Opinion Paper

FTTx Roll-out: A Commercial

Perspective beyond Technology

2010 / 11

We make ICT strategies work

 FTTx Roll-Out

Table of Contents
1 Motivation ............................................................................................................ 3
2 Roll-out Levers .................................................................................................... 4
2.1 Demand Drivers........................................................................................... 4
2.2 Competitive Forces...................................................................................... 5
2.3 Type of Expansion....................................................................................... 6
2.4 Regulation and State Subsidies .................................................................. 7
3 Commercialization ............................................................................................... 8
4 Conclusion........................................................................................................... 9
5 The Author......................................................................................................... 10
6 The Company .................................................................................................... 11

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 FTTx Roll-Out

1 Motivation

Our experience shows that the roll-out of a new network infrastructure is primarily planned
and implemented with regards to technological- and cost-oriented aspects. Yet, it is relatively
simple to achieve better economic results when commercial aspects are considered
holistically. This paper gives a short overview of the main market- and cost-oriented levers
for an effective and efficient FTTx (“Fiber to the x”) network expansion. It provides a check-
list of the essential strategic roll-out parameters and can be used for audits of running
network implementations and as a support tool for projects in the early planning phase.

The roll-out of a new fiber network infrastructure has to take several aspects into
consideration: it is necessary to determine how the network expansion can be cost efficient
and increase future revenue. Network operators have to carry out demand and competitor
analyses to determine the extent and speed of the new network roll-out. Additionally,
operators need to identify potential collaboration opportunities along with possible regulatory
requirements for the new infrastructure. A further important question linked to rolling-out a
new fiber infrastructure is whether to engage in a pre-launch commercialization.

All these principal aspects playing a role in the decisions regarding the roll-out and its
commercialization are looked at in the following paper.

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2 Roll-out Levers

2.1 Demand Drivers

First, the current market situation and demand for a new network infrastructure need to be
examined. Next to the basic demand for broadband access, it has to be determined if a high
interest for broadband technologies exists in certain areas, towns or neighborhoods. A
strong demand for higher bandwidths could be present for instance in commercial areas with
start-up companies. These areas should then be the first to be linked to the new
infrastructure. Customers, with a strong interest in broadband access that assist them in
developing their business model, tend to be less price sensitive. It also makes greater
economic sense to develop the new infrastructures in areas of higher population density; in
those areas the development costs per customer are typically at their lowest. Moreover, a
close eye has to be kept on the demand growth. For example, if a new residential area for
middle- and upper-class families is planned, demand for broadband access will increase in
the future and makes the region economically attractive for the operator.

A further important aspect is the average revenue per user. The ARPU (Average Revenue
per User) and ARPU growth give an indication of the current demand situation. A falling
ARPU is a sign that users no longer require the offered services, that the services are in
demand only in small quantities, or that the current competitive situation dictates lower prices
(„Price war“). This situation will have a negative effect on the build-up of a new fiber
infrastructure. A large capital outlay is required to survive in a price war only to stay
competitive to the other market players. Hence, the chance of a successful economic
network expansion will require even larger investments, which not all operators are willing or
able to spend. The probability of a successful FTTx roll-out will be higher if it takes place at a
time and in a region where the ARPU is on the increase, since this might indicate an
increasing need for broadband access.

Furthermore the demand for broadband services beyond access - i.e. IPTV or online
gaming services - has to be considered in order to establish their effect on the market. A
strong demand for broadband services can favor an FTTX roll-out; this is especially true
when specific parts of these services can be offered through the telecommunications service
provider like triple pay offers. Additionally the growth potential of these broadband services
has to be considered. It needs to be analyzed what new broadband services (e.g. 3D-HD
IPTV) can be implemented in parallel to an infrastructure expansion to generate increasing
demand for high-speed access products.

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2.2 Competitive Forces

One factor significantly influencing the success of a roll-out is the competition. In addition to
the number of competitors, it is important to understand how financially strong they are
and if there are co-operative relationships between competitors. It is also relevant if the
competitors are based locally, nationally or internationally. Local carriers have an advantage
in that they can limit their offers to a few attractive areas where they can rapidly expand their
networks. However it is possible for financially strong national and international carriers to
beat them to this expansion by installing FTTX network in these attractive areas and offering
broadband connections to customers before the regional carriers get a chance. In a race for
the most attractive regions, it is important to also consider a competitors’ customer base and
market strengths.

Another relevant consideration is the competitor’s type. Competitors to be considered

include, for example, cable network providers, telecommunication providers and other utility
network suppliers. Competitors from other industries have possible access to existing
infrastructures under the road (i.e. utilities) or within a house (i.e. cable service providers).
This cost-advantage for the cable service or utilities provider is a clear disadvantage for the
telecommunication company.

As the launch of FTTx-networks is highly cost intensive, it makes economic sense to

collaborate with other service providers or grow by acquiring other operators (Make-or-
Buy). For example an agreement could be reached with an electricity provider that is
renewing its networks, to lay down fiber optic cable at the same time, in exchange for an
appropriate payment. In some cases it may be economically feasible to acquire an existing
network provider instead of building up an own fiber network. In addition, telecommunication
providers can benefit from the fact that a fiber optic infrastructure is required for the LTE-
development (Long Term Evolution = 4G Mobile Network) to the radio station.
Telecommunication companies can therefore either reduce the costs of the infrastructure
development of their mobile networks or offer their new infrastructure to other mobile phone
providers in exchange for appropriate compensation.

Another consideration includes the broadband services offered by competitors. The

attractiveness and range of services competitors’ offer is key. If the various services from
competitors are adopted successfully early on, and they gain “time-to-market” advantages,
then an FTTx roll-out from another broadband provider would not be profitable.

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2.3 Type of Expansion

FTTx can be rolled-out in several ways. FTTC („Fiber to the Curb”) forms the first and least
expensive option. In this case fiber optic cables are laid to the street cabinet, and from there
existing copper networks are used. One of the disadvantages of this option is that the final
increase in broadband capacity is lower compared to the other types. Thus, should there be
a future increase in usage of broadband services or an introduction of new broadband
services, then a “bottleneck situation” would re-appear. Should several customers try to use
various different broadband services simultaneously (i.e. 2 x VOIP and 2 x 3D-HD-TV), this
could lead to delays and disruptions, thereby having a negative effect on customer
satisfaction levels.

A further option would be FTTB („Fiber to the Building”). In this model, the fiber optic cable is
taken into the building, in the majority of cases into the cellar, and from there connected to
the internal housing supply. The distribution within the building takes place, as in the case of
FTTC, with the available copper lines or existing COAX-lines. The broadband performance is
significantly higher in the case of FTTB than with FTTC. In this case, today’s broadband
services, such as IPTV and online gaming, can be used simultaneously without incurring any
service disruptions or decrease in quality. Because the installation of connections into the
buildings is expensive, it should be checked if existing lines from other suppliers can be
utilized — renting or purchasing existing lines is more cost effective as the expansion of own
lines. Also to be considered is the use of wireless in-house distribution; projects on this
subject are still in the development phase.

Another possible option is FTTH („Fiber to the Home”). Here, the fiber optic connection is
connected directly into the consumer’s house. FTTH enables the highest broadband
capacity; however it is also the most expensive form of all network models for the operator,
since approximately 70% of the total investment of this network roll-out would be dedicated
to building connections from the street cable to each house and installing the complex in-
house wiring for each house and apartment. Next to the fiber optic network installation in the
street, the in-house wiring has to be carried out. For this purpose a fiber access box has to
be put in in the building, and in larger buildings additional fiber splitter boxes must be
mounted on each floor. Furthermore, a fiber connection must be put in each apartment,
including the wiring to close the loop. In some countries like Germany, the wiring within a
building can only be carried out with the consent of the building owner(s); in a flat the wiring
can only be carried out with the approval of the flat owner/tenant. FTTH has many
advantages for broadband services, and these will continue to increase. FTTH-networks
not only represent a possible means for revenue in retail, but can also be offered to resellers
as wholesale products. This secondary usage can help to recoup the costs of the
development of FTTH within a short time frame. A rapid first allocation of FTTH will stop
competitors from developing their own fiber optic networks. When, for example, exclusive
agreement exists between the network provider who first built the new fiber infrastructure
and the building owner, then the network operator has a first-mover advantage. However, it
is necessary to check if the company responsible for the initial installation, as in markets
such as Switzerland, is also legally obligated for installing several fibers within a flat, which
can then be offered at a later date to competitors.

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2.4 Regulation and State Subsidies

Besides the economic factors, the legal and political factor “regulation” plays a key role in
an FTTx roll-out. What needs to be clarified is whether a telecommunication supplier is
legally obliged to provide his network to competitors for an appropriate payment and whether
the parties can agree on the amount of this payment among themselves or if a state
authority has a say in the setting of this price. In the EU, the Incumbent Local Exchange
Carrier (ILEC) must typically offer competitors the use of their networks at cost-based prices.
The regulated prices need to cover the interests of the network provider of return on
investments and enable an efficient expansion. In this context, it should also be clarified
what sanctions are in place should the telecommunication provider not make its networks
available on time, or not at all.

Especially in the start up phase of new networks, which are developed by new market
entrants (i.e. utilities providers), the services interoperability’s relevance will increase.
Currently it is not guaranteed that the services of a national provider will be available for all
networks.

In some countries, it cannot be excluded that a network infrastructure which has been build
by a telco might become nationalized. Should this threat exist, then it should be investigated
prior to the start of the roll-out whether the high investment can be secured in a fiber optic
network.

It should always be checked if individual countries, the European Union or United States
provide subsidies for the development of a new network infrastructure and what conditions
are linked to these subsidies (i.e. “Whitespot-development“). Such state funding, for the
demand side as well as for the network operators, can make a roll-out possible in otherwise
unprofitable regions.

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3 Commercialization

The future network expansion needs to be linked to a clear strategy. The telecommunication
company must decide if it wants to be a “first-mover” or a “follower”. It must decide if it
should enter into partnerships or into a strategic alliance and how these should be
communicated to the public.

A further central point when carrying out an FTTx roll-out is the commercialization. The
traditional commercialization follows the principle of “build first, sell later”: the infrastructure
is expanded prior to commercialization. An interesting alternative would be the “sell first,
build later” option, which is for instance applied in the Netherlands. A pre-launch marketing
campaign is at the core of this approach. Potential buyers are sought and thereafter the new
network infrastructure is rolled-out where there is guaranteed demand. The advantage of this
method is that the attractive areas are determined reliably in advance, which in turn
increases revenue probability.

On a more detailed level, next to the strategy and the commercialization, it is also important
to note that when building a new fiber network infrastructure, the public relations (PR)
strategy needs to be set. Since the media influences the public opinion, a PR-department
should be involved from the beginning of the roll-out plan in order to avoid negative publicity
and to encourage positive statements in the press.

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4 Conclusion

The roll-out of FTTx pertains to two main topics influencing each other – the network
expansion and its commercialization. The aim of the roll-out is to be cost efficient and
increase future revenue. Several factors will influence how those two targets will be met, and
what is particularly relevant is the specific demand and competitors situation. A timely roll-out
is only recommended when an increasing interest in higher bandwidths and/or more intense
bandwidths has been identified. A pre-launch marketing campaign based on the „sell first,
build later” concept can be a useful tool to expose market demand. In areas where
competitors have already established themselves, one might refrain from carrying out a
network roll-out to avoid price wars and therefore a longer pay-back period. Alternatively,
network providers can seek out potential cooperation partners to gain a footprint in already
occupied areas. A roll-out in “white spot areas” is feasible, when high growth potential has
been identified or when other economic or strategic factors make this area attractive. The
speed of the expansion is another important aspect. In some areas where FTTx networks
need to be present rapidly, it might make more sense to initially choose the FTTC option.
However, the future target should always be the expansion of the FTTH network, as it
enables the highest bandwidth and represents a source of income in the wholesale
business. Currently a full-nationwide fiber optic infrastructure will not be profitable anywhere,
thus there will always be a regional mix of several communication networks. The regulatory
conditions and the state’s subsidization options have an impact on the coverage of a new
network infrastructure and the area in which it is carried out.

 BB Demand  Expansion Types

 Country/ Regional / Local Demand
 Demand Growth
 Revenue
 High ARPU Regions
 ARPU Growth
 BB Service Usage
 Type of Service (e.g. IPTV)
 FTT - C / B / H
 Coaxial / Copper /
Fiber in-home
 Wireless in-home distribution
 Expansion Advantages
 Securing the in-home infrastructure
FTTx Roll-Out  Usage of existing infrastructure

 BB Service Growth

Expansion
 Competitors  Regulation
 Nr of competitors  Open vs. closed networks
 Co-operation between players
Commercialization  Wholesale prices fixed or market-
 Competitor’s type based

 Competitor’s Market Position  Penalties for non-compliance

 Make or Buy – Analysis  Risk of nationalization

 Cooperation Possibilities  Subsidization
 BB Services of Competitors  Type of Subsidy
 High number of BB Services  Conditions for subsidy
 Diversity of BB Service offerings

Figure 1: FTTx Roll-Out

In summary, there is not one general approach how to install a new network infrastructure –
instead the variety of environmental factors discussed above call for an individually
optimized approach. We recommend using the presented factors as a checklist to make sure
that all relevant aspects have been considered in the definition, implementation and
commercialization of the FTTX roll-out.

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5 The Author

Dr. Clemens Köhler is a consultant within the Strategy & Marketing Practice. His main focus
is on strategy development and creation of business and product models in the area of
marketing for fixed and mobile network operators worldwide. Others areas of interest are the
development of new product and service innovation, i.e. „Augmented Reality” and „Social
Media” applications.

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6 The Company

We make ICT strategies work

Detecon is a consulting company which unites classic management consulting with a high
level of technology expertise.

Our company's history is proof of this: Detecon International is the product of the merger of
the management and IT consulting company Diebold, founded in 1954, and the
telecommunications consultancy Detecon, founded in 1977. Our services focus on
consulting and implementation solutions which are derived from the use of information and
communications technology (ICT). All around the globe, clients from virtually all industries
profit from our holistic know-how in questions of strategy and organizational design and in
the use of state-of-the-art technologies.

Detecon’s know-how bundles the knowledge from the successful conclusion of management
and ICT projects in more than 160 countries. We are represented globally by subsidiaries,
affiliates, and project offices. Detecon is a subsidiary of T-Systems International, the
business customer brand of Deutsche Telekom. In our capacity as consultants, we are able
to benefit from the infrastructure of a global player spanning our planet.

Know-how and hands-on expertise

The rapid development of information and telecommunications technologies has an

increasingly significant influence on the strategies of companies as well as on the processes
within an organization. The subsequent complex adaptations affect business models and
corporate structures, not only technological applications.

Our services for ICT management encompass classic strategy and organization consulting
as well as the planning and implementation of highly complex, technological ICT
architectures and applications. We are independent of manufacturers and obligated solely to
our client's success.

Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
Telefon: +49 228 700 0
E-Mail: info@detecon.com
Internet: www.detecon.com

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