Skipping dividends is no guarantee for achieving superfast broadband

Wednesday 11 April 2012 | 12:23 CET | Background

German union Ver.di, which represents employees at Deutsche Telekom, has called for the German state, which owns 32 percent in DT, to not claim part of its dividend from the German operator. This would keep more capital in the company to increase its investments in broadband. In exchange, the government's stake in the operator would increase. Almost at the same time, the Employee Savings Fund, which holds 4 percent of shares in France Telecom, announced plans to propose a dividend cut at the annual shareholders meeting. With the EUR 1 billion saved, the French operator could increase investment.

On the face of it, both sympathetic proposals, but at the same time completely unrealistic. For DT, this implies issuing new shares, which would dilute the stakes of other shareholders. Furthermore, it's up to the management to decide on excess cash. If the government doesn't agree with its policy, then it can make its influence known in other ways. Even if more cash remains with the company, it's far from certain that this will go towards an increase in the capex budget. 


The underlying problem behind this debate is a choice made by everyone several years ago: telecom should be privatised and listed on the stock market. In itself there's nothing wrong with this, as telecom companies have a clear cash flow profile. Investors buy the stock for the dividend. However, we now find ourselves in a new era, where 100-year-old copper networks need to be replaced with fibre optics (and 3G mobile networks with 4G). This results in capex peaks and dividend reductions. The latter we've already seen at Telefonica, Telecom Italia, France Telecom and others. Capex and dividends are interlinked, but listed telecom companies will always try to keep the capex to a minimum and the dividend to a maximum.

From the government's perspective, this is potentially a problem. In many cases, where telecom and cable operators are successful in their lobbying, there's little opposition. KPN and NLkabel defend the status quo in The Hague, pointing to the fact that the Netherlands regularly scores at the top of international broadband rankings. They represent the traditional vision on broadband, based on the concept of scarcity.  By allowing the available bandwidth to increase gradually, scarcity persists and the price remains high. But there is also a counter force. This is where Ver.di shows its social face. It points to the German government's target for at least 50Mbps broadband for 75 percent of the population (under the Deutschland Digital 2015 plan, introduced in October 2010). In any number of other countries there is a counter-lobby that stands up for super-fast broadband as a way to boost the economy and contribute to social and environmental goals. In this vision, bandwidth should not be a limiting factor. For the moment, the counter-lobby has only achieved success in a few countries, such as Australia and Singapore. There, the positive effects of super-fast broadband weigh more strongly than dividend payments by telecom companies. The local PTTs (Telstra and Singtel) have even sold assets to a state-owned telecom operator - a new form of nationalisation.


This shows that the position of listed telecom companies is not irreversible. The Netherlands offers an interesting case with the arrival of CIF, the Communication Infrastructure Fund which invests on behalf of four pension funds and is managed by Rabo Bouwfonds. CIF presents itself as a player all too happy to buy up passive network elements and open these up for rent to all service providers. This resolves at least part of the problem, as CIF is rolling out fibre everywhere, both to homes and businesses, as well as mobile networks. While not nationalisation, the result is something similar. Ver.di could better promote a realistic plan. Australia, with its National Broadband Network and nationalisation of assets, shows this is possible.

In addition to nationalisation and grouping passive infrastructure in companies such as CIF, there is a third option. According to recent reports, Telecom Italia is currently considering such a plan: splitting off the fixed network. It's main goal would be debt reduction by selling a stake in the spun-off company, but it's also about investing in fibre. After more and more cuts to dividends in the past year (see above), it's likely more operators will consider spinning off their fixed networks. 

Structural separation

All three options have the element of structural separation in common. The (passive) network and services provision are separated. The stable cash flow generated by the network company allows it to invest in fibre. In theory, this happens in a focused way (it's the core business) and with numerous economies of scale, keeping wholesale tariffs low. This means a low barrier of entry for service providers. The services company has a completely different focus and business model and can concentrate on the end-user. While a theoretical negative here would be that the service providers could not distinguish themselves from each other using infrastructural aspects, this does not always hold true. For example, the fibre network operated by Reggefiber, on which numerous service providers are active. This network can support speeds up to 1 Gbps, meaning competing on the basis of speed is possible. If the modem can only support 100Mbps than this isn't possible, but thanks to new modems, there are now a variety of offers in the market, with 600 Mbps from Wisper in Eindhoven only the latest. GlasOperator, as manager of the active equipment, also plays a role in making this new service possible. 

Telecompaper is organising on 20 June the Breedband 2012 congres in Singer in Laren.

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