European Incumbent Telecom Operators at Risk From Cable Broadband Upgrades

Fitch Ratings says in a report published today, that a number of European incumbent landline telecom operators risk increasing disadvantage given a failure to respond sufficiently to the risk posed by the cable operators' broadband investments and their own resistance to spending on fibre.

In Fitch's view the cable operators in a number of countries enjoy significant scale in terms of their coverage footprints and well established broadband and telephony strategies. What is now very clear however is that DOCSIS 3.0, cable's broadband upgrade path to speeds (capable of) exceeding 100 megabits (Mb) can and have been achieved in a number of networks at relatively modest cost. Meanwhile the incumbent telecoms continue to wrestle with issues of whether to invest in fibre to the curb (FTTC), fibre to the home (FTTH), or a hybrid of the two, and where and when to invest. Regulatory concerns over the permitted return and regulated access to the incumbents' fibre networks remains an issue in a number of markets and in Fitch's view continues to inhibit investment by the incumbents.

"The UK, Belgium, Portugal and the Netherlands are the markets where incumbents face the most significant threat from cable operators, given the degree to which the cable network has been built out in these countries, the success of the cable companies broadband strategies so far, and the level of DOCSIS 3.0 deployment," said Stuart Reid, Senior Director in Fitch's EMEA TMT team. Conversely incumbents in France and Spain face a reduced threat reflecting lower levels of network build and the weaker financial profile of the cable operators in those countries. The structure of the German cable industry has meant that the take-up of cable broadband is only now beginning to gain meaningful scale there, while Italy stands apart among the major European economies as the only country without a developed cable operator and where the incumbent therefore remains that much more protected."

Fitch points to the fact that in the US, Verizon Communications embarked on a costly FTTH build out in a heavily cable networked US demographic three years ago and yet most of Europe's incumbents are still trying to understand regulatory implications and only a few have taken meaningful fibre closer to the home. Fitch recognises that in current economic conditions, competitive risks might be expected to ease as consumers seek to contain communications costs. The cable operators in a number of countries have however already upgraded their networks and are offering 50 Mb speeds, while most of the incumbents remain tied to headline speeds for the most part in single-digits.

With a far less developed TV product, Fitch also argues that it is the incumbents that are more in need of speeds that fibre can deliver given its ability to provide content streaming and video downloads. The ability to time-shift content and offer video on demand, is already proven over the cable network. Viewing trends, will however in Fitch's view, continue to fragment with the success of products like the BBC's iPlayer, as well as the commercial broadcasters' catch-up on-line offerings, in the UK for instance, catering for the TV audience's increasing desire for content at any time over a range of delivery platforms.

While DOCSIS 3.0 is a similar technology to VDSL/FTTC - the path that most of Europe's telecom operators appear to be following as their primary investment upgrade - the fact that most cable networks have been built within the last 15-20 years makes them far more efficient to upgrade. Cable already enjoys a deeper level of fibre throughout the network with upgrades therefore mainly replacing the active electronics at the cabinet level. (It does not however require the significant civil works associated with the installation of new fibre that would otherwise drive up investment costs). Consequently, Fitch estimates a DOCSIS 3.0 upgrade can be achieved at a fraction of the cost of fibre investment for the incumbents. In the UK for instance, Virgin Media has so far upgraded its network and is offering 50 Mb speeds to six million homes and expects to cover its remaining six million homes by Q309, at a cost which Fitch estimates at no more than GBP200m - GBP300m. BT Group is meanwhile planning to spend GBP1.5bn over the next four years on its hybrid FTTC/FTTH build covering 10 million homes.

The report, Increasing Risk for Incumbent Telecom Fibre Investments is available on Fitch's website (registration required).

Posted to the site on 20th April 2009