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Blog by Stephen Wilson
Incumbents in Eastern Europe right to proceed with caution in FTTH investment
In the Eastern European region (excluding the CIS) incumbents, with few exceptions, are showing little appetite for rolling out FTTH. There are a number of reasons for this, not least that some incumbents are showing increasing interest in technologies based on copper (dynamic line management, plain VDSL2 from the street cabinet or central office), financial constraints due to the poor macroeconomic environment and difficult trading conditions as well as regulation that incumbents believe discourages FTTH rollout.
Interest growing in DSL based technologies
Rather than bringing fibre all the way to the subscriber’s home Eastern European incumbents are maximising their copper assets. Both TPSA in Poland and Magyar Telekom in Hungary are customers of ASSIA whose software can help ensure line stability resulting in fewer line resynchs as well as help mitigate against crosstalk and minimise power consumption. The software can help give operators a better idea of exactly what speeds their lines are capable of, thereby helping to increase the coverage area for services such as IPTV, which both TPSA and Magyar Telekom offer. TPSA also reported that after implementing ASSIA’s software they were able to increase the maximum downstream bandwidth offer from 6Mbps to 20Mbps. The fact Magyar Telekom is a customer of ASSIA is interesting as this is the first incumbent in which Deutsche Telekom has a stake to use the software. Deutsche Telekom has stakes in a number of incumbents across the Eastern European region and so there is further potential for the growth of such software to improve DSL performance.
Plain VDSL2 rollouts with promise of improvements to come
Plain VDSL2 is also proving popular with incumbents. O2 in the Czech Republic is offering VDSL from the central office, primarily aimed at defending the ARPUs of existing customers. TPSA launched FTTC in 3Q11 and Romtelecom in Romania is also offering FTTC. With further improvements such as vectoring this trend of growing interest in VDSL is likely to continue. The complication in Eastern Europe is that the copper is of poorer quality than in Western Europe but nevertheless vectoring promises improvements across good and bad copper. VDSL2 pair bonding might also be possible with an average of 1.6 pairs per home in Poland and 1.4 in Slovakia. Of course incumbents could pursue a strategy of rolling out FTTH for higher end customers whilst concentrating on VDSL for other customers but thus far this is not a scenario that has been common.
Cash constraints limiting FTTH rollouts
Times are tough for incumbents in Eastern Europe with both fixed and mobile arms facing revenue falls. In such a panorama incumbents are proceeding with caution with regard to making investments in FTTH. For example, Magyar Telekom has cut its targets for FTTH coverage with the incumbent setting objectives in 2008 for 783,000 FTTH homes passed and yet only reaching 261,000 at end 2011 compared to 227,000 at end 2010. Romtelecom has also rolled out some FTTB but with ultimate parent company Deutsche Telekom unsure of how aggressively to invest in a market with very strong competition from RCS RDS the rollout is limited. One possible way out of this dilemma would be to share the costs of FTTH rollout with other parties in a co investment model, but as in Western Europe, thus far there has been limited progress in this area.
Regulation presents a handicap
Incumbents have also been weary to invest in FTTH because of regulation driven by the European Commission that forces the operators to open their GPON networks to bitstream competitors. Given the risky business case for FTTH with the seeming limited willingness of customers to pay more for higher speeds and the lack of applications requiring such high bandwidths the incumbent position of complaints against over burdensome regulation seems largely justified. Bitstream regulation for GPON FTTH networks is already in force with the limited rollouts from Magyar Telekom in Hungary and Slovak Telekom in Slovakia. Croatian incumbent Hrvatski Telekom had problems agreeing with the regulator on terms for access for third parties to any FTTH network that it builds, although this dispute has now been resolved but this impasse has helped handicap any momentum behind FTTH rollout.
Proceeding with caution is a sensible option for operators
The factors of improving copper based technologies, difficult economic climate and unfavourable regulatory conditions make me believe that incumbents are being sensible in proceeding with caution on their FTTH rollouts. To this list of factors we can also add the lack of success that incumbents have had with what FTTH they have rolled out. For example, the take up rate on Magyar Telekom’s FTTH rollout stands at only 12%. There are the exceptions of Latvia and Lithuania where the incumbents (Lattelecom and Teo respectively) have rolled out FTTH very aggressively and have increased their market share. But I would argue these markets are different in the sense that competition amongst alternative operators is more fragmented, regulation for FTTH more favourable and the costs of rollout lower.
Opportunities still exist for vendors
From an FTTH vendor perspective this situation is not the best but nevertheless there are compensations. Large system level vendors can hope to sell their DSL kit with VDSL2 vectoring, for example. FTTH rollouts are also not necessarily limited to incumbents. Mobile operators, particularly where regulation for DSL LLU is lacking, may rollout FTTH as is the case with MobilTel’s GPON network in Bulgaria. Neighbourhood network type operators may also choose to upgrade their FTTB/Ethernet LAN network s to GPON, such as RCS RDS in Romania deploying ZTE’s GPON equipment. The large quantity of funds available from the European Commission now and in the future for broadband infrastructure projects might also act as a spur for FTTH deployments. There is also the longer run position where eventually incumbents move to FTTH, which will be easier in Eastern than in Western Europe as the cost of FTTH rollout is lower because of the higher preponderance of large MDUs. Nevertheless this prospect still appears some way away in most Eastern European markets.