TDC follows KPN but what will the regulator do?

Wednesday 18 November 2009 | 20:41 CET | Market Commentary

TDC is acquiring the fibre optic network activities from Dong Energy. That begs a comparison with the co-operation between KPN and Reggefiber. The big question is: what will the regulator in Denmark do?

Dong is selling its fibre assets, other than the parts it uses itself. TDC pays DKK 425 million (EUR 57 million), of which DKK 100 million as an earn-out (so it depends on the network performance). The take-over will be completed by the end of this year and 146 employees will be transferred to TDC. The two parties have agreed on an open access network. Via a leveraged buy-out in 2006, TDC became an 88 percent subsidiary of Nordic Telephone Company, a holding company of Providence, Apax, Blackstone, KKR and Permira. According to rumours earlier this month, they want to sell part of their interests on the stock exchange.

The take-over is a strong reminder of the KPN – Reggefiber co-operation. In May 2008 KPN bought a 41 percent share in Reggefiber, including a series of call options to extend the share to 100 percent. Reggefiber also owns an open access network. However, the Danish transaction is much smaller; Dong Energy doesn’t even adjust its EBITDA forecast. It does write off a large sum of its fibre assets (DKK 677 million), which suggests that Dong was not doing very well with either building or exploiting the network. It is expected that incumbent TDC will re-establish some order in the business.

From a competition point of view the take-over does not look good, as one party disappears. However, it is more important that it prevents several overlapping FTTH networks from being rolled out. For TDC the transaction is therefore as logical as the deal with Reggefiber for KPN. The Dutch example gives the Danish regulator (Telestyrelsen) a blueprint for regulating the FTTH network. Open access, based on acknowledging significant market power, can therefore be expected in Denmark.

TDC announces in its press release that it chooses a form of open access which allows access to service providers. That suggests access at the service level, or IP level. In the Netherlands that kind of access is known as WBA (Wholesale Broadband Access), an unregulated service. TDC’s choice of words seems to exclude unbundling (ODF access, at Ethernet level). That gives the Danish regulator the choice between not regulating, imposing unbundling (ODF) as a obligatory service or regulating WBA. The choice by the regulator will be highly anticipated because of the effect on any further regulation in Europe.

The central questions remains: is fibre unbundling (FU), i.e. ODF access, economically viable? The Dutch case does not yet give an answer. Opta proposed regulation is still under appeal and the number of parties other than KPN and Reggefiber is limited. At ODF level only BBned and Solcon are active, but on a regional basis only. The announcement from Online Breedband in April 2009 that they intend to be an operator in the town of Almere still awaits a follow-up. Newcomers OONO and Teleplaza do not use the Reggefiber network.

It looks like this situation is caused by the proposed tariffs. This is not only the line rental (set at between EUR 12.00 and 17.50 per line per month) but especially the extra costs such as:
• Access to Area PoPs (EUR 500 per month)
• Access to City Pops
• Backhaul from the Area PoPs to the City PoPs (EUR 600 per month)
• One time costs ( EUR 100 per line and EUR 3,000 per Area PoP)

The costs of the backbone (from City PoPs to Ams-IX or other internet exchanges) are not considered, as that has often been arranged already by various parties.

These issues actually have a lot to do with the scale of the area in which the unbundling takes place. Unbundling for ADSL happens in Central Offices, of which there are around 1,360 in the Netherlands. A small number of these cover the majority of the population, so an operator can quickly reach enough scale in such a CO. Research from Analysys Mason has shown that unbundling at the Street Cabinet level is economically not or hardly viable. Twenty-eight thousand of those boxes are planned for the VDSL roll-out, which doesn’t allow an alternative operator to achieve a large enough size to be viable.

The viability of fibre unbundling falls between the viability of ADSL and VDSL unbundling. Each Area Pop, where the equipment will be placed, serves around 2,500 households, or in between the levels for the Central Office and the Street Cabinet. Simple calculations show that an operator has to serve at least 500 households to be profitable, which translates to a market share of 20 percent. That figure seems a problem for all broadband providers in the Netherlands, which isn’t strange, considering that Tele2 has a market share of 7.0 percent, Online Breedband of 5.1 percent and BBned of 2.7 percent.

There is a hybrid solution, next to ODF and WBA, as we have suggested in our FTTH report (Par 8.5, p 31). One of the parties can buy ODF access from Reggefiber to allow WBA access at a prior agreed tariff to parties like Tele2, Online Breedband and BBned (Alice). The operator buying the ODF access can more easily achieve the necessary scale, while offering WBA access on favourable terms to the co-operating service providers. The service providers don’t have to invest in the equipment which will save them a ton of costs.

As said, we eagerly await the Danish regulation. Concerning the Netherlands, we are looking forward to further developments in this area, such as the appeals cases against the regulation, any deals between Reggefiber and operators/service providers, and last but not least: the ongoing evaluation at KPN of the trials it is holding with FTTC (Street Cabinet) and FTTH technology.

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