Utilities’ contribution to national fiber development How utilities and telecom operators can cooperate to accelerate fiber deployment July, 2017 Content Executive summary 3 1. The ultra-broadband demand-supply balance remains an unsolved equation 4 2. Several utilities are contributing to national fiber development 6 3. Utilities have inherent advantages 7 4. Utilities have a variety of reasons to diversify into fiber business 10 5. Three business models can be adopted 12 6. Fiber development does not come without challenges 16 7. Arthur D. Little is the ideal partner to support both utilities and telcos 17 Authors: Andrea Faggiano Jaap Kalkman Partner Telecommunication, Information, Partner and Global Head Energy & Media & Electronics and Global Head Utilities, Middle East Strategic Advisory Services for [email protected] Competition and Regulation, Middle East [email protected] Lokesh Dadhich Carlo Stella Principal Telecommunication, Information, Principal Energy & Utilities, Media & Electronics, Middle East Middle East [email protected] [email protected] Acknowledgement for their support and valuable input: Arvind Rajeswaran and Eddy Ghanem. We would like to express our gratitude to all companies with which we have interacted. They have been instrumental in the generation of content for this viewpoint: Altibox, EPB Fiber, IWB Net, M-Net, Northpower Fiber, Openfiber, SIRO, WAOO. Executive summary As the race for building fiber infrastructure accelerates globally, utilities (especially electrical utilities) are increasingly seen as new credible players. In the most convincing cases, utilities step in and play a complementary role in national fiber development. Engagement of utilities in fiber development can result in a win-win situation for national agencies, the utilities themselves and telecom operators. From one side, utilities can exploit some advantages in fiber development, leading to accelerated fiber deployment and less spending of national funds on network expansion. The utilities themselves stand to benefit through the diversification of their revenues and enhancement of their core businesses. From the other side, telecom operators benefit from the ability to reach hitherto unprofitable customers. In this article, we detail how utilities position themselves for national fiber development, and how they can be engaged. 3 1. The ultra-broadband demand-supply balance remains an unsolved equation Globally, the race for fiber infrastructure has been Figure 2: Time taken to deploy nationwide fiber accelerating in the recent past. The number of countries # of years for fiber roll-out Duration of fiber roll-out in years that achieved 95 percent fiber-to-the-home (FTTH) coverage 10 increased from 1 in 2012 to 6 in 2016. Similarly, the number of 7 8 6 countries that achieved higher than 50 percent coverage has 4 5 3 increased from 10 in 2012 to 14 in 2016. The growth is driven by commercial purposes (the business Qatar Singapore Latvia UAE New Japan Sweden Zealand case for fiber is sound), as well as national development agendas, which consider ultra-high-speed broadband a critical Note: New Zealand expected roll-out from 2013 to 2019, Sweden started in 2006, and expected to reach 80% coverage by 2017 enabler of economic growth. Several countries globally have Note: Duration calculated as the time taken to roll-out fiber from 20% to 80% of HHs Source: Arthur D. Little analysis plans to increase the coverage targets for high-speed fiber broadband. So far, the reasons for slow fiber deployment vary by country, but – generally speaking – can be explained by the fact that Countries seriously willing to deploy FTTH now (e.g., Qatar, New user application requirements in terms of bandwidth and Zealand and Sweden) can achieve full coverage in less than 10 latency have remained moderate, leading to low take-up rates. years. In markets where fiber deployment started earlier (e.g., These requirements could be satisfied more competitively with European markets such as the UK and Germany), the expected alternative technologies such as DSL later augmented with time frames rise to 15 to 20 years due to operators’ network vectoring, bonding, etc., or even 4G/4G+ mobile broadband, strategies, competitive dynamics and regulatory uncertainties. which are less investment intensive and hence more suitable for areas that are not highly populated or digitalized. However, Nevertheless, despite demand and push from national entities, more recently the demand for 1Gbps products is increasing, and only 11 countries in the world have achieved fiber penetration1 assumed to be 10 percent of fixed-broadband market demand. equal to or higher than 25 percent. Figure 1: Households passed, 2012 vs. 2016e % HHp 2012 % HHp 2016 Penetration higher than 25% 100% 100% Lorem ipsum dolor sit amet 99% 99% 96% 95% 96% 93% 92% 88% 87% 89% 1 86% 83% 84% 78% 76% 71% 70% 66% 61% 56% 54% 51% 48% 38% 34% 28% 32% 24% 21% 17% 18% 20% 13% 6% 8% 6% 8% 6% 3% 3% 1% 3% UK KSA UAE USA Spain Qatar China Japan Latvia France Austria Sweden Portugal Australia Lithuania Germany Singapore Hong Kong Hong Switzerland Netherlands South Korea New Zealand HHp – House holds passed HHc – House holds connected Source: Euromonitor, IDATE World FTTx market June 2016, Arthur D. Little analysis 1 Defined as Households connected (HHc) over Households served (HHs). Source: FTTH council 4 1 Figure 3: Households connected, 2016e % HHc/HHs 2016 Penetration higher than 25% Lorem ipsum dolor sit amet 86% 83% 71% 70% 66% 54% 44% 43% 43% 35% 25% 21% 21% 18% 17% 13% 12% 11% 8% 2% 2% 1% UK KSA UAE USA Spain Qatar China Japan Latvia France Austria Sweden Portugal Australia Lithuania Germany Singapore Hong Kong Hong Switzerland Netherlands South Korea South New Zealand New HHp – House holds passed HHc – House holds connected Source: Euromonitor, IDATE World FTTx market June 2016, Arthur D. Little analysis To further exacerbate this situation, operational and regulatory Figure 5: Return profile for fiber investments risks generally offset the strongest willingness to invest, Internal Rate of Return Maximum as obtaining permits and rights of way from regions or (%) IRR municipalities can turn into a nightmare. This is especially true Public Sector intervention area (direct and indirect measures) when operators plan to adopt vertically integrated models in Min which the retail exploitation of the built fiber asset is exclusive to Small country the infrastructure owner. As a result, national broadband plans suffer from structural Medium country voids, as few rational investors are ready to commit to covering 1 more than 50 percent of their countries without public support, Large country be it direct (financial subsidy) or indirect (demand subsidy and Coverage 54% 75% 93% regulatory certainty). 20% 30% 40% 50% 60% 70% 80% 90% 100% High income (optimal coverage) Medium profitability Non-viable areas Source: Arthur D. Little analysis Figure 4: Launch of 1 Gbps offers, timeline Hong Kong Switzerland Singapore UAE Qatar PCCW Ltd Swisscom My Republic du launches Ooredoo launches launches1 Gbps launches 1 Gbps launches1 Gbps 1 Gbps 1 Gbps 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 New Zealand France Sweden South Portugal Spark launches 1 Zon launches Free and SFR Com Hem Korea 1 Gbps 1 Gbps launch 1 Gbps launches KT launches 1 Gbps 1 Gbps Italy Vodafone launches 1 Gbps Source: Publicly available information, company websites, IDATE World FTTx market June 2016, Arthur D. Little analysis 5 1 2. Several utilities are contributing to national fiber development As alternative network providers, utilities are well positioned to n The accepted role of fiber companies or wholesale-only play a complementary role in national fiber development. We players in the competitive arena; have seen several utilities around the world stepping in and n Higher availability of public funding or government-led trying to fill the gaps left by telecom players. infrastructure initiatives; Utilities have more reasons to be confident now, as the current n Incumbents mainly focused on the most lucrative areas; business context seems more favorable to these initiatives, n Fiber specialization offering better risk/reward balance; compared to the bust of the original tide of alternative players in early 2000: n Significant unrealized value of the left-over ducting and pole capacity among many utilities. n Rising demand for ultra-broadband among consumers, especially in light of newer applications such as 4k, 8k, VR and AR; Figure 6: FiberCos set up by Electricity Utilities New Basel, Bavaria, US Ireland Norway Italy Denmark Zealand Switzerland Germany 36-utility 14-utility Utility partnership partnership Fiber Northpower EPB Fiber SIRO Altibox Open Fiber IWB Net M-Net WAOO Venture Fiber Business Market Business National National National Business Business Trigger for diversifi- opportunity diversifi- policy policy policy diversifi- diversifi- cation cation cation cation FTTx National Public Public Market Public policy funding funding opportunity funding Business Retail Wholesale Retail Wholesale Wholesale Wholesale Retail Retail model Retail (B2B) Wholesale Source: Arthur D. Little analysis 1 6 3. Utilities have inherent advantages As alternative network providers, utilities have some inherent However, in the absence of suitable infrastructure, the cost advantages in rolling out fiber networks, with some overrated savings will be minimal, as infrastructure reuse is limited. and others underestimated. Figure 8: Comparison of civil costs incurred to deploy fiber on existing infrastructure, per meter of deployment 1. Scope to lower the build cost, but be aware The infrastructure deployed by a utility to offer its core electrical services is very similar to the fiber network architecture. In particular, the hierarchy of an electrical network follows the same hierarchy as that of an FTTH network, but is much denser (up to three times). Therefore, the fiber network can theoretically reuse the electrical infrastructure while optimizing its path to avoid redundant and unnecessary infrastructure deployment, thereby lowering the overall cost of fiber network deployment. Source: Arthur D.