McKinsey Telecoms. RECALL No. 12, 2010 - The Fiber Future

Telecommunications
RECALL No12
The Fiber Future
RECALL No 12 The Fiber Future
Welcome ...
... to the 12th issue of RECALL, a publication that offers leaders in telecommunications actionable insights on the issues the industry faces. Innovation in telecoms has taken leaps since the first-generation cellular network of the 1980s. But no single technology will allow for the level of service innovation more than the introduction of fiber is set to do. Politicians including US President Barack Obama and UK Prime Minister Gordon Brown are saying that fiber networks will advance global telecoms like roads, bridges, and trains revolutionized trade and commerce a century ago, while encouraging spending and creating jobs. At the same time, upgrading access networks to fiber involves unprecedented capital investment, making the financing challenging. We believe that wireline operators need to set their fiber agenda now and engage in a debate on how to maximize the broader macroeconomic value of next-generation networks. This RECALL issue looks at the many challenges that the industry will need to address to create value out of fiber investments. From the logistics of fiber network rollout to the principles of its marketing to the realworld stories of those meeting the fiber challenge headon, RECALL No12 has been designed to inform some of the critical fiber-related decisions being made by industry leaders at this very moment. We set the stage with an overview of the seeming inevitability of a fiber overhaul fueled by an insatiable consumer appetite for bandwidth-hungry services and technologies and the narrow window of opportunity fixedline operators have to claim their space in a competitive environment. This article is followed by a detailed look at the high-speed services fiber can offer and the consumer profiles driving the revolution. The third article in this issue of RECALL looks at products and services for the next horizon and explores how wireline players can create a truly distinctive service offering, by taking the full advantage of what fiber access networks have to offer. Next, we shift gears and examine the commercialization of fiber networks, highlighting the importance of grassroots education and a localized sales approach as the key to commercial success. The lens gets a little wider again as we discuss the regulatory and policy-making issues related to fiber networks. RECALL then takes out the tools in a nutsand-bolts analysis of the network architecture choices operators will need to weigh as they draw up the blueprints of their fiber deployments. This is followed by a focus on the frontline practicalities of a fiber deployment installation and maintenance. In keeping with RECALL tradition, we give the last words to three executives with bold fiber agendas. William Yeung and NiQ Lai of HKBN and Masaru Nishi of NTT East speak candidly about some of their strategic fiber decisions (architecture and pricing among others) and offer their perspectives on the future of fiber. We hope that this RECALL issue answers some current top-of-mind questions and that it sparks creativity as you chart your fiber course. As always, we welcome your feedback on these articles as well as your ideas for topics you would like to see discussed in future issues.
Jrgen Meffert Leader of McKinseys EMEA Telecommunications Practice
Duarte Begonha Co-leader of Next-Generation Technology and Infrastructure Service Line and Co-editor of this RECALL issue
Nelson Killius Global Leader of External Communications for the Telecommunications Practice
Michael Gryseels Global Leader of Next-Generation Technology and Infrastructure Service Line and Editor of this RECALL issue
RECALL No 12 The Fiber Future
Contents
01 02 03 04 05 06 07 08 09 Fiber: The future of wireline Monetizing fiber: Prospects for high-speed services Wanted: Fiber products and services for the next horizon Local color: Commercializing fiber home by home Invest now: Deploying fiber to achieve political and corporate objectives Framing fiber: A decision blueprint for network design Optic ops: Securing fibers business case via operational excellence Being the best: An interview with William Yeung and NiQ Lai, HKBN The fiber vision: An interview with Masaru Nishi, NTT East 7 13 19 25 31 37 45 51 57 61
Appendix
RECALL No 12 The Fiber Future Fiber: The future of wireline
01 Fiber: The future of wireline
To counter secular revenue and profit erosion trends, the wireline industry needs to reinvent its value proposition with new innovative services that will require an upgrade of access networks to fiber. The pervading trends in the wireline industry show an alarming, continuous decline of profit, mostly driven by line churn and price erosion. The industry therefore needs to reinvent its value proposition to end users and policymakers. In part, this will require upgrading its copper access networks to fiber. While governments and regulators continue maturing their approach to fiberbased offerings and networks, we believe operators cannot afford to play a waiting game. Our experience is that fiber affects every part of a wireline company, with a learning curve that easily can span several years. This is why we believe that most players should get started now. xDSL technologies have allowed the wireline industry to expand the lifetime of 100-year-old copper networks into the 21st century with broadband Internet connectivity. Despite several innovations in DSL technology, copper is gradually reaching its limits, particularly when considering the recent growth of a number of bandwidth-hungry services (e.g., full HD-quality video streaming) and the likely emergence of numerous other innovative services on the next horizon (e.g., 3D TV, remote storage, cloud computing). The main challenge is that many homes are connected with copper loops of 1 km or more, which do not allow for bandwidths of 50 Mbps (megabits per second) or greater (e.g., the equivalent of two full high-density streams and a highspeed Internet connection). If we consider that a full
nationwide fiber upgrade of the access network can take a decade in many countries, getting started becomes all the more urgent. For comparison: the move from analog to digital telephony switching took about 10 to 20 years. This is why several players have started to upgrade their last-mile networks with fiber (either with fiber to the home or fiber to the curb). The case for an upgrade is particularly imminent for players facing strong cable competitors, who can easily deliver bandwidths of 100 Mbps or more with the latest DOCSIS technology. In fact, the wireline industry across North America and Europe has been facing significant line churn from copper toward cable and other competing infrastructure players. This has eroded about 20 percent of revenues and 15 percent of cash flow. From a strategic viewpoint, it becomes critical that the wireline industry pursues a quick forklift upgrade of its last-mile infrastructure in order to retain its competitiveness and safeguard business sustainability. At the same time, these trends have reduced the financial capacity available to fund an upgrade with industry cash flows especially given the high capital expenditure involved in a fiber deployment and the relatively long payback times on this investment. Thus, the current pace of rollout remains limited. This is the case particularly in Europe, where regulatory uncertainty regarding the return on investment seems to have weakened investor support for large-scale rollouts. Some governments recognize the socioeconomic benefits of widespread very high-speed access and make
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Key profitability drivers point to three fiber strategies Key profitability drivers point to three fiber strategies
Potential fiber strategies for incumbents Attractive area (low rollout cost and high income) Unattractive area (high rollout cost and/ or low income) Verizon already selling significant chunks of network to private investors Private equity and investors experimenting with rundown models so far, with negative outcomes
Market share Alternative fixed infrastructure available (e.g., cable) Low
Seek government subsidies or divest
High High No alternative fixed infrastructure Low Early selective rollout by incumbents show double-digit revenue growth from rollout
SOURCE: McKinsey
Start now
Engage with government and other players on solution
Seek government subsidies or divest Some government/public incentives for less attractive areas already in place (e.g., in Portugal, France) Solution for attractive areas may require agreements with other operators CONCEPTUAL
broadband access a key part of their global competitiveness strategies and ICT policies. This creates opportunities for companies investing in high-speed Internet via pilot projects, subsidies, and favorable legislation. South Korea, for example, has pioneered e-learning, e-health, and e-government all services driven by the widespread availability of broadband. This made South Korea the country with the highest broadband penetration at 94 percent and highest penetration of fiber to the home at 44 percent.
compromising on the level of competition in the market. The second approach, as seen in the US and Hong Kong, foregoes subsidies and allows incumbent infrastructure to remain closed (i.e., with no wholesale obligations). In most of Europe so far, private investments in fiber rollout have been limited overall as policymakers are still trying to balance an acceptable way of ensuring competition, while still getting the infrastructure rolled out. For incumbent operators facing an unclear regulatory regime, waiting any longer to invest in fiber could be a lot riskier than acting now. As long as the industry doesnt upgrade its infrastructure, it will continue to lose customers to competing ones and wont have the ability to truly innovate from a service perspective. Western Europe has lost about 50 million fixed lines in the last five years. If this trend continues, the European wireline industry will soon reach a point of no return a point at which the cash flows are simply insufficient to fund a major network upgrade. We believe that wireline players can develop sensible strategies (Exhibit 1) for beginning with a targeted fiber rollout in anticipation of clarifying the broader economic challenge with policymakers. In the near term, focusing deployment on higher-return areas (i.e., first-tier European cities) can provide a clear
Developing a fiber strategy

Despite the uncertainty currently surrounding fiber regulations in the European Union, wireline players should develop their fiber strategies now. This will increase fiber penetration in the region, which currently lags behind world leaders like South Korea, Hong Kong, and Japan. In order to bring clarity into the regulatory debate, it is useful to look at other markets that seem to have succeeded in implementing large fiber rollouts. The first approach, tested in several Asian countries, consists of a public supply model coupled with some form of regulated access to the incumbents infrastructure. The purpose is to have state-of-the-art infrastructure without
RECALL No 12 The Fiber Future Fiber: The future of wireline
02
After deciding to upgrade to fiber, three main activity waves span the After deciding to upgrade following two to three years to fiber, three main activity waves span the following two to three years
Full-scale rollout ?1 12 - 18 months Now 6 - 9 months 6 - 9 months Wave 2: Prepare Wave 1: Decide Reach key strategic decisions Macrofiber strategy and economic case Fiber architecture, coverage, and rollout plan NGN IT architecture Construction, supply chain, and operations strategy Prior to formal launch Stabilize construction engine Test and validate Ensure field force readiness Complete detailed plans Commercialization Communications Wave 3: Establish and anchor Ensure critical elements are in place for a sustainable fiber company Organization design, skills, and processes Products and services beyond technology and pricing Operations achieving excellence in fiber services Launch
Key design decisions made and internalized by organization Clear objectives

SOURCE: McKinsey
Detailed plans ready to execute Testing, validation, and training complete
Operators fixed business, organization, and processes refocused on new fiber platform
1 Zero to six months, depending on objectives in terms of minimum number of households for launch, network and operation stability, field force readiness, etc.
investment case, defendable toward financial markets. In parallel, operators should begin as soon as possible to gain rollout, operations, and commercialization experience to take a step forward on the learning curve. The economics in smaller cities and rural areas are more challenging. Since the capital investment required per household covered can be up to several thousand euros, this results in unfeasible payback times. Consequently, solving this funding gap will require an adequate regulatory and/or different supply model.
Creating a high fiber company

Across different situations, we have observed that wireline telcos need to rethink every aspect of their business and operations in order to create maximum value and successfully execute the rollout and commercialization of new services. In other words, fiber implies a full transformation of the company, which is a process that can take many years. Our experience is that once the decision is to upgrade the company for fiber, the fundamental transformation of the company can be pursued in three successive waves over a period of two to three years (Exhibit 2). Wave 1: Get started with key decisions. In this first wave, managers must make a number of important
structural decisions, such as choosing the most suitable network architecture, taking into account economic and regulatory implications. Telecommunications managers should also, in this stage, define the most appropriate macrofiber strategy and economic case; work out the rollout priorities and planning; identify existing IT gaps and the required new-generation network IT architecture roadmap; and develop the construction, supply chain, and operations strategy. Finally and most importantly managers will need to specify what is the most appropriate organizational structure and governance model to develop the fiber business and operations (e.g., many players set up a separate unit or they have a program structure to ensure the right focus and create momentum). Wave 2: Prepare for launch. As they prepare their organization for launch, managers most critical task should be to ensure a well-oiled and high-quality operational model, across network construction, supply chain management, and installation. In addition, managers must define and validate all the internal processes required, and ensure field force readiness for the rollout. This wave will also entail working out and completing detailed plans for the commercial and home installation approaches, as well as the marketing communication strategy and approach.
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Wave 3: Establish all other building blocks of a fiber organization. This wave of the transformation will require the team to put together the remaining critical elements to ensure that the new fiber-focused company is sustainable. This involves engaging the rest of the organization and making sure it possesses the necessary structure, skills, and processes. Also critical here is ensuring distinctive products and services that crystallize the fiber networks value proposition, and maintaining the operations required to provide excellent fiber services. *** As consumers insatiable hunger for ever-increasing bandwidth and new innovative services strain the seams of existing copper networks, wireline operators will need to quickly embark in profound transformations and reinvent themselves as fiber companies. It is true that a lot of uncertainty still exists particularly from a regulatory perspective but the risk of continuing to play the waiting game now appears to be even higher. Ignoring this industry development will leave laggards that may no longer have the financial means to upgrade their copper networks to meet future enduser demands.
Duarte Begonha is a Principal in McKinseys Lisbon office. duarte_begonha@mckinsey.com
Bruno Carrilho is an Engagement Manager in McKinseys Lisbon office. bruno_carrilho@mckinsey.com
Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com
Michael Gryseels is a Principal in McKinseys Brussels office. michael_gryseels@mckinsey.com
Sergio Osle is an Associate Principal in McKinseys Madrid office. sergio_osle@mckinsey.com
Sergio Sandoval is an Engagement Manager in McKinseys Brussels office. sergio_sandoval@mckinsey.com
RECALL No 12 The Fiber Future Monetizing fiber: Prospects for high-speed services
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02 Monetizing fiber: Prospects for

high-speed services
Fiber-optic networks can offer much more than merely speedy online access and enhanced television functionality. Learn why the expanded fiber revenue pool could be substantial. Even in stormy economic times, demand for ever-broader bandwidth continues relatively unabated, as customers tap into new applications that devour torrents of data. As a result, the prospects for fiber-optic networks seem bright. In fact, a recent report examines the growing gap between Internet company broadband speeds and customer expectations in the UK, highlighting the urgent need for additional investments. To better understand the issues driving big broadband, McKinsey conducted market research in ten countries around the world, including a comprehensive survey of household broadband needs. This effort is part of a broader McKinsey initiative called NGTI (Next-Generation Technology and Infrastructure) and aimed at developing leading-edge knowledge, covering all regions and functions (e.g., strategy, technology, regulation, operations, economics, commercialization). In this context, this article focuses on high-speed product bundling in the near to medium term by exploring trends in four key fiber-optic product application areas, examining relevant customer segments and detailing how to assemble a workable fiber product portfolio.
communication services. Some examples are videoconferencing and premium home management services that could include video surveillance (Exhibit 1). Operators often pick and choose from among these applications, some focusing exclusively on high-speed Internet and others also offering varieties of next-generation services. As a result, a multitude of fiber go-tomarket approaches have emerged. In high-speed Internet, its becoming clear that with copper-based networks running at near-full capacity, telcos need fiber in order to offer many of the bandwidth-busting applications being considered. In McKinseys analysis of copper network coverage in seven representative countries, for example, only about one-third of the networks offer enough bandwidth coverage to provide 10 Mbps (megabits per second) of Internet connectivity along with a single channel of standard-definition Internet TV (another 3 to 4 Mbps). One key question operators must resolve concerns finding the right combination of speeds and prices to maximize their profits. Analysis shows that higher Internet broadband speeds could deliver a nearly 80 percent increase in the potential revenue pool (versus offering only 20 Mb at a EUR 15 surcharge). By offering a range of high-speed alternatives (e.g., 100 Mbps for an extra EUR 20 above the standard broadband offer or 50 Mbps for EUR 15), operators can reach customers willing and able to pay more for better service. McKinseys research also shows that customers tend to value Internet speed increases more in countries such as the US and Spain, where they already pay more for broadband services.
Fiber optics to the rescue in four areas

Applications hungry for a high-fiber diet include highspeed Internet and enhanced television services, such as video on demand (VoD) and high-definition solutions. Among other speed-needy niches are advanced
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01
Fiber optics could enhance four product types Fiber optics could enhance four product types
High-speed Internet 20 Mbps, 50 Mbps, or 100 Mbps download 5 Mbps, 20 Mbps, or 100 Mbps upload
TV and enhanced TV features Basic and premium channels HDTV PVR VoD Multiroom
Advanced communication services Videoconferencing Video and picture sharing School services Multiplayer games
Premium home management services Video surveillance Total computer equipment maintenance Home automation management
SOURCE: McKinsey
In TV-related applications, interest in having additional generic channels has stagnated. With the onset of the global recession, the willingness to pay for basic channels has dropped by 40 percent (30 percent for premium channels). This decrease appears driven (in part) by current price and content competition in TV markets. In some countries, formerly premium content or televised sporting events are now included in basic packages. Also, the increased availability of free, aerial-based digital terrestrial television (DTT) represents another competitive pressure for pay-TV one that grew at over 33 percent annually from 2006 to 2008 on average in key European countries and in the US. Customers tend to value pay-TV differently across geographies, influenced by the level of commoditization the service has undergone. The Netherlands, for instance, which enjoys nearly total penetration in pay-TV coverage, also exhibits one of Europes lowest average willingness-to-pay levels. The UK, on the other hand, with pay-TV penetration closer to 50 percent, supports pricing levels just about double those of the Netherlands. The addition of special TV viewing features continues to show promise in terms of customer demand in Western Europe, where the markets for basic and premium TV have recently declined or remained flat respectively. Such features include personal video recorders (PVRs),
VoD, electronic program guides, games, mobile TV, and others. While the list of potential advanced TV features is long, five applications tend to top lists across all of the countries surveyed: HDTV, shift TV (live pausing), PVR, catch-up TV (accessing standard channel programs from the last seven days via VoD), and multiroom service. In these and other applications, a significant revenue pool exists for players to capture. Regarding PVRs, for example, research in six key European markets shows that twice as many households have expressed interest than actually have them. The conversion from interest to purchase could lead to an annual revenue pool of over EUR 6 million per one million households. Furthermore, incorporating the total collection of special TV features would generate a revenue pool that exceeds EUR 22 million per one million households. A number of operators have begun to commercialize advanced communication services, including videoconferencing via VoIP (voice over Internet protocol) as well as picture and video sharing. While not yet widespread, the potential for ARPU increases exists in several niche segments. The top applications across markets include school-related services, one-on-one and multiple videoconferencing, and instant news bursts. Other smaller but potentially lucrative applications include betting and dating services. Regarding
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02
Six different segments potentially interested in fiber products build a Six different segments significant revenue pool potentially interested in fiber products build a significant revenue pool
TV and advanced features Standard TV No interest D Very high speed Speed geeks TV features C Features and highspeed geeks All features Pay-TV No interest B High speed and plain TV TV features A Best of breed All features
F Internet speed Normal broadband Advanced features are enough
E Full-feature TV and standard broadband
Narrowband or no interest in Internet
SOURCE: McKinsey
the former, Sky has developed an interactive betting platform called Sky Bet that reported earnings of nearly GBP 45 million in the 2008 fiscal year. Finally, operators have also begun to offer premium home management services that range from total maintenance plans (e.g., integral PC and home equipment installation/maintenance) to video surveillance features that enable homeowners to view images remotely via the Internet or by using a mobile phone. In this case, operators can use the in-home fiber installation process itself, which can take three to four hours, to sell and install home management products and services. Furthermore, offering fiber-related products gives operators a legitimate reason to enter the home management business. Verizon, for example, is positioning its fiber-optic service (FiOS) offer ultimately to provide home monitoring and telemetry along with FiOS TV, phone, and other services. McKinseys market research reveals relatively low overall interest in home management solutions at this point, but operators do have opportunities to make money in this area. Video surveillance, for example, generates a total annual revenue pool thats EUR 8.3 million deep per one million households, while total computer maintenance delivers EUR 5.1 million. These two services, along with home automation manage-
ment, generate the most interest in this category among consumers across all ten countries surveyed. Fiber plays a key enabling role in the four high-bandwidth opportunity areas discussed here (i.e., highspeed Internet access, TV and enhanced TV features, advanced communication services, and home management services). As such, these markets become strategically core to most telecoms players go-to-market plans.
Customer segmentation drives a fiber-friendly product portfolio

How does an operator develop a product portfolio that captures fibers full potential? McKinsey suggests a path that begins with a needs-based customer segmentation. Managers can then use this to develop strategies and product offerings for specific target groups. Having established this basis, they can then shape a comprehensive product portfolio. In pursuing this approach, McKinsey conducted a segmentation driven by conjoint analysis across ten countries that identified six customer segments with potential interest in fiber-enabled products (Exhibit 2). Best of breed customers want the best of all worlds; the fastest possible Internet connection along with all
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of the pay-TV features available. The target offering could be a premium triple play (voice, broadband, and TV) with advanced features and high speed. High speed and plain TV customers, as their label implies, look for high-speed broadband access but have no interest in pay-TV. Operators can target them using a triple play with plain TV content and highspeed voice and data connections. Features and high-speed geeks want very high Internet speeds and feature-heavy plain TV service. Operators can offer either a double play (broadband plus television) with features and high speed or a triple play with high speed and enhanced features. Speed geeks show little interest in either pay- or free-TV-related fiber products. Instead, they seek ultimate Internet speed, generating high traffic during peak times. Full-feature TV and standard broadband seekers look for full-feature TV and normal speed broadband. Operators can offer this segment a triple play with premium content and features but only mediumhigh speed (e.g., 10 to 20 Mbps). Advanced features are enough willingly accept normal-speed broadband, but want full-feature nonpay-TV service. Either a double play with features and medium-speed Internet access or a triple play with features and light-content TV will likely appeal to this customer segment. The relative importance of these six segments varies significantly across the ten countries surveyed. For example, the best of breed segment makes up roughly 25 percent of the fiber markets in the US and Sweden, but under 7 percent in Italy and less than 4 percent in Brazil. The high speed and plain TV segment sees peaks in the Netherlands (12.2 percent) and Sweden (11.1 percent), but is significantly smaller in Brazil (0.7 percent) and Italy (3.0 percent). Spain and Italy rank highest in the features and high-speed geeks segment at 10.6 percent and 9.9 percent respectively, while the Netherlands has virtually no customers in this cluster. Speed geeks congregate in greatest numbers in Italy (7.3 percent) and Spain (7.0 percent) and least in the Netherlands (0.1 percent). The full-feature TV and standard broadband segment is widely represented, with the largest clusters found
in Sweden (20.4 percent), the US (19.1 percent), and the Netherlands (15.7 percent), while Brazil has the lowest (1.7 percent). Finally, the advanced features are enough segment is the most evident in France (9.1 percent) and Spain (8.8 percent) and the least in the Netherlands (0.1 percent). While brand segments differ by market, the research reveals a number of generalizable insights. First, speed isnt everything. The customer segments interested in advanced features and standard broadband are at least as important to an operators portfolio as those interested in extremely high speed. Furthermore, speed geeks the speed-neediest segment are a generally small group across geographies (e.g., 3.4 percent in Germany and 0.1 percent in the Netherlands). In pay-TV, content is not always king. In countries that have low pay-TV penetration levels, significant numbers of people seek broadband and advanced features, but not pay-TV because they do not require premium television content. Another general finding is that products requiring high speed make up a significant part of the market. Highspeed offerings appeal to more than half of the market in certain countries (e.g., 53.7 percent in Germany and 61.8 percent in France). Also, best of breed, the segment that wants it all, is highly represented in some countries (e.g., 23.2 percent in the US and 25.3 percent in Sweden). It is apparent that a companys offer focus must differ from country to country. In France, for example, operators should focus on a triple-play premium offer at a low price, due to a low willingness to pay and a significant best of breed segment. In Spain, on the other hand, players should focus on offers that include advanced features because of a clear willingness to pay coupled with large segments that value advanced features. *** The evolving nature of fiber-optic network demand requires multinational telecoms players to assess future market opportunities from a local, needs-based customer perspective. Simply rolling out one-size-fits-all high-speed service to current users across all markets will miss national differences as well as potentially large pools of latent demand in areas such as advanced communication and premium home management services.
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Patricia Ferruz is an Associate Principal in McKinseys Madrid office. patricia_ferruz@mckinsey.com
Steven Spittaels is a Principal in McKinseys Brussels office. steven_spittaels@mckinsey.com
Alfonso Villanueva Rodriguez is a Principal in McKinseys Singapore office. alfonso_villanueva@mckinsey.com
RECALL No 12 The Fiber Future Wanted: Fiber products and services for the next horizon
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03 Wanted: Fiber products and services

for the next horizon
To capture fibers long-term value, telecoms service providers will need to go well beyond triple play and further innovate their service portfolio. Most fiber-to-the-home (FTTH) networks today are used to provide classic triple-play offerings (voice, TV/ video, and broadband). Although cable- and copperbased triple-play offerings already exist, what sets fiber apart is the higher speed in Internet connectivity. While fiber is a superior infrastructure for multiplay, simply copying these services will not render sufficient differentiation from other infrastructures; nor will it capitalize on fibers huge potential. To tap into all that fiber has to offer and gain a real competitive advantage, operators need to look beyond the plain vanilla multiplay toward a new horizon of services. Competing merely as a triple-play provider might seem to be an attractive option at first glance considering the wide customer acceptance that already exists. However, this option will likely prove insufficient for three main reasons. First, most fiber players must compete with alternative platforms providing comparable triple-play packages. Cable companies in particular offer competitive multiplay products where they have invested in wide-scale DOCSIS 3.0 deployments. In the longer run, fibers technological advantages such as its symmetry, theoretically unlimited capacity, and higher service quality are undisputed. But evidence so far suggests that customers will not value fiber over other platforms until its technical superiority results in distinctive services. Customers seem to care little about access technologies.
Second, fiber network operators must contend with alternative providers, namely over-the-top (OTT) players. These third parties have no network of their own, but offer home entertainment services such as Internet TV on top of telecoms companies broadband networks. In fact, OTT players business models are enabled by the increasingly widespread availability of very high-speed broadband services. They are also beginning to assume a larger role in providing video content. They do so, for example, by economically exploring the long-tail needs of small customer segments or niches. Moreover, OTTs can also more easily offer advanced options such as multiple screen/device content sharing, embedded e-mail, instant messaging, and gaming or gambling. Ultimately, they could outmaneuver network owners. Third, fixed telcos are up against policymaker and regulator expectations. National governments have displayed a growing commitment to deploying nationwide fiber networks encouraged by the social impact of numerous initiatives in countries with more advanced, very high-speed networks (see text box A South Korean success story). Studies have also convinced most governments of the positive correlation between a countrys competitiveness and its investment in information and communications infrastructures. This aspect further increases government willingness to support fiber network deployment. As a result, several countries such as Australia, New Zealand, and Singapore have launched ambitious public investments in broadband. Now its show and tell time. Telcos need to give evidence of these social and economic benefits to avoid losing government support, which could be in the form of funding cuts and/or greater direct state intervention. In
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Fiber for the people: A South Korean success story

A relentless drive to disseminate and push for very high-speed broadband usage across South Korea has reduced the cost of government, while delivering a vast range of online opportunities. Some examples: E-learning. A staggering 99.6 percent of students use IT for their studies (second highest worldwide). Every primary and high school has free Internet access and PCs; government programs have distributed 96,000 computers to low-income students. E-government. South Korea ranks sixth worldwide in the 2008 UN e-Government Readiness Index. Integrated e-government platforms handle 90 percent of public administration documents (e.g., for home taxes, housing registration). E-health. Almost all medical claims are managed electronically. All medical institutions are linked to the governments high-speed fiber network; remote diagnostics and portals display live medical operations. ICT access. South Korea has 94 percent broadband penetration (the highest in the world), 25,000 lowcost Internet cafs, 8,600 information access centers offering used PCs and ICT know-how. ICT policies. The ICT sector employs up to 8 percent of the workforce. R&D centers are subsidized (USD 1.2 billion) to develop a national core network. A public entity has been set up to develop ubiquitous networks with operators. New buildings are certified by connection speed, encouraging ICT investment.
Australia, for example, the government has decided to deploy its own FTTH network.
importance of social networks in Internet usage ten years ago?). Still, McKinsey expects future innovative services to emerge from three broad categories. Expanded traditional telecoms and media services. Four distinct types of bandwidth-hungry home services are likely to become mainstream in the near future (Exhibit 2). Following huge consumer uptake of HDTV sets in most Western markets, consumer electronics players are now steaming ahead to push next-generation TV. This will be characterized by embedded Internet connectivity, allowing for more interactivity and direct Internet access. Beyond this, we will see an evolution of image quality toward the next level of definition and 3D. These features will have yet another dramatic impact on the bandwidth required for video streams. Other consumer electronics and Internet-based players will also contribute as IP-enabled products and features become integrated into next-generation TVs. More and more OTT providers now offer multimedia services on demand over the Internet cloud. While OTT development challenges the traditional broadcasting model, the demand for narrow-casting and
Designing offerings with an edge

Facing these challenges, telcos should leverage fibers technological superiority to go beyond plain vanilla triple-play offerings and introduce fresh, innovative services that deliver added value for users and society as a whole. Greater bandwidth is likely to constitute a key fiber selling point in the medium to long term, and fiber operators should invest in bandwidth-hungry services. Experience from advanced fiber markets like South Korea, where half of the households have an FTTH connection, has shown how fast the market adapts to increases in bandwidth, with innovative services quickly springing into existence and spreading among customers (Exhibit 1). The development of xDSL technologies (which represented an increase in Internet speed in multiple orders of magnitude), for example, enabled numerous new services, such as peer-to-peer sharing and video-streaming applications (e.g., YouTube). History has also shown how hard it is to predict which killer applications will consume the additional bandwidth (for example, who could have foreseen the current
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01
Historically, bandwidth-hungry products always emerged to fill newly Historically, bandwidth-hungry products always emerged to fill available bandwidth newly available bandwidth
Bandwidth1 Above 250 Mbps 200 - 250 Mbps Every time, we faced the same question: Will we need that much bandwidth? ADSL DSL ISDN 128 Kbps Basic Internet browsing 1 - 2 Mbps Advanced Internet browsing Peer-to-peer music sharing 6 - 16 Mbps Internet video streaming Basic 3D worlds Video on demand ADSL2+, VDSL 25 - 50 Mbps Comprehensive IPTV offering (multiple channels, HD) Rendered 3D worlds in multiplayer gaming 100 - 120 Mbps Remote application hosting Full-scale entertainment solutions (3D perspective, full interaction) Full-scale 3D world emulation (e.g., fully moving camera in football game) Complete remote computing (processing, applications, storage) Full 3D virtual collaboration (e.g., real-time voice and 3D holography)
1996
2000
2003
2006
2009
2012
2015
Time
1 Downlink bandwidth supported by corresponding technologies; respective uplink speeds are considered accordingly SOURCE: McKinsey
long-tail TV content is well proven and will be spurred by the availability of devices that provide consumers more convenient access. OTT video distribution may become a key driver of bandwidth consumption, particularly as the current trend toward higher TV quality levels spreads from traditional broadcasting to other video distribution models. Riding the OTT wave is a trade-off game that however risky fiber players cannot afford to opt out of. Wide-area networks (WANs) in the home allow customers to connect with their home devices (PC, TV, etc.) to access their data, content, and applications from anywhere. Home WAN services require large amounts of upload bandwidth a key competitive advantage of fiber over alternative platforms. Thus, home WAN can contribute significantly to customer demand. Several players from different industries recognize the growth potential of these services and have already entered this market (e.g., software companies like Microsoft, which has launched Live Mesh). Cloud computing/storage services offer infrastructure, platforms, and/or software via a network. To work effectively, these applications require significant bandwidth not just for downstream but also for upstream connections. HD videoconferencing, for example, may be gaining momentum. Surveys reveal
strong customer preference (10 percent of European households say they are interested) and considerable willingness to pay (EUR 4.00 to 4.50 per month). Other Internet-enabled home devices. With Internet access moving beyond the living room, a growing number of devices are going online, accelerating the growth in bandwidth requirements. These nontraditional Internet-enabled devices can be divided into two major groups: mobile devices and household devices. Mobile devices extend beyond conventional handsets to include data-seeking smartphones, personal digital assistants, netbooks, and e-readers. The latter is only one example of a hot new product. When downloading e-books at home, e-readers use household bandwidth. Sales are expected to grow fivefold from 2009 to 2012. Many other household devices ranging from relatively complex surveillance systems to simpler appliances, such as refrigerators or stoves will become Internetenabled and increasingly contribute to bandwidth consumption. McKinsey expects demand for this type of service to pick up as the emerging connected families segment achieves greater prominence. Typical connected families have multiple PCs and TVs and one main entertainment center. They use networking to allow different family members to simultaneously pursue their
22
02
Four types of expanded services are likely to become mainstream Four types of expanded services are likely to become mainstream
Estimated bandwidth requirements by 2015 - 18 Mbps Download Upload
Early adopters/heavy users Next-generation TV Local model (via local devices) Service intelligence Cloud model (via access to a central server) Based on current-generation LCD TVs Enhanced with WiFi, DLNA, very high definition, and 3D 40/400 Internet/multimedia (over-the-top) Content on demand in the cloud Enhanced with HD and interactivity ~5 Home WAN Connect to home network/storage from anywhere
10/15
15/20
Cloud computing/storage services Infrastructure, platform, and software as a service from the cloud Next-generation HD videoconferencing ~5 55/70 Down- and upstream 45/60
15/30 Mostly downstream
Key traffic requirements

SOURCE: McKinsey
own interests on the Internet. Initiatives like DLNA and Connected Home cater to and support connected family living. Observers expect demand for WiFi- or Internetenabled home appliances to soon take off. Nontraditional telecoms needs. A number of new services that make use of fibers characteristics are in the early stages of development or soon will be. These will boost home bandwidth requirements even more. Appliance manufacturers are integrating more sensors into their products to conserve energy and promote remote monitoring and use. Likewise, personal communication networks will soon be ubiquitous as costs decline, as open standards become more commonplace, and as ever-increasing and cheaper computing power provides greater data processing flexibility. Governments are also providing more and more e-services for their citizens. Recent studies have shown that an average of 40 percent of a countrys public services were available online across greater Europe. Some countries, such as Sweden and Austria, make over 70 percent of their services accessible online.
promote the take-up of these bandwidth-hungry services. They should focus simultaneously on both the near and far horizons to achieve this objective. With one eye on the nearer horizon, fiber players must be able to hold their own in the competitive space, creating awareness and fostering demand. To achieve this, telcos should maintain a rapid pace in launching successive waves of new innovative services, such as videoconferencing or e-health applications, leveraging fibers distinctive features as much as possible. They would also benefit from accelerating the time to market of emerging services, for example by forging close working partnerships with players from adjacent industries. Close alliances with set-top box manufacturers could reduce these players R&D investment risks by ensuring greater alignment with telco objectives. Partnerships with other electronics (e.g., cell phone) manufacturers, content providers, or even OTT players may accelerate development of the much-coveted multiple-screen and multiple-device content-sharing services. Customer adoption of new services can be a lengthy process. Creating incentives for customer uptake would allow fiber players to both occupy the competitive space more effectively and more quickly distinguish potential killer applications and features from those with limited consumer appeal. Numerous incentives are conceivable.
Setting the fiber agenda

To accelerate the adoption of fiber, telecoms operators should not hesitate to take the front seat and proactively
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These could range from discounted promotional pricing to subsidies to acquire the equipment needed to use certain services (e.g., for surveillance systems) that mirror models used for other telecoms products. Telcos also need to develop effective mass education and promotional campaigns to build awareness of fibers unrivaled characteristics and technological superiority. Consumers are seldom aware of fibers capabilities. Mass marketing campaigns would expose them to fibers potential especially if backed by highly visible success stories. Applications with broader social impact for instance, e-health or e-education could prove particularly effective. Targeted marketing efforts can convince specific opinion-leading consumer segments (such as young people who produce and consume significant amounts of usergenerated content) of the fiber edge. One fixed-line incumbent sponsored an attractive Web site built around their new fiber network filled with street interviews, celebrity appearances, user-generated content, and voting opportunities for browsers. The award-winning site quickly drew scores of visitors and ultimately morphed into a social community where people share their experiences with the companys products and services. Focusing on the more distant horizon, fiber players should aim to build their own future by fostering the development and customer acceptance of tomorrows services and applications. Companies should promote the development of innovation ecosystems in
telecoms ones that align the interests of different stakeholders, such as governments, universities, or high-tech companies. In e-health, for instance, ecosystem participants could include pharmaceutical and device manufacturers, healthcare IT providers, distributors and retailers, outpatient and home care providers, inpatient care facilities, and payors. Telcos could even leverage their infrastructure to actually drive ecosystems. In Asia, for example, the digital city concept is gaining credence. The aspiration: to develop a city that senses, monitors, tracks, and triggers action as needed. The result: an intelligent city based on IT that enables communication between humans and the physical spaces they occupy. In such a city, residents could access information and services anywhere, anytime. The concept leverages ICT infrastructure, applications, and know-how, creating a unique, central starting position for the fiber telecoms operator. *** Plain vanilla triple-play offerings will not get telecoms players that invest in fiber where they want to go in terms of growth, customer differentiation, profits, and loyalty. Instead, companies need to explore new ways to cultivate and communicate fibers massive advantages over competing technologies. Taking decisive action on both shorter- and longer-term horizons to promote the development and demand takeoff of the three types of innovative products and services described here can ensure a bright future for their new fiber networks.
David Riphagen is a Fellow in McKinseys Amsterdam office. david_riphagen@mckinsey.com
RECALL No 12 The Fiber Future Local color: Commercializing fiber home by home
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04 Local color: Commercializing fiber

home by home
To make a return on their fiber network investments, telcos will need to commercialize both fiber and the services it allows locally one home at a time. While many telcos may have large-scale fiber network aspirations, the critical go-to-market challenge occurs at the local end of the industry. The current focus on initially building out the most profitable locations prevents operators from leveraging their strengths in nationwide media and distribution. To capitalize on a fiber rollout, telecoms operators instead should adopt a localized commercialization strategy to win market share. When operators roll out a fiber network in a given local market, they need to capture high penetration levels quickly if they hope to achieve the return on investment performance needed to become profitable. For example, in the case of a fiber-to-the-curb (FTTC) deployment with the rollout cost of EUR 400 per household, the payback period would not fall into the five-year range until fiber penetration exceeds 30 percent (Exhibit 1). Rapidly reaching critical growth thresholds can be a strong predictor of the total fiber penetration levels a rollout will achieve by the end of the first year. Markets that reach 20 percent penetration, for example, typically grow 50 percent faster during the first 120 days after launch than those with lower penetration. The upside of getting the local sales approach right is significant. Successful rollouts usually achieve over 30 percent penetration rates with EUR 10 to 20 ARPU uplifts. Faltering rollouts, in contrast, typically get stuck at about 8 to 10 percent.
Educating consumers is key building awareness at the grassroots level

To achieve wider penetration, telcos will need to educate consumers about fiber and its role in the home of the future concept because the real benefits of fiber technology are not intuitive for many people. Some advantages such as high-speed Internet are relatively selfevident to users. Other benefits are less obvious, such as advanced communications services or premium home management capabilities (Exhibit 2). Generally, telcos should position fiber as an enabling technology with a large number of uses that will ultimately converge to create the home of the future. Therefore, operators should place a strong emphasis on local promotion a concept unfamiliar to most telecoms players. Telcos can adopt local-focus guerrilla tactics to commercialize fiber. This is new marketing territory for those more familiar with using push- oriented above-the-line mass communication techniques such as TV advertising. Companies could benefit from using pull sales and marketing campaigns, adjusting them to local and regional opportunities, stringently coordinated by a central team. This approach allows telcos to achieve rapid penetration increases in targeted areas while keeping costs in check. To succeed locally, operators can build awareness through grassroots activities that align with local community events. Focusing on experiential market techniques allows for a hands-on approach when demonstrating fibers advantages to potential customers. Effective ideas include highly localized campaigns to
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01
Telcos need to achieve high fiber penetration quickly to capture the desired Telcos investment return onneed to achieve high fiber penetration quickly to capture the desired return on investment
Given a level of rollout cost, profitability is strongly driven by the level of penetration achieved Payback period1 Years 25 20 15 10 5 0 5 10 15 20 25 30 35 40 45 50 55 60 Penetration Percent ILLUSTRATIVE Rollout cost/ household EUR 400 which is highly dependent on performance in the first 120 days Average door-to-door (D2D) sales penetration Percent 30 25 20 15 10 5 0 0 50 100 150 200 250 300 Days after launch Critical period Markets that reach 20% penetration grow 1.5 times faster during the first 120 days after launch D2D agents with 20% penetration
D2D agents with penetration < 20%
1 Assuming an average of 1.5 years for time to connect, 12.5% cost of capital, 45% cash margin, and EUR 50 ARPU. For an incumbent rollout, the benefits would appear different as, e.g., only incremental ARPU is counted for existing subscribers SOURCE: McKinsey
target specific markets and focused viral initiatives that create buzz. Techniques can comprise using pointof-sale kiosks or temporary pop-up stores to connect with consumers, employing branded vehicles to blanket a community, and staging or supporting special events. Telcos can also create online happenings that cost-efficiently reach out to key segments. One US operator launched its fiber network using an experiential marketing campaign, opening temporary cool pop-up stores in key markets where consumers could sample the network in a relaxed, comfortable environment. It staged more than 1,000 events in 120 markets and commissioned street teams to roam communities in eye-catching branded vehicles to promote them. The provider found that in markets where it used event marketing, sales increased by 8 to 30 percent. A European operator discovered that when it leveraged effective local marketing strategies, it could reach 30 percent fiber penetration in a given area within three months. Yet another telco nurtured grassroots efforts to reach consumers at the local level by using converted icecream trucks to cruise through neighborhoods and stop at public gatherings. The company even hosted wine and cheese parties in apartment complexes as well as movie nights at local theaters to spread the news about
its fiber service. As a result, the company was able to cost-efficiently connect with target communities and hard-to-reach customer segments, such as less techsavvy groups. Telecoms operators should also take advantage of the unique aspects of each community to build fiber network awareness and acceptance. One element of this approach involves promoting and capitalizing on local regulator certification programs. South Korea, for example, created a certification process that measures the level of broadband readiness and speed in large, new apartment buildings. It includes a rating system that reveals whether a building provides broadband with speeds of 10 or less megabits per second (Mbps), 10 to 100 Mbps, or more than 100 Mbps. Over time, this program became ubiquitous and added a new premium rating. Since roughly half of all South Koreans live in apartments, the ratings have had a major impact on building consumer awareness of fiber networks. Creating high levels of consumer awareness regarding the many advantages fiber networks offer will take time, but efforts in the case of fiber-to-the-home (FTTH) rollouts should already start with the actual wiring process. During the first visit, when contractors install fiber in a customers home, they should distribute information detailing upcoming services, while sales teams can
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02
One challenge lies in the low customer awareness of fiber One challenge lies technologys benefits in the low customer awareness of fiber technologys benefits
Complexity of demonstrating benefit Benefit Low High-speed Internet Comments Overall value can be captured by increasing speed, but it depends on the country-specific competitive situation Typical products enabled 20 Mbps, 50 Mbps, and 100 Mbps high-speed broadband offers Reason for message complexity Can be shown on any live fiber connection, easy concept
TV and enhanced TV features Medium Advanced communication services
Content is less differentiating and willingness to pay is decreasing Advanced TV features are increasingly important Advanced communication features are still niche products, but can complement an overall premium offer, increasing ARPU in some segments Only a small segment is willing to pay a lot for these services, making them a perfect premium offer
PVR, HDTV, shift TV, multiroom
Hard to demonstrate without physical customer touchpoint
School services, videoconferencing
Hard to demonstrate without physical customer touchpoint
High
SOURCE: McKinsey
Premium home management services
Video surveillance, computer maintenance
Requires setting up a home for demonstration purposes
provide in-house demonstrations and offer promotional brochures. On subsequent visits, the direct sales force can provide promotional offers, sign up customers, and follow up with decision makers regarding new services. The telcos call center should then get back to customers concerning their satisfaction with the fiber service and use the opportunity to up- and cross-sell new services and plans to existing subscribers. Effective promotions typically tie in directly to the actual economics of the rollout. These can include limited-time offers for high-speed broadband upgrades, free limited-time IPTV offers when customers purchase other products, or free installation for those who sign extended-period contracts. The key lies in recognizing that marginal costs are minimal and large fixed costs are justified in the case of high penetration levels and the prospects to increase ARPU. For example, one European operators initial FTTH pilots showed an ARPU increase of about EUR 20, leading to a blended EUR 8 ARPU uplift for the entire connected area. Working at the local level also means that the sign-up process should be straightforward and accessible. The best way to do this is door-to-door sales, which represents the primary channel for connecting with consumers (Exhibit 3). Door-to-door sales has proven powerful in reaching consumers converting non-users into
subscribers and current customers into upgraded users. Other supporting channels include sign-up booths, kiosks in highly frequented areas, and outbound calls from the call center, which can effectively convert consumers aware of fiber services into buyers. By adopting these guerrilla tactics, one Eastern European telco captured a sales boost of 10 to 15 percent. This was based on increasing the number of broadband units sold, reducing churn, increasing installation rates, and achieving high broadband ARPU levels.
Three ways to achieve door-to-door sales excellence

Most telecoms players likely view the prospects of engaging in door-to-door sales with a certain level of skepticism. Representing the ultimate in shoe leather retailing, this tactic is a demanding but potentially powerful way to reach consumers. Success in conducting door-to-door sales depends on achieving excellence within three key dimensions. Dedicated commercialization team. The local nature of a fiber rollout requires telcos to align their organization on many local, regional, and international levels. Companies find that establishing a dedicated central fiber team to manage this initiative provides the best
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03
High accessibility eases the subscription phase, increasing conversion High accessibility eases the subscription phase, increasing conversion
Main considerations Primary channel Door-to-door A regional field force compensated based on expected customer value and penalized for churn within 6 months Requires thorough training and coordination, as well as constant quality controls via customer satisfaction feedback Set up in and around large apartment complexes to generate brand visibility and to facilitate distribution and collection of sign-up forms Set up in very highly frequented areas to generate brand visibility and, more importantly, to educate customers on the benefits of fiber Used primarily as a channel to convert awareness to sales, since educating customers on benefits is difficult
Secondary (complementary) channels
Booths Kiosks Outbound calls
SOURCE: McKinsey
solution. This dedicated team manages the commercialization effort, heavily leveraging third-party resellers. The team is responsible for producing satisfied customers; in essence, taking on end-to-end ownership of the commercialization process and aligning incentives to make it happen. Experience shows that for the highest impact in doorto-door sales, a strong in-house team should manage a third-party field force at the regional level. While a telcos in-house team could easily outperform thirdparty contractors, the one-off nature of the effort makes an in-house-only solution inefficient. Telcos can create a significant amount of value by actively coordinating and training the external agents, with one incumbent realizing a tenfold productivity boost using this approach. Furthermore, the level of local knowledge required to effectively conduct door-to-door sales highlights the benefit of local, external providers. Using third-party contractors for commercialization is most successful when accompanied by the right set of performance metrics. These can include compensating resellers based on incremental sales revenue and adding a contractual condition that directs third-party participants to return their commissions if customers churn within six months. In addition, telcos should impose thorough training and strict service quality control
measures in order to avoid any unprofessional behavior at customers premises. High-performing operations. Telecoms players can leverage customer information in order to up- and cross-sell to existing subscribers who are upgrading to fiber technology. For other households, sales professionals should be able to quickly identify the right set of products to offer them depending on the household type. In addition, telcos should optimize all customerfacing elements, such as fiber installations, call center contacts, and store visits to create a comprehensive high-end customer experience. Operationally, this means fine-tuning sales scripts for door-to-door visits and outbound calls, working to minimize cancellations caused by quality issues during fiber installations, and timing customer visits so that they dont create bottlenecks for busy users. High-quality promotional materials. Effective fiber commercialization pairs product delivery with strong promotional materials: demonstrations, videos, and brochures that tangibly demonstrate fibers benefits. These communication materials should focus on the overarching message that fiber is an enabling technology. To make the experience tangible for customers, telcos can employ a series of approaches, including equip-
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ping door-to-door sales agents with laptops so they can use video presentations with potential customers. Other techniques include creating kiosks and booths with working fiber technology that demonstrate the potential applications in real time, or equipping mobile trucks with large-screen TVs presenting streaming content. One Asian fixed-line entrant has aggressively promoted fiber access in recent years, broadcasting creative television commercials that emphasize new technology, while making light of competitors non-fiber offerings. The campaign, launched in two waves, has created strong buzz in the marketplace, building awareness of and interest in going fiber. This has led to substantial impact, generating a market-leading 24 percent year-on-year subscriber growth rate. Such a figure far exceeds the industry growth rate of less than 3 percent.
Simultaneously, the company achieved a remarkable combination of strong top-line and margin expansion in 2009 with EBITDA growth exceeding 30 percent and with an EBITDA margin expansion of over 5 percent versus 2008 year-end figures.
*** Successfully launching a fiber offering requires providers to leverage a robust platform of the right technical solutions and commercial initiatives. Getting the commercial side right could be more difficult for many telcos because of the need to connect with potential customers at the local, door-to-door level. The systematic approach to fiber commercialization described here can help telcos find success in an unfamiliar arena.
Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com
Sanjeev Kohli is an Associate Principal in McKinseys Dubai office. sanjeev_kohli@mckinsey.com
Andras Kovacs is an Associate in McKinseys Budapest office. andras_kovacs@mckinsey.com
RECALL No 12 The Fiber Future Invest now: Deploying fiber to achieve political and corporate objectives
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05 Invest now: Deploying fiber to achieve

political and corporate objectives
Fiber is the future of fixed networks, but telecoms companies and policymakers must collaborate to get there. A whirlwind of consumer, technological, and public policy trends is blowing through the telecommunications industry. In most countries, the debate is heating up over the need to upgrade the existing copper access infrastructures that have remained more or less unchanged since the 19th century and some are taking action. This debate revolves around the rollout of fiber and the role it will play in next-generation access infrastructure. Deploying fiber infrastructure can significantly boost a countrys competitive position, something that policymakers have noted. But the economics of deploying fiber remain challenging for private-sector incumbents. They are the industrys main infrastructure investors due to the high deployment costs that yield returns only in high-income, highdensity or new-build areas. This mismatch in social incentives versus private incentives appears to lie at the core of the regulatory debate and the initiatives taken to support fiber. These issues are qualitatively different from those that have dominated regulatory thinking over the past two decades. Up to now, the intent was to open up existing networks and support competitive parity. As a result, policymakers have been trying multiple approaches to bridge the perceived social versus private gap, with some initiatives working more successfully than others. We believe that incumbents must evaluate their moves regarding fiber deployment now. Such an evaluation must consider the broader impact of limited fiber rollout
on their overall business franchise. And this should be done in tandem with policy initiatives that address the underlying economic challenges involved in building new infrastructure. Such policy initiatives should not be confused with the tools and policies that address competition issues. Currently, several models are emerging that show incumbents can work effectively with policymakers to improve the economics and capture the broader economic benefits high-speed networks can create, while safeguarding competition.
The economics of fiber

Countries and cities like Malaysia, the United Arab Emirates, Japan, the US, Amsterdam, and Hong Kong are currently investing heavily in fiber. In developing economies, the rationale behind such investment is that it should attract multinational and outsourcing businesses along with the accompanying direct foreign investment. In more advanced countries, the economic argument is that fiber can improve productivity, and its deployment offers shovel-ready infrastructure-building opportunities for governments seeking to stimulate growth. Just prior to taking office, US President Barack Obama noted that increased broadband investment was a smart way to keep America competitive, while also creating new jobs and spending. Likewise, British Prime Minister Gordon Brown compared efforts to build the countrys digital infrastructure to the roads and the bridges and the railways that were built in previous times to stimulate the economy. The economic benefits of high-speed broadband infrastructure for a country
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01
Fiber investments can only generate returns for network operators in new Fiber investments can only generate returns for developments and high-income, high-density areas network operators in new developments and high-income, high-density areas
Example for 30% household penetration USD per household High-income, high-density areas Medium-income, low-density areas
New developments
Investment
1,250
1,950
3,250
Customer value
1,500 2,000
1,500 2,000
1,000 1,500
Net present value
250
750
-450
50
-2,250
-1,750
Note: Margin for voice services 70%, ADSL 45%, IPTV 30%, WACC 15% SOURCE: McKinsey
seem to be widely accepted with research showing a GDP increase of 0.6 to 0.7 percent annually for every 10 percent increase in broadband penetration. For network operators, however, the economics of fiber remain quite challenging due to the significant cost of rolling out these networks. In high-density, highincome areas, fiber rollouts could potentially yield modest positive returns, although it will mostly remain a risky venture depending on the operators ability to fill the infrastructure and on the stability of the regulatory environment to preserve retail and wholesale pricing. In lower-income, low-density areas on the other hand, there is very little financial incentive for a private investor to roll out this infrastructure (Exhibit 1). When left to market forces, this essentially means that substantial fiber rollout will materialize in only a limited number of areas. In a greenfield context, it makes perfect economic sense to roll out fiber infrastructure, as the deployment costs are relatively low. Emerging markets such as China, India, and the Middle East will automatically achieve fiber networks of substantial size due to higher natural growth and the upgrading of their housing stock. In more developed markets where growth is limited, pursuing an infrastructure upgrade by means of a natural growth strategy would take decades. In such markets, substantial fiber rollouts are
expected only in high-income, high-density areas or areas with several infrastructure players where competitive pressure will force infrastructure upgrades. In most other areas, markets will likely see a set of multiple solutions in the short term DSL broadband delivered via fiber to the curb (FTTC), for example. These solutions will not provide the same advantages as fiber (in terms of speed, for example), and they will create large operational complexities for operators managing them. It is evident that multiple access models will evolve in most countries. The objective of the ongoing regulatory debate, however, is to have fiber deliver a large proportion of access. Also, upgrading any interim access solution to fiber later in the game will likely be expensive a factor that amplifies the urgency for policymakers and the industry to think of ways to deliver fiber now.
Regulatory uncertainty complicates the economics of fiber

The benefits to the private sector of deploying fiber are further challenged as incumbents face additional uncertainties in the form of the regulatory frameworks that policymakers will use to grant access to the newly built fiber networks. While the private sector in many industries is well acquainted with funding infrastructure investments with long payoff times, telecoms
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02
South Korea, Hong Kong, and Japan are leading the pack in fiber South Korea, Hong Kong, and Japan are leading the pack deployment in fiber deployment
Global fiber-to-the-home/building penetration ranking, 2009 Percent of households South Korea Hong Kong Japan Taiwan Sweden Norway Slovenia Andorra Denmark Iceland US Lithuania Singapore Netherlands China Finland EU-15 Italy Estonia Russia Latvia
SOURCE: Global FTTH Council, May/June 2009
30.0 29.0 10.9 10.2 8.9 6.6 5.7 5.6 5.5 16.0
46.5
3.3 3.0 2.5 2.5 2.4 2.2 2.0 1.9 1.8 1.5
Countries with clear regulatory frameworks like South Korea, Hong Kong, and Japan have more widespread fiber deployments
executives around the world voice major concerns about approaching investors without having clear-cut rules and regulations in place. At the core lies a regulatory moral hazard. The historical approach has been to enforce a wholesale regime that allows others to use the traditional but largely existing copper infrastructure. Operators now fear that this will be imposed on the fiber networks once they are built an approach that would spur aggressive wholesale pricing. Such a scenario would thus result in significant value erosion for the investing operator. Regulators and policymakers have legitimate concerns about the re-monopolization of the sector in the absence of clear and committed rules governing infrastructure sharing and cost recovery levels in fiber networks. Yet, without such clarity, it becomes very difficult for private incumbents to justify large infrastructure rollouts. In those countries where clear rules do exist, they are usually based on the provision of legacy copper services and are typically not conducive to investments in entirely new infrastructures. The competition-based approach has worked well, pushing down prices for most services, opening up networks, reducing cross-subsidies, and increasing real consumer choice over the past 20 years. But this in conjunction with the rise of mobility has significantly
altered the attractiveness of investing in fixed networks. As a result, the industrys fixed infrastructure is under pressure from regulatory and market forces. A new regulatory strategy balancing the need for investment with the need to support competition may be required to prevent the erosion of fixed infrastructure. Such policy should acknowledge the differences in underlying network economics, the multiplying models of access to voice and data, and the differences in competitive intensity. It may lead to increased industry revenues in some areas, but at the cost of greater investment expenditure. In the EU for example, Viviane Reding (former European Commissioner for Information Society and Media) stated: It is very important that the conditions to invest exist and regulatory certainty is one of those conditions. Today, the regulatory landscape in Europe is unfortunately heavily fragmented in this respect. This situation might be one reason European countries seem to lag behind in terms of investments in fiber. In countries where a clear regulatory approach to fiber has been defined (for instance in South Korea, Hong Kong, and Japan), fiber rollouts seem more advanced (Exhibit 2).
Three emerging ways to support fiber rollout

Fibers regulatory challenge means that most countries are experimenting with alternative approaches, each
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03
Three main models to deploy high-speed networks are emerging Three main approaches to deploy high-speed networks are emerging
Model Goal
Laissez-faire (US) Push infrastructure Guarantee financial returns Favors infrastructure competition No unbundling of fiber
Subsidy (Asia) Make broadband accessible for everyone Favors service competition Favors open-access wholesale networks Government-subsidized deployments
Open access (Europe) Push competition
Description
High degree of network unbundling Favors fiber unbundling/open access Operators and municipalities fund the fiber network Subsidies for rural/unprofitable areas only
Funding
Operators fund the fiber network
Differences in support from regulators and government is one of the key reasons for the diversity in rollout strategies
SOURCE: McKinsey
having slightly different ways of addressing the fundamental economics of new infrastructure. In this context, three different regulatory models are beginning to emerge (Exhibit 3): Laissez-faire model. In the US and Hong Kong, for example, the intent is to encourage infrastructure rollout while guaranteeing financial returns by relieving operators from network unbundling. In essence, this model provides regulatory certainty, ensuring that the benefits from fiber investment can be captured by those investing in the infrastructure. This seems to be one reason why Verizon, for instance, invested over USD 18 billion in the last five years in an FTTH network that currently covers 14.5 million premises in the US. The model fails to address the challenge of rolling out infrastructure in unprofitable areas; it might need to be complemented by some sort of subsidy model in the future. Subsidy model. Predominantly Asian countries such as Singapore, Malaysia, South Korea, and Japan use this model to some extent to encourage broadband access for everyone. The method is to offer tax incentives or direct subsidies to network operators to deploy fiber networks. Some countries have gone even further and have mandated several degrees of separation of the incumbents network in order to create a neutral (government-owned) entity through which investments can
be channeled. Examples where this is the case include Australia and New Zealand. Open access model. Mostly used in Europe and countries that have based their legislation on Europes, this model strives to encourage competition in the market by mandating a high degree of network access based on unbundling. Here, alternative operators access the incumbents network and customers by paying a wholesale access fee. Differentiation within the market serves as the basis for competition. Although this model does foster competition, it does not necessarily guarantee investment. More recently, the EU seemed to move closer to the subsidy model by introducing several incentives, including a 15 percent risk premium on wholesale costs to help telcos recoup investments. It also allowed subsidies in rural and unprofitable areas to enable companies to build local fiber networks. This investment challenge is fundamentally new to the regulation of telecoms networks. The objective now is a large-scale replacement of existing infrastructure versus the historical objective of creating viable competition. Structural separation of passive networks has been discussed as a potential solution to the fiber deployment problem; however, this would simply replace one (private) infrastructure operator with another (public) one. Such a venture would essentially deliver on the
35
open-access requirements but would largely ignore the economic challenges of the fiber investments required. Moreover, it may tie up large network operators and policymakers in years of wrangling. Business as usual is not an option, and more innovative ways of collaboration between local and national governments, operators, and regulators will be required. Broadly, governments can act to spur demand for highspeed broadband among citizens, provide investment support for industry players, and, perhaps most important of all, put forth a compelling vision of the economic benefits of a high fiber future. Regulators need to find the right ways within their economies to balance the need for competition against the creation of an investment-friendly environment.
network operator. This is why operators need to look at the broader case for fiber infrastructure when making investment decisions. Policymakers must also play a role in supporting this process. Operators should proactively engage governments in their approach to drive fiber investment and collaborate financially whenever possible. This will be the way forward that is most likely to deliver the best economic outcome for both operators and the country. *** Most countries are increasingly focused on upgrading the existing copper network access infrastructure with fiber. Deploying the new networks can significantly improve a countrys GDP growth something that has captured the attention of policymakers. The economics of fiber, however, are less favorable for the private sector, which could only see positive benefits from their investment when rolling out fiber in affluent, densely populated, or greenfield areas. Current regulatory debate centers on this discrepancy between social and private incentives, along with the potential actions to support fiber rollout. Several models are emerging that show how the industry can work effectively with policymakers to improve the business case and obtain the broader social benefits fiber networks can offer. Incumbents should lead this industry dialog and evaluate their investments in fiber now. Failure to move in a timely manner could raise the political stakes bringing new competition or adverse regulation over time.
Why act now

Governments are eager to invest in projects likely to boost economic growth and create jobs in the near term. Deploying fiber networks satisfies both of these objectives. Incumbent operators that do not adequately acknowledge the importance of a high-speed broadband infrastructure for their country might find themselves sooner than later in conflict with their politicians who have a much broader national interest. Eventually, these operators may be faced with an undesired industry outcome that can be detrimental to the core business, such as loss of control over their own infrastructure, substantial government funding of a competitor, or the creation of a new government-owned
Luis Enriquez is a Director in McKinseys Brussels office. luis_enriquez@mckinsey.com
Sanjeev Kohli is an Associate Principal in McKinseys Dubai office. sanjeev_kohli@mckinsey.com
Wim Torfs is a Principal in McKinseys Dubai office. wim_torfs@mckinsey.com
RECALL No 12 The Fiber Future Framing fiber: A decision blueprint for network design
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06 Framing fiber: A decision blueprint for

network design
Operators face tough decisions when designing their fiber networks. No turnkey solution exists, but there is a blueprint for making the right choices. Most incumbent operators have either begun or are considering deploying fiber access networks. Those in the early planning stages need to make a critical strategic choice between the two prevalent network architecture alternatives: point-to-point (P2P) and passive optical network (PON). There are, however, other less obvious decisions regarding network design that given their impact on multiple levels are also strategically important. Deciding whether to include other services in additional wavelengths is particularly impactful, but there are numerous other smaller decisions as well. These concern, for example, the outside plant design, the in-building network, or the location of ONTs (optical network terminals). No silver bullet will resolve all these issues. Thus, operators will need to sift through their choices and design the fiber network architecture best suited to their requirements. When making these decisions, telco managers will have to evaluate their network options based on three key factors. First and foremost, they must consider the costs associated with each option. To ensure that all relevant expenses are taken into account, they should look beyond direct deployment costs and examine the impact of indirect expenses like those that stem from customer installation, provisioning, future network operation, and maintenance. Telcos should also consider their competitive positioning, which is likely to shape their objectives in terms of product offerings, rollout speed, and geographic coverage. Finally, the choice
of network design should take the existing regulatory framework into account and carefully weigh the regulatory risks associated with each design option.
Network architecture: Getting it right from the start

Whereas all legacy copper access networks follow roughly the same architecture, fiber networks can be divided into two major architectures. P2P and PON are significantly different in numerous respects and present very distinct value propositions. Choosing the network architecture (or combination of architectures for different types of customers or geographies, for example) that best fits a given telcos context and objectives is a key decision with enduring ramifications a decision that must be reached very early on in the design process. The primary difference between P2P and PON architectures is how the physical fiber itself is utilized. In the P2P approach, each fiber that leaves the central exchange connects directly to one specific home or business via a router; hence the name point-to-point. With PON architecture, each fiber that leaves the central exchange is split and can serve from 32 to 64 homes or businesses. This point-to-multipoint network requires an optical line terminal (OLT) at the operators central exchange, which feeds each fiber into an optical splitter and from there to ONTs at customer premises. The two approaches have distinct characteristics and value propositions (Exhibit 1). In terms of cost, analyses conducted and ongoing deployments show that P2P capex requirements can be roughly 5 to 10 percent high-
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01
Two main fiber network architectures have distinct value propositions Two main fiber network architectures have distinct value propositions
Evaluation G-PON P2P Explanation Capex in P2P 5 to 10% higher than in G-PON (more active equipment, more fiber, and more expensive ONTs) Opex in P2P 15 - 20% higher than in G-PON (higher power consumption/maintenance) P2P allows for faster, symmetric broadband (up to 10 Gbps by 2010 vs. 300 - 500 Mbps in G-PON) P2Ps physical unbundling makes it more suited for customized IPTV and innovative future products Analog RF offering easier/cheaper in G-PON Larger/more complex to build More fiber in P2P means more time-consuming connections/fusions
Cost
Product offering
Simplicity/ deployment speed
Flexibility
P2Ps unbundled nature increases flexibility in future product/ architecture evolutions Wholesale line sharing easier in P2P architecture (making it easier to execute potential regulatory actions)
SOURCE: McKinsey
er than those for G-PON (gigabit-capable PON, the most widely used PON variation) because it requires more active equipment and more fiber cable. Likewise, P2P opex can be from 15 to 20 percent higher than G-PON, due to higher power consumption and increased maintenance requirements. Looking at product offerings, P2P enables much faster broadband speeds up to 10 gigabits per second (Gbps) expected in 2010 versus 300 to 500 megabits per second (Mbps) for G-PON. Furthermore, P2P is likely better suited for high-bandwidth interactive Internet TV and innovative products on the horizon. Having said that, including an analog radio frequency (RF) overlay to deliver multiple analog television channels is easier and cheaper via PON. This is because PON architecture utilizes shared fibers, while an RF overlay on P2P requires RF signal splices for every fiber connecting to a home. When considering differences in simplicity and deployment speed, central exchanges will be larger and more complicated to build in P2P than in PON. Moreover, the physical need for more fiber per household in a P2P architecture results in more numerous and timeconsuming cable connections and fusions. On the other hand, P2Ps unbundled nature (compared with PONs shared-medium approach) makes it more flexible it can be better adapted to future product and architecture
evolutions. P2P can also accommodate wholesale line sharing models (like the ones used in copper networks). Since P2P and PON present significantly different value propositions when it comes to speed, upgradeability, investment levels, and maintenance requirements, incumbents increasingly see these two architectures not as mutually exclusive alternatives, but as complementary options that they can use in different parts of the network. In fact, both technologies are being deployed worldwide in large-scale launches and have already established sustaining ecosystems.
Riding the fiber wave(s): Single or multiple wavelengths

Overlays add complexity and new investment and maintenance requirements to the access network. The upside is that they also allow telcos to offer potentially important commercial services. For example, operators using multiplexing in the access network can provide analog RF to transmit multiple TV channels simultaneously (Exhibit 2). The RF overlay lets operators link the ONT directly to TV sets. Expensive set-top boxes (STBs) on every TV set in a home are no longer needed, providing a cost-effective solution for multiroom television. The downside is that RF signal sets cannot offer high-definition service or other advanced features.
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02
Multiplexing can provide additional services (such as analog RF) Multiplexing can provide additional services (such as analog RF)
RF overlay avoids set-top boxes (STBs) for all TV sets Transmission of multiple channels (60 - 85) simultaneously to all customers as overlay to IP signal ONT transforms RF overlay into an analog signal sent through the coaxial network to TV sets
IP signal
Fiber link to external network ONT
RF signal
Home gateway VoIP Phone
STB
STB
TV
TV
TV
TV
SOURCE: McKinsey
Adding an RF overlay to P2P architecture is quite challenging; it has yet to be proven in a large-scale rollout. The technology requires either using a second fiber or multiplexing two lasers on a single fiber. This calls for additional fiber splices per household along with difficult and expensive handling procedures at exchanges. RF on PON architecture also presents cost and complexity challenges, but the benefits could outweigh them. Equipped with G-PON plus RF, telcos can adopt simpler home installation procedures (by eliminating the need for STBs on every TV set). Furthermore, they can commit less bandwidth to IPTV streams. This could blunt the competitiveness of analog cable channels potentially preventing or at least delaying cable companies from fully transitioning to digital technology.
Connectors can be temporary and come in many types, whereas the fusion splice permanently connects (fuses) fiber network elements. The technology that operators choose will depend on their network objectives regarding provisioning costs, network flexibility, and rollout speed. An incumbent rolling out G-PON, for example, might choose connectors because they provide flexible points in the distribution network, allowing for additional options in managing OLT ports. This can drive down costs (especially at higher penetration levels). Connectors require less specialized labor than fusion splices, but they can be more error-prone in deployment. They also carry higher levels of regulatory risk because they can open the door to unbundling and may raise significant operational challenges. Opting for a connected access network can also slow down network rollout, since operators need to license the required street cabinets. This process usually requires engaging multiple municipalities with different licensing requirements and fees, and distinct agendas. In-building topology. Telcos also need to address their approach to in-building networks. Labor and equipment costs can vary widely with building topography and vertical duct availability. Depending on cost, coverage, and penetration targets, operators may focus on new buildings with vertical ducts or go for broader deployment.
Other smaller strategic decisions

Alongside these two major decisions P2P versus PON and single signals versus multiplexing incumbents need to reach a number of less fundamental but still critical strategic choices. These include outside plant design, in-building topology, the location of ONTs, and vertical drop (Exhibit 3). Outside plant design. Two main types of fiber cable termination technologies are found in a fiber network.
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Several less fundamental decisions are no less strategic Several less fundamental decisions are no less strategic
Key decisions Outside plant design Solution space Connected Fused Key decision drivers Network flexibility Provisioning costs Speed of rollout
In-building topology
Focus on new buildings with vertical ducts
Broad deployment
Deployment costs Speed of rollout and provisioning Building administration management
ONT location
Inside client premises
Outside client premises
Speed/complexity/cost of rollout vs. future network maintenance complexity/costs
Vertical drop
Outside P2P drop Fusion connection
Internal floorboxbased drop Pigtail connectors Connector in cabinets
Speed of rollout Expected penetration rate Solution durability Network flexibility NON-EXHAUSTIVE
SOURCE: McKinsey
ONT location. Another strategic choice is where to place the optical network terminal inside or outside customer premises. Trade-offs in rollout speed, complexity, costs, and ongoing network maintenance effort form the basis of this decision. Arguments for inside placement most ONTs are installed this way include lower installation costs, no weather-related problems, less need for additional ONT packaging or protection, and simpler setups. Outside installations, however, offer increased accessibility (e.g., for maintenance or upgrades) and less equipment exposure to children or pets. Vertical drop. When installing fiber in multistory buildings, technicians must navigate the vertical drop between floors. This can be done outside the building if it lacks cabling ducts, or inside, typically via raiser cables and floor boxes or P2P drops. Costs vary greatly with building topography, vertical duct availability, labor intensity, and equipment used (e.g., building cabinets, floor boxes, splicing and connection equipment). The decision hinges on the required rollout speed, expected penetration rate, and the desired level of network flexibility.
aware not only of the immediate cost impact of these decisions, but also of their implications from a competitive positioning and a regulatory standpoint. Costs show significant variance. The costs of various design options depend largely on four external factors that differ in each specific situation: Availability of passive infrastructure. The time and costs associated with rolling out a fiber network depend heavily on the need to deploy additional infrastructure. Digging new street ducts always the most expensive alternative typically costs five times more than using existing ducts. It also takes six times as long as roof-to-roof alternatives. Even erecting new poles is quite expensive (about twice as much as using existing poles) and time-consuming comparable to digging new ducts. In some situations, P2P may mandate the use of ducts because the high volume of fiber cables needed for this architecture can prove too heavy for poles. Labor costs. These can account for roughly 60 to 70 percent of total deployment costs, thus representing a key decision factor in network design. A worker in Denmark, for example, can be twice as expensive as one in Spain or Japan and ten times as costly as one in Brazil or Russia.
Choices, choices: Key considerations in fiber

As described above, telcos must make multiple network design decisions. When doing so, they should be very
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Geography and/or customer demographics. Geographic and demographic factors can also play important roles in choosing companies network design. While many incumbents which by definition serve mass markets prefer G-PON networks, over 90 percent of attackers in Europe favor P2P. Attackers primarily roll out fiber in small, targeted areas, and P2P has more flexibility, a higher rollout speed, and a better economic fit with the lower penetration levels that are most of these players ambition. Building topology. The types and arrangement of buildings in a given region drive fiber network deployment costs. Neighborhoods with smaller buildings (i.e., fewer than five households per building) have 40 percent higher fiber-to-the-home (FTTH) material costs per household than areas with large buildings (i.e., over 20 households per building). Positioning drives network design selection. An operators current or desired strategic positioning could significantly impact which network design is chosen. An incumbent facing intense competition from cable operators with strong analog offerings, for example, probably needs an RF overlay. Telcos seeking rapid network rollouts for competitive reasons or to collect a share of timesensitive government funding will likely choose G-PON architectures with no RF overlay. Likewise, attackers interested in targeted coverage will probably opt for P2P networks without RF overlays in order to address focused customer needs. Players looking to attract broad customer sales might commit to an RF overlay since it offers inexpensive TV access for low-end subscribers, without cannibalizing higherend customer sales (both fiber- and copper-based). Incumbents facing strong, speed-based competition from aggressive cable players with significant DOCSIS 3.0 coverage could adopt P2P architecture. Finally, operators hoping to attract business and institutional customers might choose P2P without RF due to demand for high-speed broadband.
Regulation is the gatekeeper. When considering whether to deploy a P2P or a PON network, regulation plays a decisive role. As with most of the points discussed in this article, each of these technologies offers different alternatives in handling regulated access and the associated risks. Unbundling illustrates this point perfectly. A P2P network can be unbundled with ease if so mandated, since each fiber corresponds with a unique subscriber. In the PON environment, this can be more challenging multiple subscribers share a single fiber originating from the central office. In practice, this means that an alternative operator renting one fiber will have to serve 32 or 64 customers simultaneously, making the business case much more complicated. This is certainly a key decision element for operators who face an open access regulatory regime or that would like to offer unbundling in their new network. Nevertheless, operators who select PON shouldnt assume they will get away with mere bitstream access requirements. Several regulators are enforcing mandatory access to in-building cables and existing civil infrastructure such as distribution ducts and manholes or ensuring that dark fiber unbundling is offered. Having such options can certainly reduce the time and/ or cost for competitors to deploy alternate networks. *** An operator has to make a multitude of choices when rolling out a fiber network. Telecoms managers should follow a systematic approach in making these strategic decisions, beginning with the most fundamental. Since many involve country- and situation-specific elements and because no one solution will fit all circumstances, a hybrid network with multiple design options is the likely outcome. Working through all the trade-offs involved in building the most efficient and effective network requires deep technical knowledge of fiber architectures. Coupling this with careful consideration of an operators current position will ensure telcos can achieve their objectives.
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Ruben Schaubroeck is an Engagement Manager in McKinseys Brussels office. ruben_schaubroeck@mckinsey.com
RECALL No 12 The Fiber Future Optic ops: Securing fibers business case via operational excellence
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07 Optic ops: Securing fibers business

case via operational excellence
As telcos switch to fiber networks, an upgrade of their installation and maintenance operations will ensure a positive customer experience. Telco executives face a precarious operational balancing act as they attempt to ensure their fiber-related products and services reach optimal quality and profitability levels. Most operators went through a superficially similar process when launching DSL and IPTV. Fiber, however, brings entirely new levels of complexity as managers struggle to integrate a new technology with new network architecture, services, and even IT systems. As a consequence, most operators in the early stages of fiber typically face several installation and post-sales challenges. These result in a high number of cancellations (up to 40 percent of gross sales), in ineffective installation practices (e.g., lengthy and highly variable installation times from four to ten hours), and in a high number of infancy failures (leading to several customer complaints). The implications of such performance are twofold. First, customer experience for fiber subscribers is often worse than telcos believe, leading to substantial increases in churn rates. When analyzing customer satisfaction levels from an end-to-end perspective among current fiber network subscribers, only about 20 percent have had an incident-free experience (Exhibit 1). This mediocre performance clearly has an impact on churn, since unsatisfied customers have churn rates five to seven times higher than satisfied customers. Second, scaling operations for fiber networks under current standards will be extremely challenging. Servicing just 100,000 fiber customers at current copper maintenance
levels would require 30 to 50 percent more maintenance resources than those currently devoted to efficient ADSL-based triple-play operations (Exhibit 2). These operational challenges can destroy the business case for fiber transformation in the short to medium term in two ways. Higher churn and an increase in maintenance resources mean that fibers profitability is not only compromised, but that its opex ratios significantly underperform those of copper networks. For fibers business case to work in the medium term, its opex ratios should outperform coppers. The less obvious detriment to fibers business case is the sizeable risk of destroying the brand image early in the game. Low service quality does not sit well with consumers. This negative sentiment can spread fast and kill the buzz around fibers distinctive value proposition.
Attacking fibers three operational chokepoints

In order to significantly improve the operating ratios, McKinsey recommends that telecoms players focus on three key actions: (1) reduce the number of cancellations, (2) develop a standard yet sophisticated installation process, and (3) improve the efficiency of maintenance operations. To tackle these operational chokepoints, McKinsey analyzed in depth the root causes behind each issue and developed a number of recommendations for improvement. Reduce cancellations. Empirical evidence shows that about a third of installations are canceled due to bad commercial practices, network inventory errors, obstructed ducts (namely in houses), or simply because
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01
The vast majority of subscribers experience incidents during fiber installation The vast majority of subscribers experience incidents during fiber installation
Percent Service canceled before installation Several operational issues negatively impact overall customer experience with fiber
100
40 5
25 5 5 20
Cancellations
Infancy breakdowns and later problems
No registration of breakdown by technical call center
Resolved infancy breakdowns
No infancy breakdowns, but later breakdowns
No problems
SOURCE: McKinsey
EXAMPLE
subscribers disagree with the standard installation procedures (e.g., they dont want exposed wires). The first of these culprits, bad commercial practices, can be addressed by delivering accurate installation information during sale closing and deploying alternative information vehicles (e.g., Web site) to better inform customers of fiber service requirements. Operators should also set up special fiber cancellation desks to manage customer resistance in real time during installation. Proper scripts and negotiation skills will help ensure the best alternatives are identified in each case. Also contributing to installation cancellations are network inventory errors. To address this, operators should conduct mass provisioning tests of all fiber connections before making them available for sale, setting up temporary task forces if required (to fix addresses and optical routing). A third factor in the high number of cancellations is obstructed ducts in single-family homes and apartment buildings with a single optical terminal box. This makes it physically impossible for technicians to complete the installation. To anticipate this, operators should negotiate with civil work contractors in advance, prearrange services to repair ducts (purchased by the customer), conduct pilots in potentially complicated areas, test different technical alternatives for overcoming physical fiber layout problems, train technicians, and ensure they have proper installation materials. Finally, when
many customers discover the (relatively) intrusive nature of home fiber installation, they decide to not proceed. Operators need to simultaneously provide accurate information regarding installation procedures during the sales process to manage customer expectations. They should also pilot less intrusive home network solutions, such as relying more on wireless applications and experimenting with thinner optic cable. Develop a standard yet sophisticated installation process. Currently, some operators use more than 40 combinations of customer premises equipment (CPE). Such practices can amplify the levels of complexity service technicians face, increase installation time, and lead to poor performance. Operators should select the most stable CPE combinations and proactively manage procurement and engineering. In fact, the continuous rush to capture better equipment prices, better technical solutions, and better deals typically leads to massive CPE proliferation. Although equipment is supposed to be compatible, in reality this widespread diversity causes increased breakdown rates and results in the telcos inability to provide efficient maintenance. The solution to the compatibility issue requires operators to make an assessment of the compromise between cost savings due to manufacturer diversification and the resulting higher maintenance costs. One operator found that it was able to reduce the total number of CPE combi-
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02
A transition level of only 1 percent to FTTH triggers the need for 30 to A percent more technical support 50 transition level of only 1 percent to FTTH triggers the need for 30 to 50 percent more technical support
Percent based on initial performance levels
+60 +45 +35 +35 30 - 50% more technical support needed
+10
Breakdowns
Repeat breakdowns
Calls to technical call center
Field force breakdown interventions
Set-top boxes replaced
SOURCE: McKinsey
ESTIMATES BASED ON CLIENT EXPERIENCE
nations by 75 percent. As a result, it could optimize purchasing savings, customer demand, and provisioning and maintenance expenses. Considering the fact that installations vary greatly and technicians typically have little information about the work to be done, operators should segment installation dispatching by type of home. This would allow operators to manage workloads up front and ensure the right skills for the job, since different types of homes present different levels of installation complexity. Operators would collect basic information during the sale (number of TVs to install, age of the building, presence/lack of a coaxial network) and include it in work orders. Such mechanisms could be followed by a revision of the contractors incentive schemes, recognizing the different levels of installation complexity. Many telcos leave key decisions to the discretion of the technicians. The result: any additional provisioning expenses, such as installing optional equipment at extra cost to the operator, are not always billed to the customer. More importantly, such decisions make it much harder to provide standardized maintenance. To tackle this issue, operators should standardize and automate procedures and configurations, provide technicians with adequate training and tools (ensuring that they know what works best), and dedicate technical
back-office hotlines to support technicians (reducing the need for two- to three-hour lead times that are often very hard for customers to accommodate). The final element of optimizing the installation process is to ensure that the services installed work properly. This can be accomplished by enforcing the traceability of installations with an eye toward ensuring technician responsibility. To do so, operators should mandate the use of a real-time service testing tool to close all installation work orders. If technicians fail to test the installed services, they are penalized. Such policies can significantly boost first time right performance and installation quality. To implement such a program, technicians could use personal digital assistants (PDAs) or laptops and run simple checklists or network tests tagged to a work order number. Improve the efficiency of maintenance operations. Reports from the field suggest that the fiber-to-thehome (FTTH) breakdown rate during the first six months of rollout is about three times higher than that for copper (Exhibit 3). In the end, a large majority of breakdowns require field visits and a significant portion of those visits result in expensive CPE replacements. To overcome this problem, operators need to adopt a remote problem resolution orientation, ensuring proper troubleshooting databases and monitoring tools.
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The FTTH breakdown rate during the first six months is about three times The FTTH breakdown rate during the first six months is about three higher than for copper times higher than for copper
Percent
100 30 70
40 30 10 Total fiber subscribers No problems Technical call center contacts No breakdown file opened Breakdown file opened (failure ticket) Breakdown file opened (failure ticket) in copper x3
SOURCE: McKinsey
For one operator where about 75 percent of breakdown issues were deemed to require the physical presence of a technician, the so-called post-mortem analysis revealed that in 50 percent of those cases the required action could have been conducted remotely (e.g., by resetting the router). To tackle practices like the one described, operators need to improve remote troubleshooting procedures. Ways to do this include deploying and maintaining a database of customer scripts and problem resolutions. Such scripts should, of course, be frequently updated by back offices, those responsible for platforms, and technicians. Beyond this, operators should also adopt a stricter breakdown-solving protocol in order to ensure that the field force is dispatched only when necessary. Additionally, operators should also consider adopting a proprietary firmware in ONTs (optical network terminals) to support dedicated monitoring software. This allows back offices to perform upstream tests remotely, using optical line terminals (OLTs) and downstream tests with routers and set-top boxes. Although such features should be enabled in future ONT firmware releases, tackling issues early on and integrating them in the overall incident management systems can significantly improve operations efficiency (each technician visit can cost EUR 150 or more) and overall customer experience, granting operators a fast return.
Launching the overall improvement plan

Improving fiber operations requires a specific plan and close coordination between multiple areas of the network. To ensure rapid implementation of the described improvement opportunities, operators should set up a task force supported by a comprehensive plan with clear initiatives, objectives, timeline, and responsible individuals and teams. McKinseys observations of transformation plans such as this suggests that they are most successful when sponsored by senior executives. This ensures that each initiative has leaders who are committed to specific timelines and objectives, that responsible persons are doing the necessary follow-up work, and that alert flags are raised when needed. In addition to leadership up the hierarchical ladder, lateral coordination across the various technical areas (technical call centers and back office, dispatching, field force, platforms, engineering) is also necessary. This serves to identify the root causes of breakdowns and reduce FTTH incidents. To achieve such a level of cooperation, operators need to improve communication among technical departments, particularly by transmitting the business vision to all areas involved, coordinating complementary activities (e.g., remote diagnosis and field force actions), and sharing information about already identified root causes of current breakdowns.
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This is a critical activity one which may even eventually lead operators to drastically rethink their current organizational setup. *** As the era of high-speed, fiber-focused networks takes root, telcos need to speed up their own reactions to the higher expectations customers have regarding this next-generation technology. Poor installation and maintenance heavily impact the all-important customer experience especially in the earliest days of a rollout. Thus, operators would be well served to concentrate on making sure they achieve operational excellence in reducing cancellations, streamlining installation, and optimizing maintenance.
Alfonso Villanueva Rodriguez is a Principal in McKinseys Singapore office. alfonso_villanueva@mckinsey.com
RECALL No 12 The Fiber Future Being the best: An interview with William Yeung and NiQ Lai, HKBN
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08 Being the best: An interview with
William Yeung and NiQ Lai, HKBN
HKBN was founded in 1992 by two entrepreneurial cousins as an alternative long-distance call provider. The companys initial capital was just HKD 1 million and it employed ten people. After establishing itself as the largest long-distance alternative around 1999, the founders looked at next-generation network (NGN) technology and its capabilities, strongly believing that an advanced NGN would be crucial for Hong Kongs future economic development and its peoples further development. Coupled with a thorough business case, this led to the vision to roll out a nationwide broadband network. The Hong Kong Broadband Networks name itself reflects the ambition to become the new Hong Kong Telecom (now PCCW), but founded upon nextgeneration technology. William Yeung was appointed Group Executive Director and CEO in 2008, having joined the group as COO in 2005. He looks back on over 18 years of experience in the telecommunications industry and holds BA, MBA, and MS degrees. NiQ Lai is HKBNs CFO, Company Secretary, and Head of Talent Engagement. He joined the group in 2004 and has extensive experience in the telecommunications industry as well as in research and finance. He holds an Executive MBA degree. McKINSEY: Why did you decide to roll out your own network infrastructure and not use some of the existing operators network? WILLIAM YEUNG: First of all, we can never be the best when we lease capacity or network equipment from the
incumbent, since we will always be dependent on the incumbents network and service quality. Second, if we were to use the existing telecoms infrastructure in Hong Kong, we would be limited to DSL technology a technology that will most likely never be able to accommodate down- and upload speeds of 100 Mbps to 1 Gbps. Then, we could never provide our customers with an experience similar to what people in Japan or Korea enjoy today, nor could they use similar highbandwidth applications. NiQ LAI: From the beginning, we chose independence from the incumbent. When you share infrastructure, your performance can never be better than your competitors, and we need to be the best to succeed. Continuously striving to be the best is one of our core values. One of our core purposes is to experience the emotion of competition, winning, and crushing competitors. We really want to build a legacy in Hong Kong. We want to be around in 20 to 30 years from now and be the leading operator. Most new entrants around the world have the goal of attaining a certain niche market share and profitability. We aspire beyond this, we want to have the majority share and dominate the market. This is why we need the best network for the people of Hong Kong. Leasing the incumbents network cant give us that. McKINSEY: Precisely how do you intend to achieve these ambitious objectives? NiQ LAI: To stick with this goal, we take on a ten-year perspective, unlike most other corporations who have a one- to three-year plan. We do get pressure from some of our shareholders for shorter-term optimization, but
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we are very transparent about our objectives. Having founding shareholders who still own 58 percent of the company definitely helps us adhere to our objectives. McKINSEY: To what extent has the absence of any access regulation driven your decision to invest in infrastructure yourself? NiQ LAI: That was a material factor. The Hong Kong market is basically a free market with uncapped returns. There is no mandate to provide open access to our infrastructure, so we are not obliged to open up our network. In other parts of the world, this is not the case open access is a requirement. This means, the downside is all yours: when you build the network and nobody comes to use it, you carry all the risk. But when everybody wants to use your network, the upside is shared. In other markets, this asymmetric risk profile acts as a disincentive for investment. McKINSEY: HKBN is clearly a very ambitious venture. Where do you stand today? WILLIAM YEUNG: Today, we are already Hong Kongs largest alternative broadband provider with over 20 percent subscriber market share. We are also the only operator with net market share growth. We have set ourselves a Big Hairy Audacious Goal (BHAG, see Good to Great by Jim Collins) to be the largest IP provider in Hong Kong by 2016. This is quite a challenge, but only with a high aspiration will people leap forward. McKINSEY: How do you plan to become Hong Kongs largest player? WILLIAM YEUNG: We have a clear edge on technology versus our competitors. Today, we are the only broadband provider in Hong Kong that offers speeds up to 1 Gbps throughout our entire network. This is downstream as well as upstream. The incumbent mainly offers 6 to 8 Mbps, with asymmetric speeds. We have passed 1.66 million households about 70 percent of the market and will soon have passed 90 percent. We know our competitors well. We are the only market player growing market share. The incumbents market share has dropped to about 50 percent and the other two players the distant numbers 3 and 4 will most likely be marginalized in the future. The incumbent has so many different technologies ADSL, VDSL, etc. and we dont believe they are willing to abandon this any-
time soon. Thus, we believe we will keep our technological edge over the coming years. Finally, our product offering is vastly superior to that of our competitors. We offer a 100 Mbps broadband package at USD 13/month and USD 25/month for our triple-play offer. Beyond the pricing, we also provide an 80 percent speed guarantee. If this is not achieved, customers will be refunded. We only had to refund eight customers in 2009 and our churn hovers below 1 percent a month, indicating that our customers are indeed satisfied. In short, we are well on track to achieve over 50 percent market share by 2016. McKINSEY: How can you be profitable when you sell 100 Mbps broadband connection at USD 13/month? NiQ LAI: We run our operations very lean and our capex is much lower compared with other countries. Using standard off-the-shelf Cisco routers has huge cost advantages. A typical router sells at a list price of USD 1,200 and serves up to 24 customers. We have a 75 percent utilization rate on those and obviously get substantial discounts on the list rates. This means that the cost per user becomes very low. For our standard broadband product, we only need to connect the Category 5e (CAT5e) cable from the router to the home, then our customers can connect to the Internet. We dont have the added costs of end-user equipment and installation is standardized it takes around one hour to pull the cable into the apartment, which is often done in batches. The total capex cost per house passed is less than USD 200 more than a fifth lower than other major FTTH deployments elsewhere in the world. Those typically range from USD 1,000 to USD 2,000. Upgrading the equipment is also much cheaper than in traditional telecoms networks, since we merely need to upgrade the end routers. This has made the network future-resilient. We also manage our operating costs closely. For example, half of our 3,000 employees mostly call center agents are based across the border in Guangzhou, China, where labor costs are only a third of what they are in Hong Kong. This gives us a substantial cost advantage over our competitors who have a higher Hong Kong base mix. Even with our low retail prices, we still are able to generate an 80 percent gross margin and achieve close to 35 percent EBITDA margin, which is steadily increasing.
RECALL No 12 The Fiber Future Being the best: An interview with William Yeung and NiQ Lai, HKBN
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McKINSEY: What type of network architecture have you deployed? NiQ LAI: As mentioned, we have deliberately chosen to run an off-the-shelf, computer-like network, which works very well in high-density areas such as Hong Kong. A typical building in Hong Kong has 30 stories and 20 apartments per floor i.e., 600 apartments per building. We bring fiber to the building and fiber up the vertical. Then on approximately every 10 to 20 floors, we connect the fiber to a router that serves a couple of hundred apartments. From the router, we connect a CAT5e cable to the customer premises. We even bypass the incumbents wall socket by providing our own. By keeping the CAT5e to within 100 meters, we can actually provide 1 Gbps speeds. Our network is basically the same as corporate LAN, but then taken to 1.66 million homes. In less dense areas, we have complemented this network with a G-PON fiber architecture. McKINSEY: What type of commercial model have you opted for? WILLIAM YEUNG: We do the bulk of our distribution in-house, since we are almost paranoid about quality. We like to control our product end-to-end. This is why most of our products are sold through our own channels: retail outlets, street kiosks, online channels, and telesales. We do have some dealers, but we keep this to a minimum. Our broadband product still represents around 70 percent of our revenues. Cross-selling is obviously important for us. We are continuously improving our TV offer and our triple play includes free national calls. We are able to keep the costs of cross-selling low by using our call centers and installation personnel who are highly incentivized to do so. McKINSEY: Your chairman recently stated that you have gone on the attack to lead the market into a price war, rather than wait for your competitors to initiate one. Thats quite a remarkable strategy. WILLIAM YEUNG: For us, price is an offensive weapon for long-term growth. We want to bring prices to a level where they actually do not matter anymore to consumers. Most operators want to avoid commoditization of their product. Our objective is quite the opposite: to turn 100 Mb service into a commodity, which plays to our strengths. Moreover, at current price levels, HKBN is the only operator that can operate profitably thanks to our lean cost structure. Incumbent operators have a
much higher cost base; thus, they have no incentive to invest in fiber rollout at current price levels. This will ensure that we will be a technology leader for many years to come. In other companies, this might be a difficult strategy to follow, since shareholders often want to maximize short-term profitability. Our founders still own the majority of the company. They are sticking to our longterm goal of providing broadband services throughout Hong Kong. As long as we remain independent, this goal will not change. McKINSEY: How important is talent management in your organization? WILLIAM YEUNG: We have a very strong corporate DNA where attracting talent (we do not have staff) is our biggest challenge. In the long term, its easy to replicate technology, but its difficult to replicate talent. This has been translated into our organizational model. For example, we dont believe in the traditional horizontal, functional approach. That would lead to the creation of malfunctioning silos as often seen in incumbent operators. We have structured the company vertically around five geographic areas run by mini CEOs. They are responsible for sales, network management, maintenance, and customer service and are fully empowered to best service our customers. Furthermore, each area is benchmarked monthly against every other, and improvements are continuous. This is the only way to ensure were close enough to our customers. We have also introduced the mini CEOs in other functions; to date, we have about 40 of them throughout the company. All mini CEOs bear full responsibility for their P&Ls and balance sheets. All of them, including back-end departments, have been focused on customer engagement. NiQ LAI: Our compensation is linked to performance at all levels. Salaries for some functions are up to 50 percent variable, based on individual KPIs. Even the technicians installing the broadband at the customer premises have a variable salary component. This part is based on the up-selling they can achieve and on the customer feedback we receive after every installation. Moreover, the company terminates 5 percent of the total salary base each year based on performance reviews. HKBN is a very unpleasant environment for underperformers, but if youre passionate and able, its a great place to be.
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We do invest a lot in our people. For example, we sponsor MBAs for our executives 70 percent of our top management have postgraduate degrees. We also have a management trainee program for our future leaders, known as CXO of the Future. The bar is high though: for example, we expect our CXOs of the Future to pass the CFA Level 1, run half of a marathon, and read at least one management book every two weeks during their 18-month program. McKINSEY: What have been the biggest hurdles on the way to where you are today? WILLIAM YEUNG: As in many other markets, getting access to the individual buildings has not always been easy, and often very time-consuming. We have good legislation in Hong Kong that treats telecoms providers as a utility with mandated access to the buildings without needing to pay any rent to the building owners. In reality, however, there are practical roadblocks, especially in buildings that are owned by larger groups with telecoms shareholdings. These have taken a lot of time to resolve. NiQ LAI: Looking back, it has not always been easy. It is very difficult for a new fixed-infrastructure player to make money. It has taken us seven years to reach free cash flow breakeven, and we have faced substantial restructuring phases in which we had to let many people go. Without our lean cost structure, we would not have been able to survive. McKINSEY: Where do you see Hong Kongs telecoms industry going from here?
WILLIAM YEUNG: Consolidation opportunities could arise in the Hong Kong market, but these will most likely only emerge with a change in the other operators shareholders. At that point, the competitive setting in Hong Kong could shift, since incumbent players may start investing heavily in next-generation technology. In the long term, the market will most likely only have room for two serious infrastructure players. In the meantime, there is always the possibility for partnerships between mobile-only players and fixed-only players. Again, that will only happen with changes in shareholder structures. Currently, it seems unlikely. Fixed players entering the mobile space may not take place, since mobile competition is fierce in Hong Kong and prices are among the worlds lowest. Thus, from a financial point of view, its not very attractive anymore. McKINSEY: What advice would you give other operators who are thinking about investing in fiber? WILLIAM YEUNG: Understand the market you are in. No two markets are the same. Understand what will be the technology that will lead the future e.g., mobile versus fixed, copper versus fiber and what will be the cost structure, among other factors. Next, if you see that there will be demand for those services, go ahead, but you have to realize, its a very long-term game. NiQ LAI: Do your own thing if there had been two identical HKBNs, we would have both been dead by now. William Yeung and NiQ Lai were interviewed by Wim Torfs, a Principal in McKinseys Dubai office.
RECALL No 12 The Fiber Future The fiber vision: An interview with Masaru Nishi, NTT East
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09 The fiber vision: An interview with

Masaru Nishi, NTT East
NTT is Japans telecoms incumbent with USD 110 billion in annual group revenues. NTT also leads the world in deploying fiber to the home (FTTH), using cuttingedge technology developed by its own R&D, backed by robust network management. NTT East and West provide fixed-line service. They have recovered more than 70 percent combined share of the fiber market in 2007, starting from a share of less than 40 percent of the ADSL market in 2005. This was a direct result of their successful FTTH strategy. This year, NTT announced it would be setting strategic objectives that include achieving a P&L-based surplus of their fiber business by the 2011 fiscal year. Another is to increase the FTTH subscriber base to 20 million households. Masaru Nishi is a member of NTT Easts executive board, focusing on IT and on innovation in particular. He looks back on well over a decade of experience in the group, spanning functions beyond IT like R&D. Mr. Nishi holds a masters degree in electronics science from Japans Kanazawa University. McKINSEY: Could you provide an overview of where NTT stands today in terms of its fiber network rollout? MASARU NISHI: If you include NTT East, NTT West, and other companies, we currently have around 16 million FTTH subscriber households in Japan today. This is out of about 50 million Japanese households in total. Our company has had a clear leader role in launching fiber, including the IPv6 next-generation network, which enables high-definition television and other broadband-intensive applications. Our Hikari TV service the first large, commercially successful IPTV
service even offers high-definition multicast TV, over 10,000 video-on-demand titles, and thousands of karaoke programs. McKINSEY: NTTs fiber network rollout met with great success. What was your go-to-market strategy? MASARU NISHI: We initially targeted technology leaders. At that point, our objective was to create the perception that Hikari NTTs fiber service with 100 Mbps throughput (best effort) would be the ultimate goal of broadband service. We engaged in joint marketing campaigns with real estate developers to promote the advantages of fiber in terms of property values and consumer demand. We also partnered with ISPs to spread the word about the benefits of broadband in general and, ultimately, fiber in particular. In 2004, we kick-started the FTTH phase, targeting early adopters within the young professional segment. We priced this fiber service competitively compared with conventional ADSL broadband. Subscribers in the innovator segment who were dissatisfied with ADSL speed, especially for uploads embraced fiber in a big way. We positioned fibers high speed and quality in ways that made ADSL seem inadequate. In terms of channel management, we established one-stop shopping at an electronics retailer and built direct channel modules to make interactions seamless and simple and we have kept on renovating it. The rapid FTTH expansion phase took place from 2005 to 2008, when we focused on followers within the young professional segment, on the family segment, and on
58
single students. We introduced voice over IP (VoIP) service and packaged FTTH and VoIP, then priced it in a way to lower these subscribers service invoice. We also engaged in joint marketing efforts with antivirus application, video, and other service providers. Currently, we are working on converging FTTH with the next-generation network. We will begin approaching the remaining ADSL users and non-Internet users. McKINSEY: What were the main technological decisions NTT had to reach and how were these influenced by the strategy your company chose? MASARU NISHI: We chose our gigabit Ethernet passive optical network (GE-PON) architecture, which was developed internally, due to its low cost and high reliability. We did experience challenges with in-building wiring at first, but after we developed flexible fiber, it became very easy. We recommend that subscribers take the do-it-yourself approach. For new apartments, NTT sends subscribers the optical network unit and fiber cable, which users install themselves. We also offer a downsized very highbit rate digital subscriber line 2 (VDSL2) box, which saves both energy and space. Formerly, we designed the access network to fit the subscribers current situation manually, using a combination of modular in-home approaches, VDSL2 boxes, fiber to the curb, and feeder cables. Now we promote network access design automation. McKINSEY: How do you expect the technology to evolve? MASARU NISHI: That is very hard to say. NTTs research and development activities cover a wide variety of areas and topics. These include quantum computers, voice recognition, artificial intelligence, and next-generation connection solutions. Because of this broad spectrum, there are just too many possibilities to make any meaningful predictions. McKINSEY: What criteria did you use to prioritize your rollout strategy? MASARU NISHI: In order to optimize our initial investment, we chose not to immediately spread the network out to all areas. Instead, we expanded it gradually based on demand.
McKINSEY: How did you ensure a quick rollout? MASARU NISHI: It depends on how you organize construction work, design automation, and the approach to stock management. If you do it properly in the provisioning process, you can specify the start date for construction work right at the time of the customer order. McKINSEY: What issues did you face in service provisioning? MASARU NISHI: At first, there were many cancellations, subscriber absences, and unavailable inventory. But these dropped significantly as provisioning times became shorter, inventory management became well established, and sufficient network access opened up. McKINSEY: What do you consider to be your largest challenges today from an operational perspective? MASARU NISHI: Reducing operating expenditure and driving the continuous improvement process remain ongoing challenges. Other issues include reducing manpower costs in dispatching, increasing cost effectiveness in sales promotions, and streamlining network operations. McKINSEY: Which NTT products and services do you consider true success stories? MASARU NISHI: Flets Hikari Next a next-generation network service and Flets Hikari current-generation fiber service. Both are successful. Our next-generation network offers enhanced service quality, and Hikari is a best effort type of service. Hikari telephone service has also been highly successful. As a result, migrating from what we call POTS or plain old telephone service to fiber has been achieved gradually. Our vision including our network migration plan will be announced this autumn. McKINSEY: What commercial approach did NTT use to launch its fiber service? MASARU NISHI: We focused on door-to-door and direct mail approaches, supported by active call center contacts. We also hooked up with a home electronics volume retailer, apartment developers, and ISPs. One key reason for our success was the decision to involve the 116 customer service line to build awareness of the new service right from the date of the public announce-
RECALL No 12 The Fiber Future The fiber vision: An interview with Masaru Nishi, NTT East
59
ment. Also, at the home electronics volume retailer, we promoted the advantages of FTTH to customers who bought TV sets or personal computers. We highlighted fibers speed to attract early adopters, and the benefits of Hikari phone service and Internet access to lure mass-market users. We utilized a variety of media to promote the service, including TV ads, point-of-sale brochures, and newspaper inserts. All of these were effective. We have yet to focus on some of the more viral techniques like word of mouth. McKINSEY: How do you ensure the continuous launch of new, innovative products and partnerships? MASARU NISHI: We have established an expert organization, the Broadband Service Department. It promotes service development and alliances. And it serves as a vehicle to drive innovations such as Hikari phone service. It also promotes the use of fiber to the home. McKINSEY: Looking forward, what are the main challenges and threats you see?
MASARU NISHI: The key challenge will be continuously providing a network that can adapt appropriately to evolving device, terminal, and customer needs in terms of line speeds, protocols, and platforms. Next-generation fiber to the home will spread widely in global terms over the next decade, becoming an essential infrastructure component in peoples personal and business lives. The NTT group utilizes its next-generation network in an ever-growing number of areas, including environmental applications, medical services, education, and work-life balance. Next-generation fiber will continue broadbands signature achievement in reducing the costs involved in information transfer and logistics, and help reduce the planets environmental load. As NTTs catchphrase urges: Connecting, its eco meaning the more highspeed broadband is used to interconnect, the less commuting and transport is needed; thus, broadband is more ecological. Masaru Nishi was interviewed by Kazumi Hagihira, an Associate Principal in McKinseys Tokyo office.
RECALL No 12 The Fiber Future Appendix
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News, views, insights

McKinseys Telecommunications Extranet is the gateway to some of the best information and most influential people in the telecommunications industry. The Extranet offers selected McKinsey-generated information that is not available in the general Internet. Extranet users have access to selected McKinsey articles on subjects relating to Industry & Regulation, Growth & Innovation, Sales & Marketing, Services & Operations, Next-Generation Networks, Technology & IT, Corporate Finance, Organization & HR, Corporate & Enterprise, and Equipment & Devices. Direct communication channels ensure that your questions and requests will be addressed swiftly. The site is updated weekly with new articles on current issues in the industry. McKinseys Telecoms Extranet lets you: Obtain exclusive information free of charge and use an Internet portal specifically designed for the industry Access cutting-edge know-how, interact with experts to gain new insights, and contact industry leaders Stay well-informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com Contact: telecoms@mckinsey.com
RECALL No 12 The Fiber Future Appendix
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Serving clients around the world

McKinseys Telecommunications Practice serves clients around the world in virtually all areas of the telecommunications industry. Our staff consists of individuals who combine professional experience in telecommunications and related disciplines with broad training in business management. Industry areas served include network operators and service providers, equipment and device manufacturers, infrastructure and content providers, integrated wireline/wireless players, and other telecommunications-related businesses. As in McKinseys work in every industry, our Practices goal is to help our industry clients make distinctive, substantial, and lasting improvements in their performance. The Practice has gained deep functional expertise in nearly every aspect of the value chain, e.g., in capability building and transformation, product development, operations, network technology and IT (both in strong collaboration with our Business Technology Office BTO), purchasing and supply chain, as well as in customer lifetime management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.
Telecommunications Practice February 2010 Copyright McKinsey & Company, Inc.

www.mckinsey.com

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Telecommunications

The Fiber Future

RECALL No 12 The Fiber Future

Jrgen Meffert Leader of McKinseys EMEA Telecommunications Practice

RECALL No 12 The Fiber Future

RECALL No 12 The Fiber Future Fiber: The future of wireline

01 Fiber: The future of wireline

Market share Alternative fixed infrastructure available (e.g., cable) Low

Seek government subsidies or divest

Engage with government and other players on solution

Developing a fiber strategy

RECALL No 12 The Fiber Future Fiber: The future of wireline

Key design decisions made and internalized by organization Clear objectives

Detailed plans ready to execute Testing, validation, and training complete

Creating a high fiber company

Duarte Begonha is a Principal in McKinseys Lisbon office. duarte_begonha@mckinsey.com

Bruno Carrilho is an Engagement Manager in McKinseys Lisbon office. bruno_carrilho@mckinsey.com

Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com

Michael Gryseels is a Principal in McKinseys Brussels office. michael_gryseels@mckinsey.com

Sergio Osle is an Associate Principal in McKinseys Madrid office. sergio_osle@mckinsey.com

Sergio Sandoval is an Engagement Manager in McKinseys Brussels office. sergio_sandoval@mckinsey.com

02 Monetizing fiber: Prospects for

Fiber optics to the rescue in four areas

F Internet speed Normal broadband Advanced features are enough

E Full-feature TV and standard broadband

Narrowband or no interest in Internet

Customer segmentation drives a fiber-friendly product portfolio

Patricia Ferruz is an Associate Principal in McKinseys Madrid office. patricia_ferruz@mckinsey.com

Sergio Osle is an Associate Principal in McKinseys Madrid office. sergio_osle@mckinsey.com

Steven Spittaels is a Principal in McKinseys Brussels office. steven_spittaels@mckinsey.com

Alfonso Villanueva Rodriguez is a Principal in McKinseys Singapore office. alfonso_villanueva@mckinsey.com

03 Wanted: Fiber products and services

Fiber for the people: A South Korean success story

Designing offerings with an edge

15/30 Mostly downstream

Key traffic requirements

Setting the fiber agenda

Duarte Begonha is a Principal in McKinseys Lisbon office. duarte_begonha@mckinsey.com

Bruno Carrilho is an Engagement Manager in McKinseys Lisbon office. bruno_carrilho@mckinsey.com

Michael Gryseels is a Principal in McKinseys Brussels office. michael_gryseels@mckinsey.com

David Riphagen is a Fellow in McKinseys Amsterdam office. david_riphagen@mckinsey.com

04 Local color: Commercializing fiber

Educating consumers is key building awareness at the grassroots level

D2D agents with penetration < 20%

TV and enhanced TV features Medium Advanced communication services

PVR, HDTV, shift TV, multiroom

Hard to demonstrate without physical customer touchpoint

School services, videoconferencing

Hard to demonstrate without physical customer touchpoint

Premium home management services

Video surveillance, computer maintenance

Requires setting up a home for demonstration purposes

Three ways to achieve door-to-door sales excellence

Secondary (complementary) channels

Booths Kiosks Outbound calls

Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com

Michael Gryseels is a Principal in McKinseys Brussels office. michael_gryseels@mckinsey.com

Sanjeev Kohli is an Associate Principal in McKinseys Dubai office. sanjeev_kohli@mckinsey.com

Andras Kovacs is an Associate in McKinseys Budapest office. andras_kovacs@mckinsey.com

05 Invest now: Deploying fiber to achieve

The economics of fiber

Net present value