the customer premises equipment (CPE)24.

In addition, a number of smaller operators are rolling out fibre in restricted geographic areas as shown in Table 1.

20 Ethernet Access Direct/ Ethernet Access Direct Local Access 21 Hyperoptic ‘Response to Ofcom Dark Fibre Consultation: adding dark fibre remedies for business connectivity markets’ December 2017 22 Source: ISP Review ‘Hyperoptic Grow Leadership Team for UK FTTP Broadband Rollout’ May 9th 2019 23 Project Lightning 24 https://www.ispreview.co.uk/index.php/2019/05/virgin-media-grow-uk-network-by-107k-premises-adds-more- fttp.html

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Table 1: Smaller Operator Fibre Ambitions

Company Target properties Max Year Location Advertised Speed (Mbps) Gigaclear 500,000 900 2022 Rural Community Fibre 500,000 1,000 2022 London Council 1,000,000 2025 houses County Broadband 30,000 1,000 No date East of England Trooli (Callflow) 26,000 1,000 2019 Kent Wight Fibre 53,000 900 2020 Isle of Wight Truespeed 75,000 10,000 2021 South West England Communications 200,000 2025 Glide 200,000 1,000 2020 Coventry & Warwick Toob 100,000 900 2021 Southampton 1,000,000 2029 Source: Ofcom25, Company websites.

Although this suggests an impressive acceleration in investment in fibre, it is important to treat these figures with caution as operators’ rollout plans may be revised in light of their accumulating experience of actual fibre deployment. However, it is clear that the direction of travel is towards FTTP, but it is not clear at what point in the future the level of network deployment will be sufficiently extensive to have a significant impact on the functioning of the downstream wholesale leased line and broadband markets.

For the FTTP services being built by these companies to be relevant to enterprise customers, there needs to be a correlation between the location of their networks and enterprise customer premises. We have seen above that the first areas Openreach has built FTTP have a strong rural bias, whereas most large business sites will be in city centre locations.

Looking to the future, Openreach has announced its Fibre First scheme, under which it will be rolling out to 1.7m premises in cities across the UK26. A list of these cities, along with those where CityFibre has announced it will build FTTP is shown below. Cities highlighted in bold are where both companies have said they will build.

25 ibid 26 Openreach presentation “Upgrading the UK’s digital infrastructure” March 2019.

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Table 2: CityFibre and Openreach Target Cities

CityFibre Openreach Aberdeen Southend-on-Sea Belfast Glasgow Bournemouth Stirling Birmingham Leeds Cambridge Bristol Manchester Coventry Bury Nottingham Edinburgh Cardiff Salford Huddersfield Coventry Salisbury Leeds Edinburgh Sutton Coldfield Milton Keynes Exeter Swansea Northampton Liverpool Wirral Peterborough London Source: CityFibre.com and Openreach presentation “Upgrading the UK’s Digital Infrastructure” March 2019

Building in a city, however, does not mean that their networks will correlate with the location of large businesses and other users of P2P services. In their presentation on their programme, Openreach show a map of one target city, Edinburgh, and where they are planning on rolling out FTTP (Figure 5 below).

Figure 5: Openreach Fibre Build Edinburgh

The key point to note from this picture is that Openreach’s FTTP build programme is focussed on the residential and suburban areas of the city, rather than the central business district, where demand for high quality access services is likely to be greatest. This is only one of the 19 cities in Openreach’s Fibre First programme. However, if this pattern is repeated across the other cities,

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and is representative of how PONs are deployed generally, then it indicates that Openreach and other FTTP deployments are targeting residential and consumer areas and this will not necessarily allow them to supply businesses districts.

Openreach’s consultation document on fibre deployment highlights that FTTP may not be cost- effective in urban areas, such as where access is not granted or is prohibitively expensive due to characteristics such as cobbled streets. In these cases Openreach proposes to use fast copper options, such as G.Fast or vectored VDSL27, neither of which would be able to offer P2P equivalent services.

6.2 Conclusion – Deployment The roll-out plans of network operators for FTTP appear to focus on residential and suburban areas of target cities and on rural areas, in particular those that have had some government support. However, this means that these networks are not likely to be available to supply corporate locations that have a need for leased line type services.

It perhaps goes without saying that if fibre is not available, within a reasonable distance, then it cannot be provided. So, if the PON is not physically close to enough businesses then it is obvious that it cannot be used to deliver any service.

27 Openreach (2019) ‘Industry consultation on: An exchange based approach to upgrading the UK’s digital infrastructure’ (March 2019) Paras C6 & C7.

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7 PON VS. POINT-TO-POINT NETWORKS

7.1 Introduction We now come to the most important question for this report: will the FTTP networks being rolled out today be able to deliver the services that enterprise customers need?

This is critical because if a new version of PON technology can deliver the same service features as P2P and if the assets that deliver the PON can be used to deliver P2P service quality, then Ofcom’s view as quoted in Section 2 above would be valid. If not, or if there is considerable doubt about whether a PON can deliver the quality of service that P2P networks can, then Ofcom’s view would not be valid and their focus on the network rather than the downstream service level would not be appropriate. We consider this question today, i.e. with the current technology and market conditions and in future periods, specifically in 2021 and 2026, when Ofcom is expected to conduct its combined wholesale local access and business connectivity market reviews.

This section is divided into four sub-sections. In 7.2 we briefly set out the history of broadband development in the UK, so that the development of FTTP by Openreach in particular, can be placed in context. In 7.3 we describe the PON architecture and the various developments currently in use. In 7.4 we consider whether the new variants of PON can deliver the service levels required by users of P2P services, and so whether they could be used for the same purpose. Finally, in 7.5 we consider whether the assets used in a PON could be reconfigured to deliver P2P services.

7.2 Broadband Development in the UK Broadband access in the UK has been developed from standard broadband, using only the copper network and ADSL28 technology through fibre to the cabinet (FTTC) to the current focus on building FTTP networks29. Each of these is briefly described below.

• Standard Broadband was launched ca. 2000 and is delivered on the existing copper infrastructure / network topology that had been in place to provide voice services, prior to the introduction of broadband services. The copper network is utilised from the exchange to the customer premises.

• Superfast Broadband. Rollout of electronics both at the exchange and more recently at the street cabinet began around 2010 and has allowed an increase in speed being delivered to consumers. The electronics at the street cabinet have been based on the deployment of fibre to replace the main (E-side) cables that ran from the exchange to the street cabinet. This FTTC service will migrate to FTTP, with perhaps some FTTDP.

28 Asynchronous Digital Subscriber Line 29 Openreach will also install some fibre to the distribution point (FTTDP), but this appears to be minimal and used where FTTP is not feasible.

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• Ultrafast Broadband. Is based on the replacement of copper networks (E-side and D- side30) with fibre networks that allow for broadband (and voice services) to be provided end-to-end over a fibre network (so avoiding issues relating to copper networks i.e. performance of copper depends on the “health” of the network and also the distance issues relating to the copper network31).

Ultrafast broadband is delivered over FTTP using a Passive Optical Network (PON) technology. A signal is sent using a laser at the exchange over the fibre, which at a point close to the customer’s premises, is split into a number of fibres that feed the individual customer’s premises. Currently the split used by Openreach (which is likely to be the largest wholesale provider if its ambitions set out in Figure 4 are realised) is a 1:32 way split. That is, one main fibre from the exchange is split into 32 fibres that can feed up to 32 customers, depending on planning rules used by the network operator. The signal is encrypted and ‘tunnelled’ to ensure security.

Openreach, the principal wholesale supplier of access services, is migrating its product portfolio for mass-market consumers, which today consists of all copper, hybrid copper-fibre and all fibre products, onto a single FTTP based product. In their wholesale product portfolio this is branded as GEA-FTTP. Dedicated point-to-point services will remain separated from FTTP and are not affected by its proposals regarding FTTP32. This migration path is illustrated in

30 D-side cables are the distribution cables that run from the street cabinets to the customer premises 31 Distance is a major inhibitor to copper based broadband networks. The speed that can be delivered over copper network significantly drops after a distance – that speed/distance characteristic is dependent on the technology that is being used to deliver the xDSL service) 32 op. cit footnote 27 Para D6

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Figure 6 below.

Openreach is also consulting on a version of GEA-FTTP for business customers33. In this document, Openreach again makes clear that this is not a substitute for its dedicated point-to- point service. When describing its GEA-FTTP product for business it says:

“The network build is GEA-FTTP, but we are looking to offer higher bandwidth and an installation and service repair experience that is more recognisable to customers buying our Ethernet Access Direct (EAD) products today. We therefore see this as being complementary to the EAD product.”34

33 op. cit. footnote 3 34 ibid. P. 4

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Figure 6: Openreach Portfolio Migration

Source: Openreach

7.3 Passive Optical Networks: Current and Future A Passive Optical Network (PON) is a fibre network that only uses fibre and passive components, like splitters and combiners, rather than active components like amplifiers, repeaters or shaping circuits, and is often deployed in large-scale FTTP networks. The typical PON arrangement is a point to multi-point (P2MP) network where a central optical line terminal (OLT) at the service provider’s facility distributes TV or Internet service to between 16 and 128 customers per fibre line, as illustrated in Figure 7.

Optical splitters, that is passive optical devices that divide a single optical signal into multiple equal but lower-power signals, distribute the signals to users. An optical network unit (ONU) terminates the PON at the customer’s home. The ONU usually communicates with an optical network terminal (ONT), which may be a separate piece of customer premises equipment, that connects the PON to TV sets, telephones, computers, or a wireless router.

In the basic method of operation for downstream distribution one wavelength of light is transmitted from OLT to ONU/ONT, so all customers receive the same data and the ONU recognises data to be sent to each user. For the upstream transmission from ONU to OLT, a time division multiplex (TDM) technique is used where each user is assigned a timeslot on the wavelength of light, which is a separate wavelength to that used for the downstream traffic.

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Figure 7: PON Configuration, showing G-PON wavelengths in use

Source: Electronicdesign.com

The most established form of PON is Gigabit PON, or GPON, which is an ITU standard35. Openreach is already using GPON to provide FTTP services, and it has also been deployed in many other countries including Japan, South Korea, France, Spain and the US. It is a relatively mature technology that, despite its name, supports download speeds of 2.488 Gbps and upload speeds of 1.244 Gbps. However, it is important to note that for both download and upload this is shared between the premises connected to each PON. This means that the actual speed for an end user will be less than the maximum, dependent on the number of users.

Openreach provides a good explanation of the sustained speed a user will experience:

“For example, the new 1 Gbps FTTP product is offered with a sustained downstream speed of 330 Mbps. This limits the number of customers that could be hosted on a 2.5 Gbps GPON to less than 8 (out of the 32 premises passed). Similar restrictions impact our NGA head-end designs. Moving to a “best-efforts” contended service, or accepting lower sustained speeds, would allow more customers to be supported on each network component, and so would permit significant cost benefits, but at the expense of performance predictability.”36

In addition to GPON, there are a number of other variants of PON that offer higher access speeds. These include:

35 ITU Standard no. G.984 36 Openreach consultation ‘Upgrading the Access Network with FTTP’ July 2017, p.19

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XGS-PON37, or 10G-PON, is a 10-Gigabit version. The XGS-PON provides 10G symmetrically. This has been developed to serve the demand for video and over the top (OTT) TV services. Like GPON the 10G service provided on a single fibre is split between 32 or more end users.

XGS-PON’s maximum rate is 10 Gbps downstream and 10 Gbps upstream and different Wave Division Multiplexing (WDM) wavelengths are used downstream and upstream with the 10 Gbps being shared across all of the end user connections. Thus the sustained speed enjoyed by an individual user is likely to be less than 10Gbps and dependent on the number of working connections at the splitter38. XGS-PON keeps implementation costs low as it can coexist on the same fibre as standard GPON (different splitters on the same fibre have different capabilities), although it is not yet widely implemented. It can provide an upgrade path for service providers and customers39 and potential future developments of XGS-PON could provide data speeds of 40Gbps and 100Gbps.

Ethernet PON (EPON) was developed by the Institute of Electrical and Electronic Engineers (IEEE) based on the Ethernet standard 802.3. It uses WDM with the same optical frequencies as GPON and offers a line data rate of 1.25 Gbps symmetric. EPON is sometimes referred to as Gigabit Ethernet PON or GEPON.

EPON is fully compatible with other Ethernet standards, so no conversion or encapsulation is necessary when connecting to Ethernet-based networks on either end. There is also a 10-Gbps Ethernet version, which uses a different wavelength on the fibre.

Next Generation PON 2 or Time and Wavelength Division Multiplexed Passive Optical Network (NG-PON2 or TWDM-PON)40 provides four wavelengths41 per fibre (upgradeable to eight) each of which is capable of delivering symmetrical or asymmetrical bit rates of 2.5Gbps or 10Gbps. This increased bandwidth capacity and the flexibility allows for a range of possibilities for fibre networks. These can be described as:

• Supply, manage and evolve to the required bandwidth for different services: o High-bandwidth symmetrical for business / enterprise; o High-bandwidth asymmetrical for mobile backhaul. • Support the convergence of services and users on the same infrastructure – saving CAPEX and providing additional revenues.

37 ITU standard no. ITU-T G.9807.1. 38 The service provided to the end customer depends on the number of customers sharing the 10G at the splitter. For example, the 10G could be provided to just one end customer, receiving the full 10G symmetrical. However if the 10G were split to 4 customers, each would receive 2.5G, if split to 10 customers then each would receive 1G. 39 XGS-PON is currently being deployed by some network operators and is being considered by Openreach (we’ve already said this in the main text, except for the Openreach bit). 40 NG-PON2 TWDM PON is as International Telecommunications Union (ITU) T-REC-G.989. 41 This would allow four (or eight) optical signals (light sources) to co-exist on the same fibre.

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• Provides flexibility by supporting the overlay of multiple services, user groups or operators on the same fibre. As an example, an operator could simplify its network operations by utilising dedicated wavelengths to isolate different applications provided by different operating divisions of an operator. • TWDM-PONs will allow different wavelengths to be assigned to different operators. This could provide the flexibility to facilitate the co-investment in a common infrastructure, which could encourage investment and promote the sharing of cost and risks.

Figure 8: Example TWDM-PON Configuration

Source: Vodafone/Alcatel-Lucent

One of the key requirements when the industry was developing next generation PON solutions was to allow operators to preserve their current investment in PONs and to reuse the fibre cables, which are the most expensive part of the network. The TWDM-PON solution addresses this is a number of ways:

1. Compatibility with GPON: TWDM-PON can coexist with, and expand on, current GPON deployment by operators. This coexistence allows operators’ investment in fibre to continue to provide value and return in the longer term; 2. Zero impact to outside network: TWDM-PON typically has no cost or operational impact on the existing passive components deployed as part of the GPON network rollout. TWDM-PON is capable of using the same splitters to allow simplification of fibre management, facilitate tuning and to maximise compatibility with other network components and the equipment of end-users, and 3. Ease of introduction: TWDM-PON can be introduced easily and gradually into the existing fibres of a FTTP deployment. Although the use of multi-wavelengths is feasible, some operators might find it easier to commence deployment with a single wavelength and to add further wavelengths as bandwidth demand increases or service requirements

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change. The flexibility of TWDM-PON allows upgrades to be introduced on a fibre-by- fibre basis by simply adding and configuring cards at the local exchange.

Reduction of cost and risk

The introduction of future PON technology could lead to a reduction in cost and risk by allowing more efficient operations. The technologies support wavelength management techniques that can allow operators to move end users from one wavelength to another avoiding any expensive network intervention that involves a site visit.

As an example, TWDM-PON could permit an operator to use one (or more) wavelength(s) on a common PON, deployed on either common or separate exchange based equipment. With their individual wavelengths operators can obtain flexibility and independence to offer, manage and upgrade quality of service according to their business priorities.

Summary The existing GPON technology only uses a fraction of the capacity potential of the fibre that is deployed. New access fibre based technologies such as TWDM-PON could use that potential by increasing capacity and flexibility. The changes could allow operators to create more revenues by the convergence of multiple services on to a single fibre. This helps to reduce costs by an increase in operational efficiency as well as allowing co-investment opportunities. TWDM-PON allows operators to protect their existing investment in fibre assets with the upgrade path to TWDM-PON using the same fibre and passive components as current GPON or XGS-PON networks and is achieved by the simple overlay of new active components for the TWDM-PON network. PON networks can, therefore, follow an upgrade path to enable higher bandwidth and/or meet higher demand than originally expected.

7.4 PON vs. P2P Key Functionality Even where FTTP deployment may be close to consumers of P2P services, there remains the question of whether current generations of PON (GPON) can deliver equivalent services to P2P. There are a number of characteristics of PON that mean that today P2P equivalent services cannot be delivered using GPON technology.

• Speed: GPON is restricted to 2.5Gbps download and 1.5Gbps upload. However, as explained by Openreach in the quote above, because the resource is shared, the sustained download speed is less than the headline speed, dependent on the number of users on each splitter.

• Symmetry: FTTP services based on GPON are generally provided as an asymmetric service, apart from the service provided by Hyperoptic.

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• QoS: GPON works on a “best efforts” basis, so does not deliver the guaranteed level of QoS required by the subset of business customers.

• Lack of resilience: The standard build for GPON has a single route from the exchange to the customer premises, meaning that it cannot deliver the level of resilience required by corporate customers.

Next generations of PON technologies

As discussed above, equipment vendors and operators around the world have been developing and trialling evolutions of the GPON technology used today to provide mass-market broadband services. Their aim is to reach multi-gigabit capacity on the technologies. However, a number of issues have resulted in the evolution not progressing as fast as expected. These include:

a) The capacity demands of consumers are not increasing sufficiently to justify the higher capacity on the PON technology; b) Technical challenges relating to the stability of the optics to support the increased capacity; and c) The price point of the optics currently being too high to ensure a feasible investment.

Whilst the price point of XGS-PON optics has dropped sufficiently to make it possible for operators to deploy from day one, the above points are still valid for other advanced versions of the PON technology.

A key issue for PON, and its ability to provide equivalent services to P2P, is whether it can match the resilience of a leased line. Where critical services are provided to business these are normally provisioned using a protected (or resilient network) that has tight tolerance of performance parameters such as jitter and latency. The standard provision of a PON is without protection, which makes a more cost effective solution for a mass-market deployment.

However, manufacturers of PON equipment42 consider that a GPON can provide the reliability and performance expected for business services if the network is carefully designed from the outset. The Full Service Access Network (FSAN) Group’s standard for GPON (G.984) allows for several types of redundancy within the network, however, the specification does not provide for the network interactions needed to operate the redundancy in an efficient manner.

Standard protocols require a switch to a protection circuit to occur within 50ms of a fault condition occurring in order to ensure minimum impact to services. This would require the GPON network to provide switching between OLT cards and between ONT fibre ports.

42 Such as Fujitsu in a report: Business Class Services over a GPON Network, 2006

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The FSAN has defined four types of protection topologies that can offer varying degrees of protection that can be individually considered for the protection required and by taking into account the cost of the protection solution. The four types of protection are described in Figure 9 below with an estimate of the protection they provide.

Figure 9: FSAN Protection Scenarios

Scenario Main fibre cable Access fibre % Access fibre % for business protectio for residential protection customer n to customer to business residential customer customer A Two additional splitters Dual access 60% Single access 20% allow a second main fibre fibre fibre to provide protection over part of the main fibre route B Two OLTs provided at Dual access 80% Single access 40% exchange with two main fibre fibre fibre cables to the splitter C Two OLTs at exchange Dual access 100% Single access 60% with two splitters fibre (from fibre provided. The business separate access fibres are splitters) provided to both splitters therefore providing dual access fibre. The residential access fibre is only provided to a single splitter D Two OLTs provided at Dual access 100% Single access 71% exchange with two fibre (from fibre splitters. A further two separate splitters are provided and ‘second’ these are connected to splitters) both of the initial splitters (i.e. in a mesh to provide resilience. The business access fibres are provided to both of the second splitters therefore providing dual access fibre. The residential access fibre is only provided to a single splitter

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Each of the scenarios comes with a stepped increase in complexity (fibre requirement as well as splitter requirements) and therefore the cost per solution increases.

In summary, to provide the type of protection described above would increase significantly the cost of deployment of a GPON network. Careful planning would be required to ensure that sufficient fibre capacity, both in main fibres and in access fibres, is available. Demand for protection services would be difficult to predict and therefore it would be difficult to forecast what type of protection to apply to what splitter and retrospectively providing protection to meet a customer service request would increase cost.

However, whilst the PON based solution would increase resilience and protection for a segment of the business connectivity market, all of the solutions described above rely on the sharing of splitters and fibre and are reliant on the capacity and performance of the GPON system to provide the service.

The possibilities suggested above only exist if companies deploying PONs today do so in the way suggested. If they do not then a reconfiguration of the network would be necessary to provide the resilience needed. If such a reconfiguration is not feasible then, when a business customer demands complete independence, a dedicated fibre point-to-point circuit is required. This is even more the case when the customer requires the ability to control capacity and that the service is provided with guaranteed low latency and jitter.

Advantages of Point-to-point vs. PON In addition to the ability to receive a sufficient degree of resilience, there are a number of other considerations that would mean that a PON technology would not provide a suitable substitution for the end user’s requirements. These include:

a) The independence of decision making – allows the enterprise customer to decide what they are going to do with the connectivity and what equipment they will put on the end of the connection b) Upgrades / downgrades – the enterprise customer can request changes to the service independent of other customers and services. c) Some wholesale demand is switching to dark fibre. PON technology is by definition lit and so cannot be used to meet this demand, whereas P2P can.

7.5 Assets for a PON to deliver Point-to-point services

A supply side analysis in a market definition, considers whether the supplier of an alternative product could provide a product equivalent to the focal product in response to a SSNIP by the hypothetical monopolist without having to make a significant investment in new assets. As we pointed out above in Section 2.2 there are two key aspects of supply-side substitution. First, the potential entrant is a real, not a hypothetical, company, i.e. it is an active company that has

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network deployed. Secondly, any costs it incurs in entering the market need to be recoverable within the confines of a SSNIP.

We consider here, therefore, whether a provider of a PON could reconfigure those assets to provide P2P services within this cost constraint.

The fibre that supports a PON network is laid out in a ‘tree and branch’ topology. That is a fibre feeds a splitter, which provides in this case, 32 connections to premises, a simplified version of this is shown in Figure 10.

Figure 10: PON Topology

N times passive splitter

1 to n fibre cables to customer premises

Cable from exchange to Cable from passive splitter passive splitter location location to customer premise

Source: SPC Network n = 32

To provide a point-to-point connection from the exchange to the customer premises, in theory, the access fibre connection could be spliced (or jointed) on to a separate (spare) fibre from the location of the splitter back to the exchange, as shown in Figure 11.

However, there is an important restricting factor: whether there is enough spare fibre capacity available in the cable from the exchange to the location of the splitter. If sufficient spare capacity is available, then this could technically be allocated to the customer specific P2P connection. The customer fibre connection, from the fibre splitter to the customer premise would be removed from the splitter and spliced (jointed) directly to the fibre in the cable going to the exchange. Alternatively, spare fibres from the customer’s premises could be spliced onto spare fibres on the cables to the exchange. A number of fibres in the main exchange cable would be allocated for FTTP broadband services (connected to PON splitters) and spare fibres in that cable would be available for P2P services. Those P2P fibres would be left near the PON splitter location and when a customer required P2P service then the operator would incur incremental costs to bring that fibre to the enterprise.

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Figure 11: PON and P2P Topology

N times passive splitter

1 to n fibre cables to customer premises

Customer connection removed from splitter and ‘jointed’ to spare fibre in main cable to the exchange to provide a point to point service Source: SPC Network

For a network operator the capacity of the cable to the exchange would depend on the planning rules that had been employed to plan and lay out the fibre to support the PON network. It is possible that any spare fibre capacity would have only been planned for use in the event of a fault, when the spare fibre could be swapped with a faulty fibre. There is the potential that there would not be sufficient spare capacity to offer the option of a point-to-point service over this cable. In addition to the fibre being available, other considerations, such as future demands, for both provision of service and for fault scenarios, could mean that a network operator would be able to justify not providing access to any spare fibres. Therefore there would be a need to provide additional, new fibre capacity between the exchange location and the splitter to provide any future point-to-point capacity requirements.

Even if the operator had provided spare capacity specifically to service a forecasted P2P requirement, it would still incur the incremental cost of reconfiguring the network to provide a P2P service.

Whilst there are still potential operational issues, the solution laid out above might provide a technical solution to allow a PON network to be reconfigured to provide fibre capacity for a point-to-point service request.

Importantly, however, this does not overcome the issue that the provision of a point-to-point service over a PON / topology would not by itself meet the resilience requirements of a group of end users with specific requirements for a point-to-point service.

Many of the customers who require a point-to-point service also have a requirement for service protection / resilience. This is often in the form of a second, separate path between the exchange and the customer site. Often the requirement would mean that the two connections (the primary and the resilience connection) can not physically share the same cable, the same

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duct or the same duct route. The fact that the PON is deployed in a tree and branch network means that any form of resilience (fibre, duct, route) is not available on the existing PON topology. For this reason, for a specific group of customers, the provision of point-to-point services over an existing PON / topology would not meet their requirements.

Whilst there has been some developments that could make a PON more resilient, as described above, these are not widely available and do not address the diverse routing requirements of specific customer group.

Conclusion – Technology

There are a number of developments of PON that already allow providers to offer higher access speeds, although they are not widely implemented. It is also possible to provide resilience within a PON. However, there are some fundamental topological restrictions. Specifically, a PON is designed around a splitter and so the same data are transmitted to all customers downstream of the splitter. It is technically feasible for the splitter to be bypassed, but, the network operator would need to design-in this capability along with the resilience, when the network is deployed in the first instance. Retrofitting these features would be difficult and costly.

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8 CONCLUSION: A SINGLE OR MULTIPLE PRODUCT MARKETS?

In this final section of our report, we return to the original question: is Ofcom’s apparent view that the full range of services required by households, small and medium sized enterprises and corporate customers can be delivered over the same fibre-rich infrastructure valid? If not, then it is unlikely that those services requiring the specific features of a P2P networks will be in the same relevant market for regulatory purposes as those delivered by PON topologies.

8.1 Demand Side Analysis

As noted above in Section 3, products are in the same relevant market if they can be used by customers for the same purpose (end use), the economic test for which is the Hypothetical Monopolist Test (HMT).

However, if the fundamental characteristics of two products means that they cannot be used for the same purpose, then there appears little need for an economic test to determine whether there is likely to be any demand side substitution in the event of a SSNIP.

We have seen above in Section 5 that there is an identifiable group of customers who require, and are prepared to pay for, an enhanced set of services over and above those delivered by even ultrafast broadband. Table 3 below sets out the requirements of this segment of customers and compares the ability of broadband and point-to-point leased lines currently in the market to deliver these requirements.

This table shows clearly that broadband does not have the capability of delivering the key service requirements of high-end customers. Our forward looking analysis set out in Section 7 above shows that this is unlikely to change in the foreseeable future due to the inherent characteristics of the PON technology used to provide broadband access.

Even if FTTP broadband were able to deliver the same QoS as a P2P network, it would need to be available in locations where business customers with that requirement are located. Despite the ambitious roll-out plans for FTTP of a number of operators over the next six years, these are centred on residential locations and there is no evidence of a strong correlation between the location of supply and demand for enterprise grade services.

These fundamental characteristics, and the timescale and location of future fibre roll-out, suggest that FTTP based on a PON and a P2P network will not be useable for same purpose in time for the 2021 market review and probably not by 2026. The European Commission’s basic test of products be used for the same purpose is, therefore, highly unlikely to be met.

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Table 3: Demand side comparison of FTTP and Enterprise Ethernet

Requirement Features of

Broadband Leased Lines Ultra high speed up to 100Gbps ✗ Currently only ✓ 1Gbps on G- PON, 10Gbps on XGS-PON, though NG PON will be able to deliver higher speeds. Symmetric upload and download speeds are the ✓ same But not from all ✓ providers. Dedicated path between A and B ends of network. ✗ ✓ Dedicated bandwidth allocated to customer ✗ ✓ Low Latency. ✗ ✓

Dependent on version43 Resilience service availability at as close to 100% as currently possible, with secondary routing being an ✗ ✓ important factor. End to end monitoring and management of the service path. ✗ ✓

8.2 Supply Side Analysis The second test for whether two products are in the same market is supply side substitution.

There are two reasons to believe that this is unlikely to take place by 2021 and 2026. First, Openreach and other builders of FTTP are focussing their efforts on residential areas of cities rather than business districts where most of the demand is located. To supply these areas would require substantial investment in building networks in a different part of the city or town.

Secondly, whilst it is theoretically possible for a fibre in a PON to bypass the splitter and be taken directly to a customer site, the network would have had to be dimensioned to have enough spare fibre, over and above the demands of broadband consumers, to meet this need. Further, it

43 Newer versions of PON technology have low latency that could support services such as 5G networks, but this is not the current standard deployment.

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would need to have been designed with built-in redundancy to meet the resilience needs of customers. Unless this has already been done, a significant investment would be required to upgrade a PON to be able to enter the P2P market and enable it to meet the specific demands of a segment of that market.

However, whether or not there could be supply-side substitution is an empirical question. Based on our previous analysis we propose a three-stage test to determine whether such substitution is present:

i) What is the network technology of a potential entrant and how is it configured today?

ii) Have the necessary developments in PON technology been made available in the market at a price point such that alternative suppliers’ existing networks can be reconfigured and /or expanded?

iii) If such technology is available, does the cost allow the network operator to compete with the hypothetical monopolist after it has imposed a SSNIP and reduce the hypothetical monopolist’s profits?

8.3 Overall Conclusion In this report we have set out how the demand of a certain group of customers for high quality service (including very high bandwidth, low latency and resilience) differs from the wider market for broadband access.

We have also assessed where Openreach and other network providers are building FTTP networks and seen that there is no strong correlation between the location of FTTP and the location of business premises that need high quality services. Further, the timescales set out by network operators for building their networks suggest that it will be at least 10 years before most properties in the UK are passed by fibre.

We have also examined whether the current and future versions of PON will be able to provide the service grade of a P2P network and found that there are certain characteristics of PON that mean this will not be possible.

We conclude, therefore, that a fibre network based on PON and one based on P2P cannot be used for the same purpose by customers, even where a PON is available, and so will not be in the same market in time for the 2021 market review and are very unlikely to be in by 2026.

Finally, we have proposed a three-part test for Ofcom to determine whether PON networks available in the market at the time of market review, can act as a supply-side substitute for P2P networks and so whether a single multi-service network exists.