Fiber networks require huge upfront investment and have a payback period of many years. The business cases that support these investments always contain a degree of risk – most noticeably on the demand side, but costs can also be uncertain when digging in a new location.
CSPs that are considering the deployment of a new network, or expansion of their existing fiber footprint, will look to reduce the risks as far as possible. In this post, we look at the strategies that CSPs in Europe and the USA have employed to reduce and mitigate these risks.
Google Fiber, USA
In 2010, Google entered the fiber broadband market in the USA, in a move widely seen as seeking to disrupt the status quo and encourage the incumbents to invest more in fiber. Although further expansion of its FTTP network has been put on hold for the time being, Google provides a useful case study on how CSPs can reduce demand-side risk.
Google used several innovations in its business model and its network deployment process. Most notably:
- Google engaged with the local community to drive demand for services.
- It reduced demand-side risk by asking customers to register and pay a deposit before construction began.
- Neighborhoods had to exceed a minimum threshold of pre-orders before fiber was deployed.
Since Google showcased this approach, many other CSPs have successfully employed pre-registration of interest before committing to invest in a selecting area. Examples include Gigaclear in the UK (30% sign-up threshold per 4000+ home community) and Greenlight Networks in the US.
Beyond the financial risks, a specific issue for new entrants in fiber network deployment is lack of expertise. This was the case for Enel – a large utilities company in Italy. To address this challenge, Enel opted to merge with an existing fiber provider Metroweb (owned partially by CDP, an Italian Sovereign wealth fund), creating a new company known as ‘Enel OpEn Fiber’.
By joining forces with Metroweb, Enel secured expertise in fiber deployment and was able to share the capital investment. Enel has a goal of reaching 9.5million homes with FTTP by 2021. The two capital-rich entities expect to invest ca. €3.7 billion into the fiber rollout, 85% of which will go towards the 2021 target.
UK-based HyperOptic provides ultrafast fiber broadband (up to 1 Gbps) to high-rise MDUs (multi-dwelling units) in metro areas.
MDUs are attractive to CSPs as they provide the opportunity to sell services to multiple dwellings using a single connection to the building. However, despite the favorable economics in the last mile, the internal cabling of MDUs can be tricky for a couple of reasons. Firstly, permission to prewire the building will be required from the landowner or freeholder, and this may not be forthcoming. Secondly, prewiring a high-rise can be time-consuming – particularly in older properties that lack integrated building solutions for HVAC and comms networks.
HyperOptic overcomes the first of these challenges by directly engaging with building residents, managers and freeholders to secure permission to connect the buildings. For the second, HyperOptic focuses on large, new build developments where the cabling costs are lower. Finally, to manage demand-side risk, HyperOptic takes Google’s approach down to a micro-level, ensuring that there’s a minimum level of interest within an MDU before committing to connect it.
Másmóvil is a quad-play operator in Spain that has a stated goal of passing 2.3 million premises with FTTP by the end of 2018. To achieve this, it has partnered with Orange, striking an agreement to jointly build FTTH to 1 million homes in Spain.
Másmóvil saw an opportunity in a competition authority ruling that obliged Orange to engage in partnerships as a condition on its purchase of the Spanish CSP, Jazztel. Under the agreement, Másmóvil will build up to 500,000 homes in ‘low competition’ areas. By focusing its attention on those areas with low population and no incumbent FTTP provider, Másmóvil will be able to build its market presence in the ‘value for money’ segment. Orange meanwhile will focus on more competitive, urban areas.
Másmóvil claims this solution will allow them to move towards their network expansion goals in an ‘economically efficient manner’. Other examples of sharing between the companies include access to Orange’s existing FTTP footprint and collocation on Másmóvil towers.
Openreach (a division of BT Group) is responsible for maintaining and developing BT’s local access network in the UK. It provides a variety of wholesale products and services to CSPs. Openreach aims to provide ultrafast speeds to 12 million homes by the end of 2020, and believes 10 million of these could be full fiber (FTTP) under the right market conditions.
To explore CSP appetite for such a large investment in fiber broadband, Openreach engaged with its downstream wholesale customers through a consultation process in June 2017. The outcome of this industry engagement is yet to be communication, but it does represent a change of style on Openreach’s part – indicating interest in a more collaborative, multi-party approach.
Openreach plans to expand this strategy, offering CSPs a chance to discuss strategic efforts in private prior to public consultation. They hope that these initiatives will lead to better relationships and collaboration between CSPs in tackling issues inherent with any large-scale network expansion.
In September 2017, Vodafone announced plans to invest around €2bn of incremental CapEx in fiber broadband services in Germany by 2021. This investment umbrella includes two network expansion programs that will be funded through a co-investment model.
In the first initiative, ‘Giga-business’, Vodafone will partner with Deutsche Glasfasser to reach 2,000 business parks, covering 100,000 companies. Under the agreement, Deutsche Glasfasser will invest in the passive infrastructure which Vodafone will use to supply services to the businesses. Vodafone will then purchase the infrastructure over a four-year period. This approach limits Vodafone’s up front cashflow to roughly one third of total build (excluding CPE costs). Also, by limiting the deployment to business parks that commit to a minimum take-up of 40%, both parties reduce demand-side risk and ensure early revenues.
The second initiative, ‘Giga-Municipality’, sees Vodafone partnering with local municipalities to reach homes in rural areas. Vodafone will own the link from the fiber backbone to the central office from which the local municipality can build and own the infrastructure to the home (potentially supported by government subsidies). Vodafone expects an outlay of around €0.2bn - €0.4bn to reach around 1 million homes in rural areas. Again, a demand threshold is applied with commitment from one third of homes required before construction starts.
Vodafone has since announced a partnership in Portugal with local operator NOS to jointly deploy and share an FTTP network for 2.6 million homes and businesses.
Choosing the Right Strategy
As these case examples show, whilst fiber networks require large investments, there is plenty of CSP appetite for fiber network deployment when the business case is positive. Strategies to reduce the investment risk can include stimulating demand, reducing demand-side risk through pre-registration, smart targeting of geographic areas, and partnerships to spread risk and pool experience.