Will The Internet Break? ISP Economics Assessment to 2012

Published by: Screen Digest

Published: Oct. 13, 2008 - 68 Pages

Table of Contents

Tables and charts

Executive Summary

Methodology

Definitions and Notation

Bits and bytes

Penetration

Exchange rate

The growth of internet traffic

What is broadband?

Dominant fixed platforms

The growth of consumer broadband

The swell in traffic

Explosion in services integrating video and software

The transition to high-definition (HD) video: a heavier load

Multiple connected PCs and devices using connections

Peer-to-peer (P2P) software used for illegal file-sharing

Pressures on ISP profit margins

Regulation and competition define the industry

Broadband regulation differs according to market and platform

US vs Western Europe: to regulate or not to regulate?

Western Europe:

DSL has welcomed a range of providers

LLU has helped drive competition

DSL dominates cable

NGANs deployed locally; incumbent telcos moving to wider rollouts

US:

Competition characterised by network rivalry

Two US incumbent telcos leading NGAN rollout

Broadband availability

Western Europe:

Widespread DSL provision

Case study: ConnectKentucky

US:

Rural areas frequently lack rivalry between fixed providers

Access revenues under pressure, leading to consolidation

The economics of current-generation platforms

Competition driven by speed and price

DSL:

Wholesale and unbundled DSL: differing routes to the consumer

Wholesale

Local Loop Unbundling (LLU)

Vibrant LLU sectors create two-tiered pricing and services

Economies of scale: LLU restricted to urbanised areas and well-backed players

All DSL is not created equal

Real-world speed deteriorates with loop length

Poor quality copper infrastructure can lower throughput

Line crosstalk and electrical interference can affect achieved speed

LLU operators can undercut wholesale DSL prices

LLU can respond to speed and pay-TV rivalry

DSL: costs and data flow

1) Access

Wholesale

LLU

2) Backhaul capacity

Wholesale

LLU

3) Core - international data transit to the internet

LLU and wholesale DSL: a comparison of economics

Access analysis - the squeeze from price competition

Backhaul: a point of contention

Owning the backhaul, absorbing the data costs

Western Europe: revenue flow between parties under different DSL provision models

Backhaul analysis - the impact of rising user demand

A dual threat to LLU?: de-regulated wholesale broadband and incumbent telcos' NGAN build

De-regulation of wholesale broadband

Incumbent telcos' build-out of NGAN networks

Cable broadband:

Broadband strategies built around core TV businesses

How cable broadband is delivered

Cable's bandwidth capability

Maximising bandwidth potential, leveraging existing infrastructure

Cable: owning the network

Network rollout restricted to urban areas

Beneficial operating economics

Exempt from open-access obligation

Ability to absorb rising bandwidth costs

The economics of next-generation platforms

What is a next-generation access network (NGAN)?

Investment cost: return in what timeframe?

Key drivers to NGANs

1) Technical

2) Economic

a) Operational cost savings

b) Capital cost savings

3) Regulation can hinder NGAN deployment

NGAN platforms: advantages and disadvantages

FTTC (VDSL/VDSL2):

Choosing FTTC over FTTP

Cases where FTTP could be a more attractive proposition

FTTP:

A costly but future-proofed architecture

DOCSIS 3.0:

Two main benefits: bandwidth capacity and efficiency

Network upgrade is comparatively cost effective

Emerging trends and challenges

Reconfiguring user payment models to reduce or subsidise ISP bandwidth bills

"Happy hour" download periods

"Meter-based" charging

Open web: traffic inspection and content exploitation

Blocking or throttling of particular application traffic

Charging for priority delivery of online services

Closed platform: leveraging infrastructure to launch content delivery networks (CDNs)

Emerging advertising models

Tables and Charts

Tables and charts

Executive Summary

Number of consumer broadband connections

Consumer broadband connections by region

Broadband penetration

Consumer broadband penetration by country

The growth of internet traffic

Examples of broadband definitions

Speeds capable using different broadband technologies

US: forecast online video data consumption

Download speed for different types of content over different broadband connection speeds

Definition of closed and open broadband services

Example of average monthly user data transfer by UK ISPs

Number of PC households

PC households by region

US: broadband-connected living room devices

Regulation and competition define the industry

Western Europe, North America and Mexico: broadband connections split by type (2007)

Examples of ISPs in the Big Five split by core business type

Western Europe: incumbent telcos' share of retail DSL broadband connections

Western Europe: incumbent telcos' share of retail DSL market

Western Europe: unbundled lines

Broadband connections by access technology (2007)

Western Europe: unbundled DSL share of total DSL connections

Examples of broadband ISPs exiting markets

Annual broadband access ARPU by technology

Western Europe, North America & Mexico: top 20 ISPs ranked by subscribers (2007)

BT Group broadband ISP customers

Deutsche Telekom broadband ISP customers

Telecom Italia broadband ISP customers

France Telecom broadband ISP customers

Telefonica broadband ISP customers

Big Five incumbent telcos: global broadband ISP customers

Examples of services bundled with broadband access

The economics of current-generation platforms

Sample ISPs offerings in different countries (as of Q3 2008)

Average marketed DSL speed

Western Europe: average DSL and cable marketed speeds

Western Europe, North America & Mexico: average broadband price

Overview of components in DSL provision

Maximum xDSL throughput to UK households

Western Europe: full and shared access unbundling prices

Western Europe: full and shared access unbundling prices (2007)

Maximum xDSL bandwidth capacity at various loop lengths

Big Five: difference between recurrent DSL line costs and ARPU

Local loop unbundling (LLU) (simplified)

Wholesale DSL from incumbent telco (simplified)

Simple resale DSL from incumbent telco

Forecast number of broadband DSL connections

Forecast number of broadband cable connections

Cable share of total broadband connections

DSL share of total broadband connections

Cable broadband distribution

Average marketed cable speed

Western Europe: cable homes passed

Western Europe: proportion of cable homes passed that are 2-way enabled

Analogue and digital cable penetration

NGAN providers by type

The economics of next-generation platforms

Example of future household throughput requirement

Capital cost per home passed & connected using next-generation broadband platforms

Western Europe: examples of possible regulatory remedies on NGAN platforms

Fibre-to-the-premises

Fibre-to-the-cabinet

Example FTTH rollout costs (France Telecom)

PON

Point to point

Average marketed alternative access technology speed

FTTP share of total broadband connections

Forecast number of broadband FTTP connections

US: NGAN addressable households

US: announced or deployed roll-out areas for NGAN platforms

Western Europe: examples of NGAN rollout

US: examples of NGAN rollout

Abstract

• Consumer broadband connections in North America, Mexico and Western Europe reached 155m by year-end 2007. By 2012, this figure is predicted to reach 228m.
• Tight regulation on broadband access in Western Europe has driven the dominance of DSL, while cable is the most popular platform in the US. Fibre-to-the-premises connections represented a minor portion of the market - under 5 per cent - in the two respective regions at year-end 2007.
• The battleground for broadband providers on both sides of the Atlantic has centred on speed and price. Average marketed broadband speeds have risen consistently over the last five years.
• Two main factors are squeezing profit margins: robust price competition and a swell in traffic which is pushing up bandwidth costs. Traffic is set to intensify with mass video consumption via online platforms bringing content to the living room TV.
• Notably from an ISP perspective, monthly average revenues per user (ARPU) have eroded and are predicted to continue to fall to 2012. This effect is particularly acute in Western Europe where the regulatory environment has fostered intense price rivalry, driven by local loop unbundling (LLU).
• Such is the pressure on margins in Western Europe, that even before a host of other ISP expenses have been taken into account - like mounting data costs, heavily subsidized end-user hardware, staffing and network equipment - many ISPs' balance sheets are already looking slim. In 2007, Screen Digest analysis reveals that in the European 'Big Five', DSL providers, which dominate the region's broadband market, were left with monthly returns of around Euro6-Euro7 once ongoing line fees were paid to incumbent telcos. This has fallen from over Euro16 in 2002 and could slide to as low as Euro5 by 2012 if pricing trends continue.
• The big losers in the ARPU decline are the pure-play internet service providers (ISPs) which have tried to offset the squeeze by bundling additional services with broadband access. However, the effect of these value-added services has been limited. New entrants with another core area of profitability, such as pay-TV and mobile phone companies, have transformed broadband access itself into a low-cost bolt-on in packages.
• Providers owning backhaul infrastructure built close to users, including LLU, cable and fibre operators, are better positioned to absorb data costs than ISPs with limited or no infrastructure.
• A number of factors are fostering deployment of next-generation access networks (NGANs), which Screen Digest defines as emerging high-speed fibre- and DOCSIS 3.0-based networks. However, in Western Europe, uncertainty over practicalities and economics of NGANs is delaying rollout.

• In-depth discussion of the strengths and weaknesses of the business models of different fixed line broadband providers - including fibre-based, cable and DSL ISPs
• Overview of the technical capacities of different fixed access platforms
• Forecast subscriber and access revenue data to 2012

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