Carrier Evolution

It still is unclear how much demand for 50 Mbps to 100 Mbps broadband access exists, at prices suppliers are willing to offer, in European and North American markets.

But we soon will get additional tests of demand.

BT’s “Openreach” fiber to the home network now has reached about ten million premises across the United Kingdom, ahead of schedule. This is some months ahead of the original deadline for this figure that was the end of 2012. The FTTH network is expected to enable access speeds up to about 80 Mbps.

So now the issue will become “how many customers will buy the faster-speed services?”

By some estimates, there have been 570,000 sales so far, both by BT and all wholesale partners, representing penetration of 5.8 percent. Of course, early in the deployment of any new fixed network, sales efforts necessarily are circumscribed as most of the work goes into physical construction.

To be sure, some will argue that BT and others have not moved fast enough. But there remains some room for circumspection about the level of demand for the “superfast” services, at least in the near term.

Only about 14 percent of respondents to a survey currently see a need for speeds of 50 Mbps or higher, about five percent of the total 3,000 customer sample, and would imply a total nine percent penetration of super-fast broadband when added to the four percent who already have speeds over 50 Mbps, the Marketing Directors says.

Among the 35 percent who want a higher broadband speed, there was only a modest willingness to pay more. Around 42 percent of those who want a faster speed would not be prepared to pay more for it.

Another 25 percent would be prepared to pay up to €5 a month for their desired faster speed. About 15 percent would be prepared to pay over €15 a month for their desired faster speed.

Only about 35 percent of broadband owners currently see a need for faster broadband speeds, and only 20 percent are prepared to pay more for it. Of the 35 percent who do want faster speeds, about half would like to see their broadband speed double within two years.

Keep in mind “doubling” would generally be from about 7 Mbps, a typical capability for many customers.

Significantly lower prices seem to be the key, as U.S. access provider Sonic.net’s experience would suggest.

Sonic.net sells fiber-supplied Internet at 100 Mbps for about $40 a month, and includes a home phone line with unlimited national calls. A 1 Gbps service costs about $70 per month. By way of contrast, in the markets where it operates, Comcast offers broadband service with Internet speeds of 105 Mbps for about $200 a month, Sonic.net says. Verizon’s FiOS service offering 150 Mbps costs about $200 per month.

In 2012, Sonic.net has gotten penetration substantially above what we have tended to see in other markets where such service is available.

In Sebastopol, Calif., about 39 percent of households are now Sonic.net customers. In Forestville, Calif., 20 percent of households are customers.

Healdsburg, Calif. has 11 percent take rates, while Santa Rosa, Calif. has 11 percent penetration as well. Petaluma, Calif. has about five percent take rates.

The point is that making “superfast” broadband available is only part of the adoption story. There has to be demand, at prices consumers think are “fair,” and that suppliers can afford to offer. Sonic.net says a “passing” costs about $500. So at 33 percent take rates, the cost per customer for the network is about $1,500 each.

A study conducted by Marketing Directors for for Berenberg Bank Telecom of consumers in the United Kingdom, Germany and Italy reveals “huge” lack of customer demand for super-fast broadband.

Despite that, European Community officials are pressing service providers to bring superfast speeds to 50 percent of European households by 2020, a goal which presently seems challenging.

The current average access speed in Germany is 32 megabytes per second and about 14 Mbps to 15 Mbps in Italy, for example.

Customer satisfaction rates are also high and very similar in all three countries surveyed. Only 15 percent of respondents said they were dissatisfied with their current broadband speed.

That doesn’t mean demand will remain at current levels forever. Experience might suggest that users and applications over time take advantage of higher processor speeds, more storage space or memory.

For example, German broadband homes already receive three times to twice the speed of U.K. and Italian homes. But some percentage of consumers in all three markets also say they want “double” their current speeds, no matter what those current speeds currently are providing.

A reasonable way of looking at matters is to assume that a typical multi-person household is capable of generating demand generated by simultaneous web browsing, multi-room HD TV streaming and uploading to cloud storage that creates demand for services between 15 Mbps and 30 Mbps.

The arrival of ultra-high definition TV could boost reasonable demand to perhaps 40 Mbps to 80 Mbps at some point in the future. A reasonable person might ask whether the advent of such demand can occur within the reasonable lifetime of any current network. In other words, even if such demand develops, does it make sense to build it now, or build it later, when the demand surfaces?

Markets for distance learning, tele-medicine and e-health likely exist, but might not be consumer markets.

Experience in several countries illustrates the problem. Portugal has among the most advanced fiber availability in Europe. It has so far seen adoption rates of about nine percent among customers for broadband access. But not every household buys a broadband access service, so overall household adoption is about five percent.

The Netherlands has a robustly competitive broadband access market, and about a third of all households can buy a fiber-to-home service. But only about four percent actually seem to buy, the Marketing Directors study suggests.

In some markets, such as Sweden, perhaps 27 percent of households have access to FTTH, and a high 71 percent of those do subscribe, meaning 20 percent of Swedish households currently subscribe to FTTH services.

As seems always to be the case, South Korean and Japanese adoption leads most other nations. In South Korea, about 37 percent buy, while some 56 percent of households that have availability actually buy service.

Low prices again seem to be key.

The conclusion might well be that, at present, “superfast broadband” is more a supply-push than a demand-pull issue. Lowish take rates mean there is lots of risk, given the high capital investment, and the opportunity cost. Is a rational executive better served by investing those funds elsewhere, in mobile services and applications, for example?

Also, as always is the case, there might be a better business case in urban markets, but a very-difficult business case in less-dense areas. All those questions become bigger questions as high-capacity Long Term Evolution networks are deployed, as well.