We have heard it all before, but an analysis ‘prepared for’ Cable Europe has (not too surprisingly) found that cable has huge advantages over telco architecture. This report was carried out by Fitch Ratings and focused almost entirely on reading the 2009 company reports from telcos and cable companies.
Its findings are mostly that in some European markets, particularly the UK, Belgium, Portugal and the Netherlands, there is the opportunity for cable to take on telcos in much the same way that they have in the US.
Fitch Ratings puts this down to capability of DOCSIS 3 to deliver Capex efficiencies ahead of their telco competitors. Effectively because it appears to be cheaper to upgrade a modern cable network to an even more powerful one, the suggestion is that telcos have and will continue to resist the big step of upgrading their lines to fiber.
This conveniently neglects that fact that in the UK and also in France, where Fitch concludes that the cable community is in bad financial shape, the incumbent telcos have already embarked on a plan to take fiber much closer to homes and also to turn the network into an entirely IP based network.
At no stage does Fitch actually work out the upgrade cost per home reached for either type of business, and as we state in other articles this week, there are many upgrade steps before cable can gain the benefits of being entirely an IP proposition.
In effect Fitch is making a collective investment case for cable in Europe, suggesting that some of these companies are in need of further investment.
The key point of the report is to ask what will it cost to reach 100 Mbps for most of these network, but 100 Mbps is an arbitrary number. Why not choose 20 Mbps, which suits the investment case for ADSL2+ and VDSL2 which telcos use, or 1 Gbps which might mean fiber to every home which might mean that cable has to completely do away with QAM based equipment. It also neglects how moveable a feast technology is and how easy it would be to run another line to a home and bond it using the Telco architecture or that cross cabinets give an opportunity to run fiber to the street very effectively.
On the subject of telcos and fiber, Fitch says, ‘This resistance to invest in fiber has been further exacerbated by ongoing decisions on whether to invest in fiber to the curb (FTTC), fiber 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’ fiber networks also remain an issue in a number of European markets,’ writes Stuart Reid, senior director, TMT Group, Fitch Ratings in the latest edition of Cable News.
All this is true. But if cable had the same universal service regulation and the requirement to unbundle its connectivity (which may well arrive at some point over the next ten years), then its own investment cases suffers.
The report points out that in the UK where Virgin Media has upgraded its network to offer customers current speeds of 50 Mbps, the cost was under £300 million. By contrast BT group has committed to spending £1.5 billion over the next four years on its hybrid FTTC/FTTH build covering 10 million homes.
This misses a point or two. BT has far more customers to get back the investment from, and its aim will be customer retention. Now Virgin has made that investment, it has to attract new customers and given its slowly eroding reputation for awful service and awkward pre-VoIP phone connections (now gone, but still in the public mind) it has a high customer acquisition cost to lay out, instead of Capex, and much investment to improve its churn figures, it’s just that this investment is not in the ground.
Fitch identifies the UK, Belgium, Portugal and the Netherlands as the markets where incumbents face the most significant threat from cablecos, while the lower levels of network build and a weaker financial profile in France and Spain has resulted in a less threatening cable sector.
Contrasting the United States with Europe, Fitch points out that US incumbents such as Verizon committed to the build out of fiber-to-the-home some three years ago, while their European equivalents have continued to struggle with regulatory matters.
We would suggest that the rate at which fixed line phone customers are a) eroding in revenue per line and b) leaving incumbents, has not reached the level where investment is required on such a grand scale as it was by Verizon. The incumbents can’t tell investors ‘We are going to put fiber in the ground just in case cable takes off,’ that would be irresponsible. They have to wait until damage is being done to their customer base.
Using purely anticipated return on Capex which has not yet been invested, as a measure to evaluate a sector investment potential is a little disingenuous to say the least. In the US where these investments have been made, the rising tide of OTT (Over The Top) video is harming cable more than its rivals, while the big enemy to fixed phones lines are cellular phone lines, a renowned weakness and huge investment problem for European cable companies.
If Fitch was to discuss the investment case to move to a full quad play, and then examine the likely declining returns on such investment based on widespread OTT video, it might conclude that owning any kind of line in the ground was more of liability than an asset.
Also the emergence of a strong free to air Digital Terrestrial TV segment across most of Europe, makes investment in Pay TV a totally different proposition than the US, where free TV is virtually a thing of the past.