F2C 2012: Benoit Felton

The (Slow) Fiber RevolutionBenoît Felten, CEObenoit@diffractionanalysis.com

Why a Fiber Revolution ?• 2007 saw the birth of www.fiberevolution.com• Why is it a revolution? • Abundant supply of bandwidth • Future proof wireline broadband • Opportunity for new entrants in the market • Opportunity to rethink social organisation around universal connectivity• In markets with advanced fiber penetration, the online service economy is thriving.

The reach of 100 Mbps service over Fiber is expanding Finland Sweden Norway Baltic Russia Netherlands States France Slovenia South Korea North-Eastern USA (VZ) Romania Japan Chattanooga, TN Portugal Italy Turkey Taiwan New Delhi Hong Kong Singapore Sao Paulo Places where 100 Mpbs FTTP service is available with more than 100k homes passed.

The Gigabit Race is On!

The Reach of Gbps Internet Service Still Limited Telia Telia Bredbands Bolaget Bredbands Bolaget & 5 other ISPs & 5 other ISPs T2 Slovenia NTT NTT T2 Slovenia EPB Fiber ZON Superonline KDDI KDDI EPB Fiber ZON Superonline HKBN HKBN PCCW PCCW Places where 1Gpbs FTTP service is available with more than 100k homes passed.

Why Gigabit?Speed Sells Gigabit Creates Differentiation Real-Time is Addictive

And yet... Average Speeds per Region (Source: Akamai State of the Internet) 7.00 6.00 5.00Average Speed (Mb/s) Europe 4.00 APAC Middle East 3.00 Latin America North America 2.00 1.00 - Q42008 Q12009 Q22009 Q32009 Q42009 Q12010 Q22010 Q32010 Q42010 Q12011 Q22011 Q32011 Q42011 1-2 quarter decline accross the board

Is wireline quality of experience degrading?• Too early to draw definitive conclusions on the basis of 2 quarters of decline, but worth keeping an eye on.• If there is continued decline, explanations could be: • Akamai’s data gathering methodology has changed • Economic crises causes customers to downgrade their subscriptions • Quality of experience is really degrading• Content is shifting to higher standards of quality, the number of devices pulling on set network resources is increasing but broadband access isn’t following suit.

The Incumbents’ Passive Resistance• Incumbents that are not facing a very serious competitive threat on the network layer (from cable or from another FTTP new entrant) have no incentive to aggressively deploy NGA: • They already own a very profitable (though obsolete) infrastructure • They are no longer structured for long-term investment• Incumbent resistance to FTTP takes different forms. Fiber to the Manipulating Future Siphoning Press Release Needs Public Subsidies The incumbent makes The incumbent insists that the The incumbent convinces numerous broadband needs of users is local and nationalannouncements, but doesn’t not so high (and even gets governments that any public actually implement much if broadband redefined in that subsidies for broadband anything (France…) direction…) (US…) should go to the incumbent (UK…) Litigate, litigate, litigate…

Mythbusting: There is no FTTH/B “demand issue”• Despite some variation on a project by project basis, take-up is generally a factor of time. Take-up vs years in operation• Acquisitions 90% strategies aim to Take-up across deployment 80% accelerate take-up 70% Altibox 60% Bredbands• Premium 50% Networx Bolaget strategies tend to 40% slow it down Superonline 30% Verizon HKBN KPN 20%• Larger projects TEO 10% and incumbents Orange PT have generally 0% lower take-up 0 2 4 6 8 10 12 14 Years in operation

Mythbusting: FTTH/B ARPU on average is 46% higher than DSL• When comparing FTTH/B Average Revenues Per User (ARPU) with DSL ARPU for the same player (or, in case of FTTH/B only players for the incumbent in the same market), across the sample we see that on average FTTH/B ARPU is 46% higher. DSL ARPU vs FTTH/B ARPU (normalized USD) 60 50 40 30 55 20 38 + 46% 10 0 Average DSL ARPU Average FTTH/B ARPU

Why FTTH/B ARPU is higher?• Overall, FTTH/B prices are higher for equivalent service propositions (bandwidth excepted)• FTTH/B customers tend to subscribe to more services (ie. more revenue generating units for the service provider)• FTTH/B customers tend to buy more options and pay as you go services: premium channels, VoD movies, multi-screen options, etc.• Examples: • On average 2.5 VoD per month on DSL and 7 on FTTH/B • 90% of FTTH/B customers have triple play vs. 15% on DSL

Competitive ARPU vs Incumbent ARPU• Incumbent operators tend to be Competitive ARPU vs Incumbent ARPU more cautious regarding (base 100 = average DSL ARPU) FTTH/B pricing strategies. 200• Competitive operators have to 150 reduce the gap with DSL ARPU to develop their customer base. 100 178• Incumbent operators have 114 50 94 104 lower incentives to sell aggressively due to the 0 revenues from copper local Average DSL ARPU Average FTTH/B ARPU loop. They call it “managing the transition”. Competitive Incumbent Competitive + 121% DSL FTTH/B Incumbent ARPU + 172% ARPU

Original and Compounded Policy Sins• The original sin of telecom policy makers was not understanding that infrastructure and services operate: • On different timeframes • With different investment structures • With different skillsets • With different market dynamics• The compounded sin of telecom policy makers is thinking they can find incentives for incumbents to invest in next-generation infrastructure.• Policy makers need to wake up and smell the coffee: only by encouraging infrastructure renewal through new entrants (municipalities, utilities, new infrastructure players…) can they hope to

The Missing Piece• Telecom funds don’t want to finance long-term infrastructure.• Infrastructure funds don’t want to finance telecom players.• Awareness of the infrastructure opportunity is rising!

The Revolution Will Not Be Television• Betting on incumbents to drive next-generation access networks is misguided and will not work.• Policy makers should focus on eliminating all barriers to alternative players – public or private – deploying infrastructure.• Television is no longer the driver for NGA deployment and adoption. NGA should be viewed as very profitable long term infrastructure investment and funded on that basis, which would ensure: • a competitive landscape (optimal take-up realised through open access) • A universal deployment (if the right compensation mechanisms are put in place) • A future proof technology (as long-term investors seek revenue assurance)

F2C 2012: Benoit Felton

by Freedom to Connect

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