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Broadband Access
Broadband Boost for Telcos
Fixed-line ROCE Is Up Worldwide, Says KPMG
by Iain Morris
Under siege from new challengers, fixed-line telcos are
consolidating their operations, launching new broadband
products and striking alliances with former competitors.
According to the 2005 update of KPMG’s Global
Telecommunications Financial Performance Tracker – which
records analyses the financial performance of the leading
telcos worldwide – the strategy is paying off. Return on capital
employed (ROCE) is up in America and Europe and as healthy
as ever in Asia, making operators a more attractive
investment target than they have been for some time.
But with price erosion squeezing ARPU, and a host of regional
challenges on the horizon, they will need to be just as flexible
in the future. KPMG has been considering the developments
to date and long-term prospects in different markets.
America: Tackling the Cable MSO
America has been the site of some ambitious consolidation
strategies over the past year. All in all the net effect has been
a positive one for ROCE, which, according to KPMG’s figures,
shot up from 4.9 percent in 2004 to 9.2 percent last year.
However, price-based competition continues to take its toll on
cash flow, which fell from US$66.5 billion in 2004 to US$52 billion in
2005. KPMG believes the major challenge in the future will be
to reverse that trend through bundling and product
differentiation.
According to Alex Sanderson, head of communications sector
UK for KPMG, an important battleground in the US will
continue to be contested between the telcos and the
broadcasters, represented by the cable television community.
In areas like New York, says Sanderson, cable infrastructure
has been in place since the 1970s, making it a more natural
channel for the consumer who wants a broadband service. The
very preponderance of cable infrastructure poses a quandary
for telcos also looking to inhabit the broadband space.
“If you’ve got an established broadband TV connection, then
the introduction of another one has got to be differentiated in
some way,” says Sanderson.
Given the nature of the competition, telcos might struggle to
achieve differentiation at the service level with IPTV. How they
could steal a march on the cable providers, believes
Sanderson, is by rolling out new high-speed infrastructure
such as Fiber to the Home (FTTH), and some hefty
investments in this technology have already been made.
According to the Telecommunications Global Broadband
Access Survey, conducted in August 2006, incumbents in North
America are moving far more quickly on FTTH deployments
than their counterparts in Europe and Asia.
Sanderson thinks that pursuit of a 100 Mbps FTTH system
possibly has as much to do with catering to the demands of a
burgeoning audience as it has with supporting new in-home
entertainment services.
“In the 1990s we had a huge increase in capacity and it
created a glut,” he says. “That glut is now starting to clear as
data and other services increase. If we get to a world where
people are highly active in terms of in-home entertainment
there’ll be a huge increase in required capacity, so you’ll see
a need for investment purely on that basis.”
EMEA: Meeting the LLU Threat
KPMG’s assessment of the EMEA broadband market should
provide some good news for regional operators. According to
its report, the leading fixed-line telcos recorded sales growth
of 8.3 percent over the past year. That compares with a fall
in revenue of 0.4 percent the year before and a slim increase
of 0.8 percent in 2003.
For the first in more than two years, claims KPMG, revenue
growth in the fixed market is outstripping that in the mobile,
and that growth is translating into increased profits, up from
US$39.7 in 2004 to US$48.7 last year. The fixed-line telcos, it
seems, have turned an important corner.
KPMG attributes that growth to the popularity of broadband.
It’s a well documented fact that subscriptions have soared in
recent months, fuelled by the raft of alternative network providers that have
unbundled incumbents’ exchanges and are attracting
customers with cutthroat pricing. Tier One operators are
responding by converging their products. Sanderson cites the
tie-up between BT and Vodafone in the UK by way of example.
“Quite realistically they’ve realized the future is about coming
up with the best combined offer to customers,” he says.
But while some view Local Loop Unbundling (LLU) as a
stimulant of competition, others believe it is having a
detrimental effect on the state of infrastructure. Carriers could
be holding back on their fibre deployments for fear that
regulators will compel them to make those networks available
to alternative network providers as well.
Sanderson thinks a variety of factors are hindering
development. “The need just isn’t perceived to be there,” he
says. “There’s no doubt that you will have to have Fiber to the
Curb (FTTC) at some point, but FTTH? If you look at ADSL2+,
it offers pretty high capacity -- up to 20 Mbps. A lot of people
would argue that this is enough.”
Asia Pacific: Financing the Future
According to KPMG, the benefits of boosting operational
capacity are most apparent in Asia, where ‘the growing scale
of service operations’ has pushed the ROCE to 11.6 percent --
the highest of the three regions considered. As in America,
however, the increasing level of price competition is exerting
some downward pressure on profit margins, which dropped
slightly from 11.6 percent in 2004 to 11.3 percent last year.
In the leading Asian markets of Japan, South Korea and
Taiwan, there has been a surge of activity on the fiber front.
In Japan, notes the KPMG report, NTT continues to pour
trillions of yen into fibre development, and millions of people
throughout the country can now enjoy broadband access at
speeds of 100 Mbps for no more than US$50 per month.
At that price, given the weight of the investment, can NTT
really expect to reap any return?
“Certainly not at the moment,” says Sanderson. “The key
issue will be long term.”
‘Long term’ may well have been the view adopted by the
Japanese government when it unravelled initiatives to
encourage those fiber deployments. But with DSL doing a
sterling job of driving broadband take-up -- the success of
triple-play helped push cash flow in Asia from US$56.6 billion in
2004 to US$59.4 billion last year -- just why are the politicians
putting pressure on players to invest in such an expensive
alternative?
“I suspect part of it is Japanese attitude towards long-term
investment in technology,” says Sanderson. “It’s the idea that
doing things as a leader is good because it establishes your
place in the market.”
It’s a policy that has been mirrored in other Asian markets,
explains Sanderson, but in isolation it doesn’t tell the whole
story. The fixed-line telcos have been forced to counterattack
under threat from the mobile broadband fraternity, whose
success with 3G has not seen replication in other parts of the
world.
“Korea and Japan alone were home to nearly two thirds of the
world’s 3G subscribers in 2005,” reads KPMG’s report.
In that kind of environment, the incumbents have not been
able to afford the luxury of resting back.
A Common Thread
For all the regional differences, carriers are united by the
perception that they must evolve into new areas of the value
chain or risk becoming sluggish utilities. Companies like
Yahoo!, Google and MSN are racing ahead with the
development of new ‘sticky’ services that keep customers
coming back for more. Unless the telcos can find an effective
response, their customers might start to see them purely as a
delivery channel. And being nothing more than a bit pipe
could only work to the telcos’ advantage if the economics
change.
“If you take a pure utility model, it’s not very attractive in a
market where there’s quite a lot of supply,” says
Sanderson. “How do you distinguish and make a return on it?
Having said, that, if supply becomes limited and you control
that supply then it does become an attractive model.”
Sanderson has his doubts about the fully integrated model --
whereby carriers involve themselves in everything from
content generation to delivery -- not least because in such
alien territory the telcos risk a culture clash with the more
established media companies. But he believes that in the
current market they must at least forge closer ties with the
content community.
“I think telcos will struggle to deliver value unless they have
ways of securing content to a degree,” he says. “So instead of
content origination they need to have ways of accessing and
supplying that content.”
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