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27 August 2019

Three UK’s fixed broadband push will require tight cost control

The UK arm of Hutchison’s mobile group, Three UK, is leveraging plentiful 3.5 GHz spectrum and an advanced push into cloud-based networks to improve its 5G costs and mount a stronger challenge to its rivals in an over-competitive market. Three has been innovative in the 3G and 4G eras, in terms of tariffs, marketing and attractive consumer propositions, prefiguring some of the tactics of the USA’s ‘Uncarrier, T-Mobile.

Its economics have been helped by its site sharing joint venture with BT/EE, MBNL, but it has been deeply disadvantaged by a poor spectrum position. That has changed for 5G because of its acquisition of UK Broadband, a very minor fixed wireless player but owner of a substantial block of the most desirable spectrum for first-phase 5G roll-outs, in 3.5 GHz.

Three plans to press home its advantage by deploying a cloud-native core at an early stage, working with Nokia, and establishing a roadmap to Cloud-RAN, plus continuing to innovate in pricing and services – something that will be easier with the flexibility of a cloud core.

Three was, fittingly, the third MNO to launch commercial 5G services in the UK, after EE and Vodafone (O2 will follow this autumn). It is emulating the big US operators by offering fixed wireless services first, partly because these can start to generate revenues in targeted areas without requiring wide coverage to attract users; partly because Three is toying with the possibility of providing well-priced fixed/mobile services and getting at least a toehold in the home broadband market.

Like Three’s 4G mobile data plans, which were disruptive when first introduced, its 5G fixed wireless offering aims to undercut rivals while being supported by a snappy advertising campaign. The tariffs are competitive at £35 a month, data is unlimited, and the customer equipment is self-installed (another important aspect of the cost model for Three, since it saves on truck rolls and engineer visits).

Still true to its name, the operator chose just three London locations in which to switch on its new services – Camden in north London and Camberwell and Southwark in the south east of the capital. Other areas of London, plus 24 other cities, will follow between now and year end. (These are Birmingham, Bolton, Bradford, Brighton, Bristol, Cardiff, Coventry, Derby, Edinburgh, Glasgow, Hull, Leeds, Leicester, Liverpool, Manchester, Middlesbrough, Milton Keynes, Nottingham, Reading, Rotherham, Sheffield, Slough, Sunderland and Wolverhampton.)

It is unclear how far the fixed wireless service is a low cost entry point to a full mobile 5G proposition, and how far Three really believes it can take a share of a fixed home market which is already very price-competitive.

On the one hand, it is impractical for Three to do a full-scale mobile launch on day one without being very overshadowed by BT and Vodafone in terms of reach, but that does not mean mobility is not the end goal. CEO Dave Dyson characterizes Three’s offering as “mobile-led but with an opportunity from broadband”.

He told LightReading: “Right now, there are not enough sites in our network to have a credible mobile launch. By the end of the year we’ll have 25 cities and towns but there are still a few things that need to come together in terms of planning consent, landlord consent and making sure the right transmission is in place.” And the new cloud-native core, which is in the process of being deployed and will be 5G-ready, is necessary before full mobile services can be supported. The other UK operators are using their 4G cores for now, so can handle mobility management and other functions in the old way. They will face the migration to a new cloud-native 5G core at a later stage, but Three hopes to avoid that disruption by doing it before 5G services are fully commercial.

On the other hand, Three does have a sufficiently large amount of mid-band spectrum – and some millimeter wave – to be able to support a high level of fixed broadband capacity without having to spend large sums on more airwaves for years to come. The aim, probably, will be to revive the dream of the WiMAX operators, of differentiating their services against those of wireline providers by offering a completely integrated fixed/mobile or even quad play proposition – not just a common bill, but a common connectivity which could be used by any devices and carried with the user on their smartphone.

In the WiMAX days, that idea foundered on low levels of fixed speed and full mobility, but most importantly because of the established brands and services of the mobile operators. The former points may be addressed by 5G – Three is seeing fixed speeds of 450Mbps sustainably, it says – and the MNO has the advantage of an existing mobile brand. However, in the age of WiFi everywhere, it is questionable how attractive the single connection argument is for users which can, if they wish, buy their mobile and fixed contracts from a single supplier such as Virgin Media or BT.

But succeeding as a new entrant in home broadband and multiplay services, in an already price-competitive market, is a tall order and it may be that Three has to retreat from the fixed-line space once its network is fully built out, and revert to its strengths as a challenger pure-play MNO – with the new advantage of a good spectrum position. But if it is to succeed in its grander ambition, much will depend on achieving a very competitive cost base for converged services.

In theory, building out fixed wireless should be far cheaper than building out fiber-to-the-premises – indeed, BT is likely to reduce its total FTTP cost by using millimeter wave fixed 5G connections for the last few feet into the home. And only 8% of UK homes currently have access to fiber right into the home, which Three promises with its indoor 5G WiFi hub device.

However, the idea that wireless beats fiber on TCO over time, and therefore always gives the operator the flexibility to undercut rivals on price, is more complex. Once fiber is built, it needs little maintenance or major upgrading for a far longer period of time than wireless, which not only has shorter technology generations, but also has higher operating cost and maintenance requirement.

Fiber will continue to beat wireless for peak speeds and reliability. And the fiber can be reused to backhaul mobile or WiFi cells, improving the cost base of a fixed/mobile network. Self-backhauling small cells, especially in higher band spectrum, may be an important cost tactic for Three, to reduce reliance on its wireline rivals. Currently, its main backhaul suppliers are Virgin Media and Colt and it is working with SSE Enterprise Telecoms to unbundle BT’s exchanges and put in fiber links.

So it will be vital for Three UK to continue to drive down its cost base, to make its fixed wireless business viable even after BT and others have extended their fiber reach and taken their short term capex hits. Maintaining competition in the supply chain, and being able to choose the most price-competitive vendors, are key.

This is why the firm is particularly concerned by the Huawei situation, and the risk that the new UK government may take a harder line on Chinese vendors than its predecessor to please the USA. The administration of previous prime minister Theresa May had not finalized official policy on whether to allow Chinese suppliers into the 5G networks but had seemed likely to permit them in the RAN but not the core. New prime minister Boris Johnson may decide to align himself more closely with the USA, which has barred Chinese suppliers from national infrastructure deals for about eight years, and has, over the past year, introduced many new restrictions, based on allegations (always denied by Huawei and as yet unproven) of cybersecurity breaches.

Three is building its 5G RAN with Huawei, and replacing Samsung equipment in its 4G network with the Chinese firm’s multi-radio systems. It is working with Nokia for its cloud-native core, which until the change of government, had seemed likely to save it from having to change its mind about its 5G suppliers. But if the UK swings towards a ban in the RAN, despite the lobbying of Three, BT and Vodafone (all Huawei users in trials or RAN), Three would have to do a rip-and-replace exercise for the second time in a year.

Dyson said: “We are certainly not ignoring it, but I don’t want to wake up in 12 months’ time and regret a decision to slow things down on the basis there might be a decision one way or another.”

In the next three years, Three says it will install Huawei’s 5G base stations at 6,000 of its 16,000 UK mobile sites – which together handle 80% of its current traffic. It has not, as yet, announced a second RAN supplier, despite the problems a single-source policy has caused some sister firms – its joint venture with Vodafone Australia was hit by that country’s sudden ban on Huawei RAN or core equipment, for instance.

CK Hutchison splits off towers, eyes global infrastructure build:

As we have covered in some detail in Wireless Watch this year, divesting physical assets, particularly cell towers, is a very popular way for operators to boost value, release cash and move costs off the balance sheet. CK Hutchison is the latest telco to pursue this path, restructuring its assets in Europe and Asia-Pacific into separate infrastructure and operations divisions.

The towers will be placed into a group called CK Hutchison Networks Holdings, whose portfolio will consist of 28,500 towers in Europe, including those shared with BT in the UK and Telenor in Sweden. The parent company retains an option to add a further 9,300 towers in Asia to the unit, which would bring the total to 37,800.

Meanwhile, the European and Hong Kong operations will be placed in a single, separate  holding company, CK Hutchison Telecom. Its first objective is to refinance €10bn of debt for its Italian MNO, Wind Tre, to improve its robustness in a highly pressurized market (see separate item).

The new structure is expected to generate significant economies of scale and to enable the operating group to pursue more international approaches to financing, procuring and running its next generation networks. In particular, we can expect a cross-border strategy for building cloud infrastructure and running cloud-based 5G networks, the aim being to achieve the scale and resource flexibility that a huge, international version of Three UK’s 5G platform would bring.

“The new organization structure and the refinancing transaction will allow the group to generate significant financing cost savings from 2020 onwards, as well as rationalize its investments in light of the expected need for harmonization of network, IT platform, and infrastructure configurations to meet new trans-national business opportunities going forward,” said CK Hutchison in a statement.

And the new towerco will have freedom to pursue its own revenue opportunities with third party operators, as well as supporting the operating companies. Hutchison already demonstrated its awareness of the growth value in various levels of wholesale business when it set up Hue, its MVNO platform, which aims to activate and provision large numbers of virtual operators, a model which could be greatly expanded with the help of multinational cloud-based network infrastructure and wholesale network slicing.