Operators’ dilemma

By Pieter Verhees and Patrick Koen

Ever expanding need for network capacity, but top-line is under pressure

Consumers continue to use more and more data, leading to increasingly higher bandwidth requirements. These requirements are largely driven by non-linear TV viewing and over-the-top (OTT) applications combined with the higher resolutions at which this content is delivered. At the same time, prices for access (either mobile or fixed) are under pressure, especially with the recent Vodafone-Ziggo joint venture, effectively introducing a new quad-play (TV, internet, fixed telephony and mobile telephony) player to the market. This poses some key challenges for network operators: the demand for network access capacity is ever increasing and requires significant investments, but at the same time their top line is under pressure. This dilemma is forcing operators to make some well-considered investment decisions.

Customers drive the demand for capacity

The biggest factor is video, especially online video games, non-linear TV and OTT. Internet video has grown rapidly in the Netherlands and the OTT sector is advanced, with Netflix estimated to have passed the 2m subscriber mark in 2016. This is especially true for fixed networks. Mobile, on the other hand, is driven by an ever-growing share of 4G access in combination with increasing and even unlimited data bundles, like the one T-Mobile introduced in January 2017 (with significant effect on base growth) and the unlimited 4G data, voice and text-messaging proposition introduced by Tele2.

The latter two examples point out the challenge which operators face, i.e. the need to be competitive while having to invest significantly in network capacity. The situation seems untenable, with competition putting pressure on prices, leading to propositions that stimulate data usage and in turn force operators to invest in network capacity – all while their top line is declining.

A recent example of challenges in the industry was the problematic launch of HBO’s popular show Game of Thrones, which affected fans across the world. The sheer number of viewers on HBO GO caused problems with HBO’s servers as well as specific network-related issues in the Netherlands. This example shows how customer behaviour in consumer digital media is changing and the impact on bandwidth and high-reliability access networks.

Intense competition puts pressure on pricing and drives bundling of services

The intense competition in the Netherlands centres on bundles, which are increasingly quad-play rather than triple-play. According to the ACM, by the end of March 2016 there were 674,000 quad-play subscriptions, up by 40.7% in the same period the previous year. The IDC predicts that quad-play subscription penetration in Western Europe will reach 24% in 2020.

The Vodafone-Ziggo merger brings together the country’s second-largest mobile operator and largest cable company. It has created a unique situation in which two operators can offer quad-play services in the same geographical area, competing head-on nationwide.

Vodafone agreed to divest its fixed consumer business as part of the European Commission’s conditions for the merger, with T-Mobile buying this in November 2016. Vodafone-Ziggo now competes head-on with incumbent KPN in the quad-play market, while T-Mobile’s acquisition of Vodafone’s fixed business will allow it to compete directly with both market leaders. Over the next 12 months, the Dutch market will continue to progress towards quad-play and content-focused high-value services for end users.

Competition in the mobile market is likely to focus on increasingly large data bundles, with both Tele2 and T-Mobile offering ever-larger allowances. In January 2017, T-Mobile announced a new unlimited data subscription, potentially triggering further commoditisation and price pressure.

It is clear that operators need to be and are trying to stay competitive by complementing their subscriptions with third-party content and services (such as KPN including Spotify in some of its subscriptions). Expanding these propositions has consequences for both margin and capital expenditure – they stimulate the use of data, e.g. by adding streaming services, and thereby also effectively lower margin on the product. The business case for this is to reduce churn and thus increase customer lifetime value – which makes sense in a competitive market. However, KPN’s new proposition line-up clearly shows a decoupling of (third-party) premium services. They are evidently going in a different direction, even though increased speeds, data bundles and quad-play benefits remain intact.

Availability of Next Generation (NG) Access services

The ever-increasing data usage is possible in part because high-speed mobile internet connections in the Netherlands are growing at a faster rate than in Western Europe as a whole.

Given the top-line pressure combined with bandwidth requirements, operators need to make smart choices about how and where to invest in capacity for next-generation access services. For fixed access networks, KPN’s approach is to invest in both DSL upgrades (e.g. vectoring and bonding) as well as the ongoing rollout of fibre-to-the-home (“FttH”) to provide high-speed broadband connections. The incumbent now provides broadband internet on copper using VDSL2, pair-bonding, vectoring and bonded vectoring, with potential plans to move into bonded vectoring plus (up to 400Mbps) and NG.PON (up to 1Gbps) as the latter two are mentioned in its own Q2 2017 presentation.

Even though the Netherlands is far ahead in Europe in rolling out copper upgrade and NG access, this is a Europe-wide trend.

The challenge going forward

For fixed access spending, we know FttH is (or can be) much faster and more reliable then DSL. From a financial point of view, however, it makes sense to invest in DSL upgrades to limit capital expenditure. Using existing infrastructure and technology for high-speed consumer internet services is clearly much more economical at this point in time, even more so when we consider that cable operators can also use existing cable networks and increase capacity by upgrading to DOCSIS 3.1 and 3.1 full duplex (making symmetrical upstream/downstream possible), with significantly lower investment in the access network than rolling out a new fibre footprint.

The big challenge for mobile is to provide sufficient capacity in dense urban areas where data consumption is high (specifically at peak hours). Two main factors come into play when addressing this challenge: (1) the role of small cells, (2) the role of 5G.

Small cells (i.e. low power radio access nodes with a range of 10 meters up to few kilometres) will play a key role in access spending by providing capacity in dense urban areas where data usage is high or very high. It gives operators a means to increase capacity locally at relatively low cost by eliminating the need to set up a macro site. Both KPN and Vodafone are known to be rolling out small cells in specific locations in the Netherlands and the rollout will likely gather momentum over the next years – potentially in combination with 5G in the longer term.

5G is the other factor with the potential to solve local capacity challenges. Operators will likely not aim for national 5G coverage; this would be very expensive due to the high frequency band that is used and not needed.

In summary

All in all, the Netherlands is a competitive market at the forefront in Europe in terms of bandwidth and NG access. But with the Vodafone-Ziggo merger creating a new quad-play player that is putting more pressure on prices and driving up competition, the need to make smart choices in access spending has never been so important. To reduce (or at least limit) investments in fixed network access, operators are avoiding or limiting the need to rollout completely new footprints, either by upgrading DSL or moving to DOCSIS3.1 along with rolling out fibre.

To reduce (or at least limit) investments in fixed network access, operators are avoiding or limiting the need to rollout completely new footprints, either by upgrading DSL or moving to DOCSIS3.1 along with rolling out fibre. In mobile access, operators look to small cells and 5G to fulfil their capacity needs.

Operators must invest continuously in network capacity to enable the exponential growth in data usage, even though their top line is under pressure. This has been the case for many years and is expected to remain so for the foreseeable future.

Contact us

Mark Kuijper

Technology, Media and Telecom Industry Leader, PwC Netherlands

Tel: +31 (0)88 792 54 38

Patrick Koen

Manager, PwC Netherlands

Tel: +31 88 792 73 80

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