National Fibre Strategies ADL Report


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“National Fibre Strategies: National economic imperative or just another private industry task?”

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National Fibre Strategies ADL Report

  1. 1. Telecommunication, Information,Media & ElectronicsNational economic imperative or just another privateindustry task?National Fibre Strategies
  2. 2. ContentIntroduction 3Broadband is a Key Lever for Economic Growth 4Great Macroeconomics, but a Challenging Business Case 6Five Models for National Fibre Strategies 9National Fibre Models –Which to Choose? 11The Golden Rules for Successful National Fibre Models 14Conclusions 16Arthur D. Little Experience 17Authors 18
  3. 3. 3The socioeconomic benefits of advanced telecommunications infrastructure and services areintuitive, as well as definitive. Global studies by Arthur D. Little on the socioeconomic benefits ofbroadband have demonstrated the links between advanced telecommunications and the diversityand strength of economies.While the telecommunications industry has continued over the years to invest vast sums inautomation, digitalization and higher-speed fixed and mobile access, the industry has now come toa unique point in its history. Until now, it has been possible to modernize and upgrade thefundamental copper-based network, which was inherited in most cases prior to liberalization of theindustry. Now the time has come for the industry to move decisively to fibre. Further upgrades tocopper are possible only for short network segments close to the customers’ premises. Wholefibre or mainly fibre networks are now needed not only for the very fastest fixed access services,but also to underpin the micro layer of the latest mobile backhaul networks.The industry has spent almost 10 years debating which network architecture best fits thecomplicated puzzle of return on investments, technological soundness and competitive position.The challenge now is how to attain the clear national economic benefits of the latest fibreinfrastructure while managing the considerable investment required. The best approach to meetthis challenge remains unclear in many countries.This paper identifies five National Fibre strategic models that have been implemented by countriesaround the globe, and assesses which of these models are most likely to fulfill National Fibre goalsto the benefit of all stakeholders, including governments, regulators and policy makers.Thesemodels lever a number of key success factors, which can be adopted by industry, government andregulators, and which require more sophisticated public and private coordination and graded policyframeworks.Introduction
  4. 4. National Fibre Strategies4Advanced high-speed telecommunication networks have longbeen considered a key underpinning of healthy economies. Now,with the explosion of internet-based business transactions andan increasing reliance on e-mail, file transfer, social networkmarketing, Cloud IT and real-time remote collaboration, thedigital economy has become fundamental and mission critical toeconomic growth in every country.Technological scenarios enabled by ultra-broadband areextraordinary and exciting. No longer is the need for 100 Mbpsper line being questioned, and a combination of factors indicatesthe further development of ultra-broadband demand in thefuture (Figure 1).Arthur D. Little has conducted studies to explore the linksbetween broadband services and economic growth in OECDcountries. While not yet delving into causality, these studiesidentified the complex relationship between productivity andinnovation, which ultimately drives economic growth (Figure 2).Source: Arthur D. LittleFigure 1: Ultra-broadband demand driversUltrabroadbanddemand= SimultaneityResolution andscreen sizex Multiple screens perpersonOn-demand/Interactivity/ Cloudx Multiple connectedobjects At office/at home Multiple videoofferingsBroadband is a Key Lever for Economic GrowthDoublingnationalbroadbandspeedpermanentlyadds 0.3% toGDP1Increasinghomebroadbandspeed by 1Mbps increaseshouseholdincome by onaverage US100 dollars peryear2For every 10percentagepoints increasein broadbandpenetration, theisolatedeconomic effecton GDP growthis ~1%For every 1000additionalbroadbandusers,approximately80 new jobswere created3Socioeconomic Web of Benefits from High Speed BroadbandFigure 2: Broadband networks in a web of socio-economic value creationNote: This map is a simplification – in reality there are even more factors and linkages1) Arthur D. Little in cooperation with Chalmers University of Technology. Based on advanced econometric analysis of 33 OECD countries with speedintervals of 2 to 20 Mbps; 2) Arthur D. Little analysis, based on advanced econometric analysis of 13,000 households in 15 OECD and BRIC countries3) Increased automation has a negative effect on number of jobs, however the net effect of increased broadband speed on the number of jobs is positive,according to several studies.UpdatedSuperscripts
  5. 5. National Fibre Strategies5While the broadband web of value evolves differently in eacheconomy, the headlines are consistently stark and easily identified.Increasing broadband speed permanently boosts GDP, jobs arecreated and household income is increased.Figure 3 correlates fibre deployment with the market capitalizationof network operators, and GDP of their home regions.Thisillustration suggests that the correlation between fibre deploymentsand economic growth is more than coincidence.More crucially, high-speed networks strengthen and drivediversification of economies as Small and Medium Businesses(SMBs), essential for robust economies, are often the quickestto adopt and benefit the most from improved on-line business.For example, as Cloud computing is taking off around the globe,it is the SMBs that gain access to more software and other ITservices to enhance their businesses, provided there are high-speed, low-latency and affordable networks available.1) FTTH Council Presentation; Asia assumption: China - 63 mill. HHP as of June 2012 + 25 mill. HHP added for Dec 2012 figure (assumption: yearly50 mill HHP); MENA figure as of Sep 2012; 2) In top 30 global operators, nationality according to HQ location; 3) As of Sept 28, 2012; 4) InternationalMonetary Fund, October 2012 (Europe – EU-27, Asia – Newly industrialized Asian economies); 5) At end of 2012FTTH/B Households Passed(% of total households1))Market Cap of Network Operators byRegion2) GDP Growth per Region4)Figure 3: Fibre deployment, Telco market cap and regional GDP growth rates6%USAsia* MENAEurope*32%19%-505102012201020082006MENAWorldAsiaUSEurope72107118998388129DJIA*MENA5)20123)201020082006WorldAsiaUSEurope117759878100100100100100GDP growth in %, constant pricesWorld*Dow Jones Industrial Average*Asia – China, South Korea, Japan; Europe – EU-27;*EU-5 – France, Germany, Italy, Spain, UK2.3%Basis of 100 in 2006EU-5*14%Implementing the right national FTTH/B deployment fosters industry value generation and strengthens economicdevelopmentUpdatedChanges to thesource and theheader of the leftmost graph
  6. 6. National Fibre Strategies6Given the socioeconomic advantages of fast networks and theundisputed capacity supremacy of fibre, why has the telecomindustry been unsuccessful in developing a good business case forextensive fibre deployments? The answer is that the investmentrequired to replace what is often over 100 years of infrastructuredeployment is vast. The Fibre-To-The-Home (FTTH) Councilestimates that re-wiring Europe on a similar reach and scale as thehistoric networks will cost a massive EUR 200 billion. Similarly,when evaluating the Google Fibre case, Goldman Sachs reportedthat at least USD 140 billion is required to partially cover the US.It can be further argued that these private initiatives can probablynot be completed without extensive partnerships with municipal,regional or national governments.Comparing what has been invested in fibre in the region to dateand what has been promised as future investment in Europe,we see there is still a long way to go (Figure 4).The last time the industry took on national network deploymentson this scale was before privatization, before networkcompetition and when industry profitability was higher. In mostcountries, there are several parallel telecom infrastructures thatfurther hamper industry economics. A typical developed countrymay have an incumbent fixed network, a challenger fixednetwork, four mobile networks, cableTV networks covering alarge proportion of the country, and an electrical power or otherutility company with a fibre network in several large cities. Thiscould amount to five or six national telecom infrastructures,which no one would suggest for roads, railways, and wateror electricity systems.This mosaic of infrastructures typicallyresults in densely populated areas being served with multiplesolutions of variable standards, and the rest of the nation beingunder-served. Hence the phrase “digital divide” was coined.The situation presents regulators with an unfamiliar challenge.After 30 years or more of breaking national monopolies, thereis now a growing opinion and sound argument that too muchinfrastructure competition is holding back fibre deployment,which in turn is hurting consumers and the wider economy(refer to Figure 2).Great Macroeconomics, but a ChallengingBusiness CaseCost per Household Passed in Relation to Household Density1)Fibre Investment Requirements EU 27 The European Union set ambitious targets in the “Digital Agenda” –at least 50% of the households in European Union will use broadbandconnections of 100 Mbps or more Assuming a targeted 100% FTTH coverage of EU-27 countries, atotal investment of approximately € 202 billion is needed1 To date only approximately 11% of this investment has been madeor announced, indicating a huge gap between needed and effectedinvestments. This may be attributed to the unclear regulatorylandscape and limited initiative by operators to collaborate togetherto invest in fibre050010001500200025000 1000 2000 3000 4000cost/HHP in €# of households/km21) FTTH council – “The Cost of Meeting Europe’s Network Needs”, July 20121) FTTH Council – “The Cost of Meeting Europe’s Network Needs”, July 2012;2) FTTH Council – “Financing Stimulus for FTTH”, July 2013;3) Investments announced by Incumbents – Arthur D. Little – Exane BNP Paribas Report2011 (€250mil. added for each EU country not included in report)Target investmentfor 100% FTTHcoverage in EU-271)17920210 13Investmentto date2)Publicityannouncedto date3)Investmentsto be takenEUR bnFigure 4: FTTH Council estimates of National Fibre deployment in EU27
  7. 7. National Fibre Strategies7Simply put, the best solution for National Fibre involves well-dug trenches that are maintainable, can be reconfigured andexpanded, offers the latest technology and presents options toaccommodate new technology in the future. This is not cheapand even in the favorable situation of dense cities, the businesscase typically heads for +15 year breakeven. More importantly,there is a significant risk associated with such a business case,as represented in our Monte Carlo simulations (Figure 5).Thisexample represents only one fibre deployment; a competitivebuild would reduce both take-up and the business case.The take-up rate, defined as the number of houses passedconverted to houses connected with fee-paying service, iskey to business case performance. In an environment wheretake-up rates could be half or a third if other alternatives are laid,then competing companies are going to look for the cheapestsolutions and deploy only in the most densely populated andhigh revenue areas.This fibre investment opportunity often has to compete withintelecom operators’ portfolio of projects, including near-termreturn cases for new product launches and mid-term returncases for local-loop shortening projects, such as VDSL. Theoverall business environment is further complicated byregulatory uncertainty, such as the possibility of regulatorypressure to open up fibre access investments to competitionat cost-oriented price levels.Taking all this into account, it isnot surprising that, in the absence of some better industrycoordination, fibre projects often do not get the highest priority.As part of the Arthur D. Little - Exane BNP Paribas Report 2011,we surveyed over a hundred leaders in the European telecomsindustry to get their opinions on what makes or breaks themove to fibre. Regulatory stance was at the top of the list(Figure 6 overleaf).Min range0,0%5,0%10,0%15,0%20,0%25,0%30,0%35,0%40,0%45,0%50,0%55,0%60,0%65,0%70,0%75,0%80,0%85,0%90,0%95,0%100,0%7,3% 8,0% 8,7% 9,3% 10,0% 10,7% 11,3% 12,0% 12,7% 13,4% 14,0% 14,7% 15,4% 16,0%Risk curve: IRR cumulated probability curve for a FiberCoFigure 5: Simulations with different coverage scenarios show that ‘value at risk’ increases with coverageCoverageMix ‘a’Coveragemix ‘c’CoverageMix ‘b’Coverage ‘a’ ‘b’ ‘c’FrequencyIRR
  8. 8. National Fibre Strategies8European regulatory policy is now under discussion. GeorgSerentschy, Chair of BEREC and CEO of RTR, the AustrianRegulatory Authority for Broadcasting andTelecommunications,recently stated:Today, the focus of telecommunications regulation inEurope is to some extent on promoting static efficien-cy. Low prices for consumers are widely seen as theultimate goal. However, there are a few drawbacksthat arise from this approach. The main downsideis that firms – especially incumbents – can hardlyearn the profits needed for broad investment in newinfrastructure. The entrants, on the other hand, haveonly few incentives to invest in their own infrastruc-ture, because they can easily access the incumbent’snetworks (option value).The ‘ladder of investment’ concept, which tried tocombine static and dynamic efficiency, failed in thisrespect […]. It is worth noting that the concept of‘ladder of investment’ was instrumental for openingthe market. However, it became obsolete when it comesto fostering investments in a new infrastructure.If governments want the macroeconomic advantages of fibre,then a degree of industry coordination and stimulation ofdemand need to be part of their policy-making.Opinion based on observationsPotential Triggers for FTTH/B Roll-outFigure 6: Industry survey as part of Arthur D. Little – Exane BNP Paribas report 2011“Superfast broadband: Catch up if you can”Source: Arthur D. Little -- Exane BNP Paribas 2011 Report, “Superfast Broadband: Catch up if you can” A supportive regulatory model is vital for a FTTH rolloutand needs to balance the trade-off between infrastructurecompetition and investments It is key to develop the regulatory model in closecollaboration with all relevant stakeholders to ensure anoptimal model selection and deployment A sufficient demand for high speed broadband and thelevel of xDSL saturation is another logical factor triggeringthe FTTH/B rollout The current level of competition on the broadband marketcan be an important factor spurring investment into nextgeneration networks (e.g. high cable competition forcingTelCos to invest in fibre networks), while in other areasover-competition in infrastructure stifles investment Public money is seen as a very important instrument toincentivize rollout activities, especially in unattractiveareas for investment (low-density areas)1,31,52,03,53,8High Demand /xDSL SaturationSupportiveRegulatory ModelStableEconomyHigh Availability ofPublic MoneyHigh Level ofCompetitionIndex reflecting the number of responsesEmploymentshould bedeployment
  9. 9. National Fibre Strategies9Arthur D. Little has just concluded a global survey of NationalFibre strategies in nearly 50 countries. From this study, weidentified five models that governments around the globe havebeen following to reap the benefits from fibre (Figure 7).Each model is a combination of (i) regulatory intensity rangingfrom low (freedom) to high (mandatory open access andregulated pricing) and (ii) degree of public investment rangingfrom zero to full public funding. With the level of public fundingcomes a related degree of policy and regulation of the usage ofthe assets. Underpinning the models are the specific nationalfactors that play a significant role in which model is chosen orprevails, especially in terms of the level of network competition.Model 1 – Private investment, unregulatedIn this model, service providers are free to invest in fibre wherethey deem suitable. Little to no regulatory pressure to unbundleto competitors is applied, and regulated prices are not enforced.This model usually results in service providers investing intofibre. Good quality services at competitive prices appear inmajor population centers, but little beyond those areas. TheUnited States is a well-fitting example of this model.Model 2 – Graded government support, incumbent ledIn this model, the incumbent operator, usually still with asignificant government investment stake or a high level ofinfluence, is mandated to roll out an extensive National Fibrenetwork. Public money is involved in the exercise either directlyor indirectly, and some regulation on open access is applied tocreate a competitive environment. Quite often the secondoperator in the market will also establish a smaller position inselected regions or areas, and be in a position to offer analternative national service via regulated open access. Smallerplayers in the market usually rely purely on a regulated openaccess policy.Five Models for National Fibre StrategiesSource: Arthur D. Little analysis *Regulatory intensity in these models can vary from low to high depending upon situational factorsNational Fibre ModelsSituational FactorsLegacy TechnologyNetwork CompetitionGovernment IntentRegulatory PreferenceLow HighHighMediumLowRegulatory IntensityPublicInvestmentUnfeasible for theGovernmentGovernmentControlled FibrePrivate Invest,Heavy RegulationPrivate Invest,Unregulated54 CommentsCherry PickingStrategy ProminentNational RolloutStrategy Prominent1Graded Government Support,Private Led*3Graded Government Support,Incumbent Led*2Demographics Level of publicinvestment isdetermined based oninvolvementof the governmentas investor/operator Level of regulatoryintensity is determinedbased on theobligations imposed onfibre operator and thetype of infrastructuresharing chosenFigure 7: Five National Fibre ModelsFTTB/H changedto fibre
  10. 10. National Fibre Strategies10This model usually results in a more extensive, higherpenetration network than Model 1, but care is required toensure that artificially-created competition resulting from publicpolicy does not adversely impact service level competition.Otherwise, this model can lead to either uncompetitive prices ordull service offerings. Japan is a good example of this model.Model 3 – Graded government support, private ledSimilar to Model 2, Model 3 results in a more equallycompetitive multi-player market, where the government hasdistanced itself from the incumbent. Importantly, thegovernment drives and partially funds a National Fibre agendathrough all the players in the market. These models generallydeliver high levels of fibre penetration and coverage, allowingfree market forces to operate where they naturally would andpublic money to be focused efficiently on areas where freemarket forces would not deliver fibre. With public coordination,targeted public investment, and graded or lighter touchregulation, these models also foster healthy competition at theservice level. France is a good example of this model.Model 4 – Government-controlled fibreIn this model, the government takes a full hands-on approach tocreating and, in some cases, operating a National Fibre network.With such models, the government agenda for a digitaleconomy is in the foreground, and the objective of policy andregulation is to openly offer and possibly transfer theinfrastructure to the communication service providers in thecountry for commercial service operation. These models willprobably achieve high penetration and a highly uniform standardof infrastructure, and the associated national economics thatcome with it. However, current examples of this model indicatechallenges in terms of speed and efficiency of construction.Australia is a well-fitting example of this model.Model 5 – Private investment and heavy regulationThis model assumes that communication service provider (CSP)competition is strong, and CSPs believe that the fibre market isso attractive that project financing will be easy and fast. Further,this model then applies open access and regulated pricecontrols so that other, usually smaller, CSPs can offer serviceswithout the burden of heavy infrastructure investment. Theintended result is considerable infrastructure competition thatdrives low prices for highly specialized services. The overallEuropean telecom regulatory stance is well-fitting of this model;however, individual countries within Europe often followsignificantly different models in their local markets, dependingon the specific mix of competition from cable operators, thequality of copper network and the peculiarities of the regulatorycontext.In a global survey of National Fibre Strategies, there wereleading and lagging examples for each macro model. Hencechoosing a National Fibre strategy is not just a simple case ofgood model / bad model. Rather, it is a case of identifying thebest model for a specific national market conditions and applyingthat model well.
  11. 11. National Fibre Strategies11An analysis of achieved penetration rates reveals the complexityof the National Fibre topic and indicates where nationalsituational factors can swing to favor either FTTB/H or hybridFTTCab models. A selection of results is shown in Figure 8 (asnapshot of performance as of December 2012) and Figure 9overleaf (the same examples normalized by time in operation,based on a simple average penetration per year of operation).It is clear that it is already time for FTTB/H solutions in manycountries.While it is tempting to look at the top and bottom of the listto find winners and losers in the fibre race, this would bean oversimplification that ignores many markets’ specificcharacteristics, such as where FTTCab is a valid alternative.Each example of the various National Fibre models is unique.For example, the UK, due to its relatively compact geographyand proud, 100-year history of significant network investments,has a good copper- and coax-based access network.The countryenjoys a high proportion of fast broadband (circa 50 percent ofhomes have access to 50 Mbps or greater). This situation hasimpacted the timing and reduced the pressure to move fully tofibre solutions.This gradual approach has also been adopted in other countrieswhere cable and FTTCab address the need for increasedconnection speed with limited marginal costs, and enablefurther enhancements to be implemented over time. However,50 Mbps will rapidly be seen as modest, and the need to moveto FTTB/H may be approaching over the next five years. Incountries with a very strong copper infrastructure, we may seethe remaining meters of copper get further life extension thanksto the expected evolution of new technologies, such as G.Fast.While it is not a simple decision between good or bad NationalFibre models, there are some overarching observations, whichare summarized in the following four conceptual categories:nn the unfittingnn the fastnn the unlikelynn the promisingNational Fibre Models – Which to Choose?FTTH/B Households Passed and Households Connected (snapshot as of Dec 2012)Figure 8: Selected national fibre penetration correlated to underpinning models (Dec 2012)Source: FTTH Council Dec 2012, Singapore Statistics report, Arthur D. Little analysis; *uptake or HHc is largely determined by various service offerings,pricing and Go To Market strategies, where as HHp is a pure measure of infrastructure achievement1) As of June 2012 – December figures to be released end of March 2013; 2) As of Sep 20120.7%0.2%1.0%0.5%2.7%1.7%7.1%9.5%19.0%5.3%22.1%3.4%22.4%10.1%51.8%0.1%61.2%45.0%85.0%65.8%85.1%58.0%87.0%42.5%90.0%8.0%95.0%43.0%96.0%30.8%100.0%12.1%% Households Connected% Households PassedLeading Fibre NationsGoes ‘also’FTTCabGoes ‘mainly’FTTCabGoes ‘mainly’FTTCabnewUpdatedQatar numbersSouthKorea1)Australia1)Singapore UnitedStates1)FrancePortugalJapan1) LatviaLithuania KSA2) Germany UKNetherlandsUAE2) HongKong1)4 55113312 2 3 2 2 1 2 5ModelQatar
  12. 12. National Fibre Strategies12THE UNFITTINGModel 5, which relies on private fibre investment coupledwith heavy regulation to encourage consumer servicecompetition, generally does not deliver fibre on any scale!The heavy investments and long pay-back periods involved,coupled with the uncertainty of service take-up rates due tocompeting infrastructures and the probability of low serviceprices, clearly discourages those who have the technicalcapabilities to build such networks. Indeed Europe, where theoverarching policy is Model 5, lags behind other regions overall(Figure 3). Where individual countries within Europe haveachieved higher penetration, they have done so by adoptingattributes of quite different models in their local market (Figure10 overleaf).THE FASTModel 1 (Private investment, unregulated) achieves a higherpenetration rate than its opposite, Model 5, without thepolicy or regulation overhead, but is unlikely to achievewidespread coverage, thus creating a digital divide. Itencourages less than efficient parallel infrastructures and henceinvestments, which with better coordination could achievehigher coverage at no extra cost. In such a model, networkinvestments are focused first on densely populated areas,gradually expanding to less populated areas, while rural areasand the digital divide remain a public issue.Source: FTTH Council Dec 2012, Singapore Statistics report, Arthur D. Little analysis; % Households Passed/Connected per Year – normalized HHP/HHCactual data with respective roll out start years (Roll out start year is determined based on announcements from operators or govt./regulatory fibreinitiatives start date) 1) As of June 2012; 2) As of Sept 20120.0%UK0.1%0.1%Australia1) 0.5%Germany0.3%1.4%USA1)1.1%2.1%KSA2)0.6%2.4%Netherlands0.8%3.2%France0.5%3.2%South Korea1)4.1%6.2%Japan1)3.5%7.5%Latvia3.0%15.3%Singapore5.6%23.8%Qatar14.3%32.0%Hongkong1)5.0%9.4%Portugal2.0%10.4%UAE2)10.8%14.2%Lithuania4.4%14.3%% Households Connected per Year% Households Passed per YearLeadingFibreNations2322131223511545ModelFigure 9: Selected national fibre penetration correlated to underpinning modelFTTH/B Households Passed and Households Connected (time normalized)
  13. 13. National Fibre Strategies13THE UNLIKELYThe well-intended government-controlled fibre Model 4, whileprobably resulting in the most uniform and widespreadinfrastructure, will do so at a slower and perhaps lessfinancially efficient way. The industry, through competition, hasdeveloped provision efficiency at both infrastructure and servicelevels, which Model 4 generally does not fully exploit.THE PROMISINGModels 2 and 3, which adopt a hybrid approach generallyachieve the highest levels of penetration and do so in a moretimely and financially efficient way than other models. Thehybrid approach is a combination of free market competition,graded government coordination and geographically-targetedpublic investment open to competitive bid.The difference between Models 2 and 3 is the level of competitionin the market. Model 3 is applicable for highly competitive marketswith multiple players with balanced competitive positions, andModel 2 where a government-controlled, heavily-influencedincumbent is dominant. In those markets where governmentsretain a significant stake in the incumbent, the temptation is todrive National Fibre through that incumbent, but this can havesignificant adverse effects, destroying essential service levelcompetition unless policy safeguards, such as a transparentwholesale model, are put in place.FibreUnbundlingPriceRegulationCommentUnbundling with price regulation for dominant players recommendedCurrently virtual loop unbundling for incumbent, no price regulationyetFibre loop access regulated for incumbent with ex-post price controlLocal loop unbundling with price regulation in place for incumbentGraded regulation depending on area density/competitionCurrently no requirements for fibre unbundling and price regulationIndependent offer for wholesale access from incumbent since 2011 –pricing issues persistentOnly WBA* regulation – fibre unbundling regulation under wayFibre unbundling and price regulation in place since 2011.40% network was deployed before enforcement of WSFunctional separation of incumbent, with price regulation (dark fibre),Utilities and 100 regional companies active in FTTH/B businessCurrently no requirements for fibre unbundling and price regulation inplaceDeregulated fibre in dense areas – regulation only applying to rurallow competitive areasInadequate progress on fibre local loop unbundling - only theoreticallyin place – and high wholesale access chargesSuggestions for unbundling with price regulation from regulatordeveloped – not implemented (yet)Source: HHP and HHC data as of Dec 2012, from FTTH council and other publicly available resources *WBA = Wholesale Broadband Access(regulation heavy in case of Slovenia, regulation put in place after deployment; in Sweden, utilities built and then sold assets to incumbent)Lithuania 30.8%100.0%Latvia 12.1%61.2%Portugal 8.0%53.0%Bulgaria 14.7%52.6%Sweden 22.7%46.9%Slovenia 12.3%43.0%Denmark 12.4%37.7%Slovakia 11.2%36.1%Romania 1.2%33.6%France 3.4%22.4%Netherlands 5.3%22.1%Germany 0.5%2.7%UK 0.1%0.7%EU total 3.0%14.0%Households Connected as % of total HouseholdsHouseholds Passed as % of total HouseholdsIn place and enforced In development or not enforced Not in place and not in development( )( )Figure 10: European national fibre penetration and degree of compliance to overarching EU fibre model(Model 5 – private investment/heavy regulation”)EU Model VariationsCompliancewith EUregulationHIGHERLOWER
  14. 14. National Fibre Strategies14An analysis of the most promising examples of National Fibremarkets and the models underpinning those cases has identifieda number of golden rules, generally applicable to all of theanalyzed models:nn Believe that ultra-broadband is an essential infrastruc-ture for national competitiveness. Especially in Europe,there is an immediate urgency to reassess the regulatoryframework in order to attract investments and investors,who are increasingly looking to other markets given the poorEuropean economic outlook.nn Create an investment friendly business environmentand avoid heavy regulation, such as ubiquitous mandatoryopen access with cost-oriented price regulation, in highlycompetitive markets, especially where there is an absence ofsignificant public money for fibre networks. Adopt regulatorymeasures for legacy networks with no counter-effects on otherfibre investments. For example, lower copper access chargesmight reduce incentives to invest in cable or mobile broadbandnn Focus regulation on intermodal competition – Mobileoperators and cable companies increasingly compete withfixed line services.The focus of regulatory policy should,therefore, clearly change from an intramodal towards a moreintermodal holistic approachnn Capitalize on the competitive capabilities of all players inthe marketnn In many (generally larger) countries, governments needto be prepared to invest public money to achieve a highpenetration of fibre and this should be done through a na-tional economic development frameworkIn the generally preferred Model 3 or Model 2 (in those marketswith a heavily government-controlled incumbent), there are vitalsuccess factors that underpin successful implementation:nn Combine private endeavors with graded and targetedpublic policy coordination and public financial incen-tives, which requires skillful government-led coordinationof attractive free market investments in black areas vs. lessattractive, white areas requiring public financial supportnn Establish and ensure equal and open competition forthese public funds to all operatorsnn Ensure public finance is targeted to avoid distorting thenatural competitive composition of the market, avoidsubsidizing other operator costsnn Ensure that a transparent and symmetrical wholesalemodel exists for interconnection of the access networksEventually, more favorable context conditions may apply and thelaunch of specific models should be accompanied by actionstaken in other policy areas, in order to:nn Increase national digital literacy and stimulate demandnn Support the purchase of highly technological equipmentby SMBs and consumers (e.g. tablets and laptops)nn Strengthen the ICT industrial policynn Nurture theVenture Capital ecosystemnn Support the development of local OTT playersWhile Public-Private Partnerships can be complex, there aremany good examples where a hybrid approach has beenapplied. In many countries, similar schemes have already beensuccessfully applied in other infrastructure or public serviceareas. For example, in France they have established a systemspecifically for fibre deployment in low-density areas. In theNetherlands, KPN created a mixed private finance model forfibre, which is helping to push penetration levels. In SaudiArabia, the government successfully established an industryfund, the Universal Service Fund, for the development of mobileinfrastructure in remote areas. While these or other exampleswould need to be adapted to fit specific national situations, thereare benchmarks or templates from which to start.Our overall assessment, as shown in Figure 11 overleaf, pointstowards the hybrid models, achievable by reducing regulatorypressure and committing public money, and illustrates some ofthe key questions to be considered when defining a NationalFibre strategy in each specific national situation.The Golden Rules for Successful NationalFibre Models
  15. 15. National Fibre Strategies15Key questions when choosing a modelNational Fibre ModelsFigure 11: Balanced models combine public coordination of infrastructure competition to achieve national goalswhile maintaining healthy service level competitionSource: Arthur D. Little What is the likelihood of national coverage? How quickly will national coverage beachieved? How much duplication can be avoided whileassuring higher standards and a future-proofsolution? How efficiently will public money be used tobuild fibre where it would not otherwiseoccur? How to avoid public money being used wherea free commercial situation exists? To what extent can safeguards be made toensure public money is used for fibre build andnot distortion of service level competition? Which model best balances the many interestsof the various stakeholders?Low HighHighMediumLowRegulatory IntensityPublicInvestmentUnfeasible for theGovernmentGovernmentControlled FibrePrivate Invest,Heavy RegulationPrivate Invest,Unregulated541Graded Government Support,Private Led3Graded Government Support,Incumbent Led2
  16. 16. National Fibre Strategies16There are clear socioeconomic benefits from high-speed, low-latency, super-fast broadband. These benefits are tangible at thenational level in terms of permanent contribution to economicgrowth, employment and the strength and diversity of businessecosystem, especially in terms of the SMB segment.The term ‘high-speed’ is redefined every year. Globally, it istime for fibre, but the business case is challenging, especiallyconsidering how the telecom industry has evolved. The industryhas, in many countries, undergone decades of regulatorypolicy that has successfully replaced monopolistic control withfree market competition. Now the industry faces a challengenot encountered since long before liberalization. It is timefor a decisive, quick re-build to fibre on a massive scale. Theinvestments needed are vast. Some nations have already beensuccessful, while others, including many mature economies, arelagging significantly behind.Left purely to a free market model, nations will witness a digitaldivide; while some areas are not served at all, other areashave a patchwork of duplicated hot spots that are localizedin city centers with potentially sub-optimal infrastructures.More differentiated regulation is now required that recognizesappropriate levels of regulatory intensity at infrastructure andservice competition levels. The single regulatory approach oftelecom-focused infrastructure and service as one indivisiblebundle, which has also given Over-the-Top providers a free rideto revenues at the expense of telecom operators’ infrastructureinvestment, is no longer feasible.The key success factors for the development of winningNational Fibre Strategies are:nn Reduction of regulation pressure in order to create a moreinvestment-friendly environment by introducing new remu-neration and wholesale pricing mechanismsnn Maintenance of cross-operator competition in fibre deploy-ments in economically viable areas in return for an absenceof regulationnn A publically-initiated fair and open orchestration of thoseoperators in second- and third-tier areas where free-marketeconomics can be extended with modest conditions, suchas reciprocal open access between operatorsnn A publically-initiated, fair and open approach with a combina-tion of public and private funding directed to coordinatedfibre build in those least economically attractive areas – againwith appropriate conditions to ensure reciprocal access andthe prevention of internal cross-subsidy that would other-wise distort or reduce competition in super-fast servicesA multi-tiered, hybrid approach that differentiates betweeninfrastructure and service-level competition can drive anoptimum balance between national economic interests, free-market economics and a healthy telecommunications industry,that is able to provide affordable leading edge ICT services sonecessary for economies going forward. Conclusions
  17. 17. National Fibre Strategies17Arthur D. Little uses innovation in products, services,technologies, process and business models to help ourclients achieve growth in theTechnology, Information, Mediaand Electronics (TIME) sectors. Arthur D. Little has deepindustry knowledge of the telecom and IT sectors, based onextensive client work, addressing market analysis, strategy,and performance improvement for telecom operators andICT service providers. We continually support leading globaloperators in developing their strategies, offerings and routesto market. Furthermore, Arthur D. Little continues to invest inthe development of intellectual capital, exploring what’s next,hosting and contributing to global events and conferences, andhelping to shape opinions that drive the growth in theTIMEindustries we serve.Arthur D. Little Experience
  18. 18. AuthorsDr. KarimTagaManaging PartnerGlobal Head TIME Practicetaga.karim@adlittle.comVidhitha KanakamedalaBusiness AnalystSO Practice Middle eastkanakamedala.vidhitha@adlittle.comMichael HofnerConsultantOM Practice Central Europehofner.michael@adlittle.comAndrea FaggianoPrincipalTIME Practice
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  20. 20. D. LittleAs the world’s first consultancy, Arthur D. Little has been atthe forefront of innovation for more than 125 years.We areacknowledged as a thought leader in linking strategy, technologyand innovation. Our consultants consistently develop enduringnext generation solutions to master our clients’ businesscomplexity and to deliver sustainable results suited to theeconomic reality of each of our clients.Arthur D. Little has offices in the most important business citiesaround the world.We are proud to serve many of the Fortune 500companies globally, in addition to other leading firms and publicsector organizations.For further information please visit www.adl.comCopyright © Arthur D. Little 2013. All rights reserved.ContactsIf you would like more information or toarrange an informal discussion on theissues raised here and how they affect yourbusiness, please contact:AustriaKarimTagataga.karim@adlittle.comBelgiumJean Fischfisch.jean@adlittle.comChinaJian Xuxu.jian@adlittle.comCzech RepublicDean Brabecbrabec.dean@adlittle.comFranceDidier Levylevy.didier@adlittle.comGermanyMichael Opitzopitz.michael@adlittle.comItalyGiancarlo Agrestiagresti.giancarlo@adlittle.comIndiaSrini Srinivasansrinivasan.srini@adlittle.comJapanYusuke Haradaharada.yusuke@adlittle.comKoreaKevin Leelee.kevin@adlittle.comMalaysia SingaporeThomas Kuruvillakuruvilla.thomas@adlittle.comMiddle EastLokesh Dadhichdadhich.lokesh@adlittle.comNordic CountriesMartin Glaumannglaumann.martin@adlittle.comThe NetherlandsMartijn Eikelenboomeikelenboom.martijn@adlittle.comSpainJesus Portalportal.jesus@adlittle.comSwitzerlandClemens Schwaigerschwaiger.clemens@adlittle.comUKRichard SwinfordSwinford.richard@adlittle.comUSAJohn W.