Gloomy outlook for the broadband industry?

Charles Arthur of the Guardian and Ian Fogg of Jupiter Research have been posting their thoughts on how the UK broadband industry will fare in an economic downturn. On the face of it, they both make fairly gloomy reading – although the demand for basic consumer broadband will remain, the churn rate (users switching between suppliers, which drives much of the product innovation in the marketplace) will slow down as people move house less. (A house move is known to be a major trigger for people to re-assess their need for, and supplier of, domestic services). But suppliers may be unable to make the capital investment needed to deliver the next-generation services currently planned – BT’s 21CN is at risk, as is their recently-announced FTTC/FTTH initiative.

We’ll also see the end of loss-leader offers and unprofitable services will be replaced by more openly-priced straightforward offerings. In addition, the penny-watching consumer will be able to work out that a free laptop which is contingent on a 24-month mobile broadband contract at £45/month isn’t free at all, and isn’t even the cheapest way to buy the laptop – seeing the end of these complex offers.

My view is that we’ll see a return to basic value-for-money offerings, which will probably lead to more consolidation in the market as smaller providers find it more and more difficult to differentiate their services. Some of the larger operators will pick up some bargains in the shape of the customer base and/or the network assets of their smaller competitors.

Not good news for those whose livelihood is dependent on the continuous innovation and capital investment in the broadband industry.

BT announces high-fibre diet

It’s been a while coming, but BT has finally responded to industry, press and regulator calls to share its plans for higher-speed broadband. In a press release dated 15th July 2008, the company revealed that it plans to invest £1.5bn in fibre infrastructure to reach up to 10 million homes by 2012, enabling broadband speeds of ‘up to 100mbit/s’.

That super-fast figure, though, will only available in those areas where BT elects to deliver FTTH (Fibre to the Home), which will primarily be in new-build areas, such as the lucky pathfinder community at Ebbsfleet, Kent, where BT has already commenced FTTH trials. FTTH is expensive, and requires new distribution plant and a new connection to every served premises – which is unlikely to make economic sense in the general case.

The alternative approach that BT has announced is FTTC – Fibre to the Cabinet (or Curb if you like). This relies on a single fibre connection from the local exchange to the end-of-street cabinets or distribution points (DP – the green boxes that Openreach engineers set their tents up at). A home’s existing copper connection to the DP will be driven from a mini-DSLAM installed in the green box. Since the copper length is small, new technologies such as VDSL can be deployed instead of the more common ADSL or ADSL2+, allowing real-world speeds of up to 40Mbit/s to be achieved. FTTC provides an attractive compromise between cost and speed, and needs minimal disruption at the customer premises – an upgraded xDSL modem or router will be needed to take advantage of the higher speed, but the phone line and other connections remain the same. FTTC, then, is an attractive option to upgrade existing residential areas.

BT is careful to emphasise that the fibre investment is dependent on Ofcom coming up with a suitably supportive regulatory environment in order for the company to get an acceptable return on its £1.5bn. The commercial model must depend on BT having price-setting flexibility, and not be constrained in how it plans to offer access to the fibre network to other communications providers. Expect to see much deliberation behind closed doors at Riverside House on that aspect.

So the lucky BT-supplied consumers who are currently starting to enjoy the first BT ADSL2+ up-to-24Mbps service, along with those C&W and Be Unlimited users who’ve had it for a while, will only enjoy their position at the top of the speed charts until BT comes along and fibre-enables their exchange – then it’s upgrade time again.

Will the real digital divide please stand up?

Received wisdom tells me that when someone talks about the UK’s ‘digital divide’, they’re referring to ‘haves’ and ‘have-nots’ – those who can, or can’t, get access to broadband internet connections. But it’s much more complicated than that.

Last month Ofcom released the results of an investigation into broadband takeup, and found that rural households are more likely to have a home broadband connection than their urban counterparts. This must reflect a greater desire to consume services online amongst rural dwellers – perhaps that’s because theiy are less well provided for with access to local physical services (shops, banks, post offices etc)  than town-dwellers. When you pass 5 bank branches on the way to work you’re less likely to need to use online banking than if your nearest branch is in the next town the other end of a once-a-week bus service. When you can pop into the local Tesco Metro near the train station on the commute home, you don’t need to order groceries online.

BBC News Online reporter Rory Cellan-Jones is in the middle of a fascinating report into broadband availability in remote parts of the UK – he’s blogging about it and giving regular updates on Twitter.

Where town-dwellers win, though, is access to higher-speed services. The BBC and other sources are reporting the results of a thinkbroadband.com survey into broadband connection speeds. The site features a speed test application which users can access to test how fast their line is working – the results published are an aggregate of their users’ real-world speeds over the first 3 months of 2008. The results show, in summary, that users in predominently urban areas get significantly faster speeds than those in mostly rural areas.

This shouldn’t really be a surprise. Factors influencing the speed of a user’s connection include

• Whether the user has acccess to a choice of higher-speed operators
• For ADSL, the length and quality of the user’s phone line

The economics of Local Loop Unbundling (LLU) mean that an operator delivering the higher-speed ADSL2+ service is likely to concentrate on areas with more potential customers served by a single Digital Local Exchange (DLE). The more densely-populated urban areas give rise to DLEs with far more connections than urban DLEs, so we see the appearance of a choice of higher-speed operators in those areas.

Another inescapable fact is that the average length of a telephone line from the DLE to the customer is much lower in urban areas. So for a given ADSL or ADSL2+ service, the average speed attained by customers is likely to be higher. In the case of cable, the service is available almost exclusively in urban areas because of the economics of delivery. Virgin Media is starting to roll out new infrastructure to support 50MBit/s internet services – this will only serve to exaggarate the speed advantage of city dwellers.

I believe the real digital divide issue is an economic one. Initiatives to deliver public and private services onine struggle to attract users at the lower end of the socio-economic spectrum. This potential audience doesn’t have high-speed internet access at home for cost reasons (you need to buy a computer as well as be able to receive the service). Until this gap can be closed, we will always have digital haves and have-nots.

Broadband deregulation from Ofcom

In a notice issued this week, Ofcom reached the final conclusion of their broadband market review process. They have found that in 70% of the UK, there is no longer a situation comprising Significant Market Presence for any provider in the wholesale broadband access and backhaul market, leading to the immediate deregulation of those services in the areas concerned.

For many of us in the broadband industry, this signifies that we’re nearing the end of a long and difficult journey. For the past 4 years, representatives from the larger LLU operators have participated in a scheme run by the Office of the Telecoms Adjudicator (OTA) whose brief was to oversee the implementation of robust systems and processes with BT (mostly Openreach) and its LLU customers in order to stimulate and support the LLU marketplace, providing a genuine choice of operator (excluding the ‘last mile’) for wholesalers and consumers in the UK.

This scheme has presided over the complete replacement of Openreach’s order management and orchestration systems for LLU and Wholesale Line Rental (WLR), and supporting the establishment of BT Wholesale’s position as an equivalent to its competitor LLU operators, removing any commercial or technical advantage it had as a subsidiary of BT. New fault management and MIS systems have also been introduced, allowing Openreach to handle the new connection, migration and in-life support for an install base of around 4.5M unbundled lines (April ’08), which is growing steadily at a rate of around 200k/month.

The landscape is unrecognisable from the one we saw in the early days of the OTA scheme. BT had creaky systems, order management processes which invariably involved manual intervention at several stages, their provision of backhaul circuits (which connect an operator’s equipment in the BT exchange back to the operator’s own network) was backlogged, and the rate at which BT could build out racking and power with the exchanges for the other operators to use was way below market demand.

The original OTA, under Peter Black, Clive Fedida and Jim Reilly, presided over months of painful meetings between the operators and BT. Weekly performance reports showed KPIs which were never met, project deadlines missed, operators impatient that their business plans around LLU were being held up by slow performance by BT. The popular view was that this we deliberate gerrymandering by BT – I’m not sure this was actually the case; BT had many hard-working dedicated people working on LLU, but they were frustraated in their efforts to deliver by the inevitable inertia to change within BT’s mammoth operation.

But gradually, things began to improve. A new well-engineered platform was built to handle the order volumes predicted by industry (‘Equivalence Management Platform’ – EMP). The design of the interfaces and processes within EMP was shared with industry over the course of about a year of weekly workshops – quite a departure for BT, who have never in the past involed a customer in their IT development process. A project board, chaired by OTA, oversaw EMP’s development and launch. It wasn’t without its problems at first, but those have been ironed out over time leaving a platform and service wrap that meets industry expectations.

Openreach has also improved its delivery of backhaul circuits and exchange build-outs to within industry KPI targets.

As a result of these improvements, LLU has enabled competition in the marketplace to such an extent that in 70% of the UK, Ofcom finds that no operator has Significant Market Presence – indicating that the playing field is sufficiently level in those areas that no economic or other regulation is required to ensure that the consumer is protected.

The industry as a whole should pat itself firmly on the back. We’ve changed the world in 4 years.