Interview: Fujitsu confirms rural fibre business case (exclusive)
22 June 2011
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Following its recent announcement that it is planning, in collaboration with Virgin Media, TalkTalk and major broadband retailers, to roll out a fibre network providing next-generation broadband access to up to five million homes in rural parts of the UK (BTwatch, #220), Fujitsu responded to doubts expressed by BT Group that the Japanese information and communications technology (ICT) giant had a viable economic model and the necessary corporate backing.
Speaking to BTwatch, Andy Stevenson, Chief Executive of Fujitsu Telecommunications Europe, expressed confidence in Fujitsu’s ability to deliver genuinely future-proofed services to the population beyond BT’s current plans for fibre rollout, highlighted industry and government support for the company’s efforts, and suggested BT’s doubts were based on a mindset at the incumbent focused on exploiting existing network assets rather than taking an innovative approach to next-generation services.
BT’s network an asset… and possible legacy liability
Stevenson suggested BT’s Openreach division is compelled by its ownership of legacy infrastructure to pursue an approach to next-generation access based on its traditional way of doing things, working to ‘sweat’ the copper and narrowband switching assets.
“ FTTC [fibre-to-the-cabinet] from our perspective would be a very much interim technology step that wouldn’t have the longevity or the capability to migrate [to] the likely landscape of new services that will come over the next ten-to-20 years. ”
“ Predominantly, the UK network — based on Openreach — is based on a fixed topology of exchanges and street cabinets that were there as part of the original copper network build up. That network — obviously through no fault of BT’s — is not necessarily optimised for the way that services have to be delivered to residents, and obviously things evolve over time. So one of the things that we think is really important is that while the [physical infrastructure access] PIA duct and pole access is critical to leveraging existing infrastructure, the topology of BT exchanges shouldn’t necessarily dictate the way that we plan our core fibre infrastructure, and that has a material effect on the way that you architect services. ”
Fujitsu predicts dramatic rollout cost reductions — if BT prices revised
While not revealing detailed figures, Stevenson expressed confidence that if a new network could be provided through a coordinated rollout in a relatively contiguous geographic region, the cost of fibre-to-the-home (FTTH) deployment could fall significantly compared to BT estimates.
In the past, BTwatch has interpreted BT predictions as putting the cost of a national fibre rollout at a level very roughly equating to £1,000 per household passed.
“ We did some techno-economic modelling around five million homes over a five-to-ten year period, [amounting to] about 50% of the ‘final-third’ UK challenge outlined by government. We carried out physical audit of assets in three Yorkshire towns and shared the findings with [Openreach], Ofcom and our industry collaboration[partners]. The reason why we chose the number five million is if you’re going for something that will be manifestly sustainable for the UK economy, and will attract retailers of sufficient national capability to want to go for something — the likes of Virgin Media, TalkTalk, Sky [BskyB], O2 [Telefónica], etc. You need to be talking at least half of that [2.5 million properties passed], let’s say, poorly served broadband footprint today — where there is very evidently pent-up demand. There’s nothing that stops you from going for the full nine million ["Final Third" of fibre-unserved properties]. Obviously, the deeper you get in terms of rural deployment, it gets harder, but that challenge and those economics would be robust and scale to the challenge. ”
Stevenson supported earlier criticisms from the industry of proposed PIA pricing from Openreach, which had cited Fujitsu-based commercial cost estimates to illustrate what they considered a more appropriate infrastructure access charges (see separate report). He noted the disparity that current proposed pricing would see the cost of building out the new elements of a rural fibre network outweighed by the expense of gaining the necessary access to existing Openreach infrastructure.
“ The techno-economic modelling we’ve done thus far would say that PIA, as it’s priced today, in BT’s [reference] offer, would represent more than 60% of the cost of building it out, which, as it’s purely a passive infrastructure already sat there on the ground, would seem disproportionate and unfair. Fujitsu, Virgin Media, TalkTalk, independent consultants, and many others in industry don’t think it’s a true cost-based model [or] priced up on a fair and reasonable term. ”
Fujitsu confident its numbers stack up; BT appears isolated in scepticism
Stevenson insisted that Fujitsu, which is both a significant customer and major supplier to BT, as well as a major IT services competitor, is in continuing talks with the incumbent. He said that, to date Fujitsu had been “very open” and shared information “very transparently”. Stevenson also said that (despite the public jibes by senior BT executives noted by BTwatch), Fujitsu had faced “no significant pushback” from BT on the calculations put forward. He noted the regulator Ofcom and the Broadband Delivery UK (BDUK) initiative had reviewed data from which calculations were made and Fujitsu proposals were welcomed.
“ We’ve done quite a lot of study in terms of various geographies in the UK that we feel are pretty representative of what we’re going to be facing in deploying to the five million homes. ”
Partnering Openreach on fibre appears unlikely
Stevenson drew back from suggestions that a partnership model with BT had initially been pursued, stressing the telco had given an impression of commitment to its existing rollout model. He suggested this was a commercial decision based on legacy assets that BT needed to maximise. The BT fibre plan was also positioned as an attempt to go some way towards reclaiming a stronger monopoly position in the wholesale market (BTwatch has previously drawn comparisons between the BT proposals for wholesale fibre access and the grip the incumbent exerted on the market prior to the 2006 Ofcom regulatory settlement which led to the creation of Openreach — BTwatch, passim).
“ Naturally we have discussed strategy with BT around NGA [next-generation access] in the past, and it was pretty clear that they [BT] were totally committed to their approach to it; and it’s not a case of ‘we didn’t want the engagement’ or that they hadn’t considered other things: I’m sure they are considering other things. ”
“ I just think there’s some commercial imperative that they [BT] look at, in terms of their [sunk] asset, their route-to-market, and that they believe they can — through Openreach — recapture at least part of the wholesale fixed-line monopoly that they’ve enjoyed before by going the route that they’re going. So, I think government’s move to get PIA back on the agenda, and to press that agenda quite hard, is actually changing their mindset and making BT rethink. But I think, because BT felt that nobody in industry would seriously put the money into the investment, that they could still defend the position that they’ve taken. ”
International models influence “truly open access plans”
Stevenson considers that a hybrid of existing fibre rollout models seen in Asian countries such as Japan and Korea, but also in Europe in Holland, Italy, and Spain, would suit the circumstances prevalent in the UK.
Stevenson cited Fujitsu experience in supporting fibre rollout plans in Australia through the government-backed National Broadband Network (NBN) as a particularly useful comparison, although recognised this is a significantly more heavily subsidised project than in the UK. Despite this, NBN was presented as an example of the type of “truly open” platform that the company is proposing to deliver from launch, which can support multiple technologies, and enable numerous service providers to be present in a single home — something Stevenson considers to be possible, but difficult, in the UK environment.
Interestingly, Stevenson also referred to Fujitsu work in Portugal where the company is involved in fibre network projects. When questioned around a year ago on fibre pricing, BT Group Chief Executive Ian Livingston responded by saying BT costs were broadly in line with other incumbent telcos in Europe, aside from Portugal, which he said had a “different topography”. This suggests to BTwatch that Fujitsu had been able to set out its vision of next-generation networks at senior executive level, but that BT was unwilling at that stage to consider alternative rollout plans.
“ We’ve talked to [BT] about what we’ve been doing in Saudi [Arabia] and what we’ve done in Portugal; we’ve given contacts all the way up to [senior management] in terms of those regions and what we’re doing. ”
Fujitsu riding “perfect storm” as BT surprised
The opportunity in the UK was described by Stevenson as a “perfect storm”, with government commitment to fibre investment, and a clear economic argument from a wholesale perspective for investing in a substantial and long underserved swathe of the country.
“ The opportunity in the UK is a bit of a perfect storm between market demand, nine million homes a largely untapped market in the final third, the need for major retailers to see competitive wholesale offerings, regulatory opportunity, [and] government funding coming together to address our embarrassing ranking in OECD [Organisation for Economic Co-operation and Development] studies of economies powered by broadband. ”
“ Fujitsu has a strong government [sector] base, also a strong telco [operational] case in the UK… and there is a need in the market, most importantly, that will be sustainable. ”
“ We see this [plan] as a good model that kind of polarises a lot of the value that we can bring to our own customers, so we do see this as a good opportunity, and, for the UK, it is something that is urgently needed. I mean, how long are we going to talk about the ‘Final Third’ being just left in the backwater? “
FTTC described as already dated, with inadequate future-proofing
Stevenson questioned BT’s approach to fibre deployment, relying as it does on FTTC and associated restricted speed and upgrade capabilities, as not reflecting the way the market is changing.
“ The market is accelerating at a pace that we can’t really predict. One thing that is certainly sure is that Nielsen’s Law [of internet bandwidth for premium consumers doubling every 21 months] is happening, as is Moore’s Law [that the density of microprocessors, widely interpreted as a yardstick of computing power, doubles approximately every 18 months, i.e. outpacing bandwidth expanding at the pace of Nielsen's Law]. “
“ By the time we’ve worked out how a 40Mbps — or even 80Mbps — connection will be delivered to people, services are coming on board that will just change the landscape in terms of what people would be interested in buying, and so our view is that an investment in infrastructure has got to give as much headroom in terms of future [bandwidth] growth as possible. ”
“ For us, FTTC is very much an interim step and the UK really needs something else, and, from a government perspective, if you really want the UK economy to be world class, you’ve got to be looking to something that stimulates truly next-generation access, rather than the interim step to go to copper as a halfway house. ”
“ I think if you take a hybrid of what’s happening, you can see the trend that more open access is actually driving more revenue onto those networks. ”
Still obstacles before investment a done deal
Stevenson said he was optimistic that conditions will be right to continue with Fujitsu’s plans, welcoming indications from Ofcom that it is willing to intervene in the dispute on PIA pricing between BT and the rest of the industry (see separate report). However, he also acknowledged that “BT will make a compelling case that their model and pace is sufficient for superfast broadband.”.
Yet, even if the investment environment is not appropriate for the major-scale investment in rural fibre that Fujitsu envisions, the company is still committed to investigating the case for regional deals. Stevenson reiterated that, while the speed of plans for fibre rollout are dependent on the regulatory environment and adequate linked-up regional government investment plans, work on delivering wholesale fibre services through the pursuit of local government contracts and public-private partnership efforts would continue, albeit at a “very considerably” slower pace, and with less investment.
“ There’s some conditionality about whether or not it gets done, and that conditionality is: firstly, does the regulatory regime in the UK support it, in terms of will there be compelling pricing on PIA?’, because, without it, it will happen, but at a very slow pace; and, secondly, is the government going to actually create the right vehicle through BDUK to aggregate demand that is coming out of the local regions to create a sensible framework in which a player can take a significant portion of it? If those two things don’t happen, then we end up with very small rural investments as we’ve done historically. That won’t attract the big retail brands because they’ll end up with 40 or 50 small networks — they just can’t afford the systems investment to sustain that model for competitive services. ”
It was this degree of conditionality that was said to account for UK investment plans not previously appearing in the roadmap of the division’s Japanese parent company. This absence had led to BT implying at its recent results presentation (see separate report) that financial backing from Fujitsu corporate headquarters may not be forthcoming. This scenario was dismissed by Stevenson, who was adamant that if the right economic conditions prevailed and there was a reasonable return on investment the case would be sufficiently compelling.
Stevenson also indicated that Fujitsu is working with Openreach and the wider industry towards agreeing a consensus, and that his company would be willing to increase the rate of its progress once a roadmap is in place. However, it appears there is some way to go in discussions before this becomes a likely prospect.
“ We are moving forward. We’re in discussion with Olivia Garfield and [TalkTalk Chief Executive] Dido Harding and [Virgin Media Chief Executive] Neil Berkett, etc., about how we move this forward together. Because we want to try as much as possible, everybody wants to try and avoid a long, protracted debate, so even if there was a roadmap or price reductions, if there was something which says ‘okay, we’ll work together on this, it starts this way, it moves down this way, and these are the efficiencies we look at’, then I believe the industry would start to accelerate its plans to support BDUK’s aspirations. ”
Scope to expand plans beyond the “Final Third”
Fujitsu indicated that the figure of targeting five million premises for its network had been chosen somewhat arbitrarily, simply representing a sensible and significant start towards addressing the nine million homes not currently featured in the UK fibre rollout plans of BT and Virgin Media. Covering the remainder of the population was described as difficult, but within the realms of possibility based on Fujitsu’s assumptions on rollout.
Stevenson said Fujitsu was not, at this stage, interested in areas where BT and Virgin Media are already well established and building out services, as in this scenario it becomes more of a marginal call for potential wholesale customers considering a switch of wholesale provider to a newcomer.
Ambitious plan intended to provide strategic appeal for retailers
Another telling reason for the five million homes figure was to create a more attractive proposition to major broadband/media retailers who want access to that market. While securing attention from major BT retail rivals would be possible with a substantially smaller footprint, a new network with five million potential customers is said to raise the project to ‘board-level status’, and thus merits an integral role in prospective major customers’ overall strategy.
“ Talking to the likes of Sky and Virgin Media, I mean, a million’s ‘interesting’ — they wouldn’t say ‘no’ — but four or five million is [At this scale,] this is board-level strategy that they would come on board, really work with us to draw volume and they would sign up to penetration models that they’ve studied very carefully. It’s that type of bond between, say, a wholesaler who’s got a real plan and a real scale behind it that gets them very excited. ”
Fujitsu emphasises partner engagement, but altnets less effusive
BTwatch has noted that the two named potential Fujitsu partners, TalkTalk and Virgin Media, have appeared positive but not overly committed to the project in recent public statements.
Recently, Dido Harding described the Fujitsu initiative as “one of a number of options” on fibre for TalkTalk, although she did go on to say that Fujitsu is a “very strong contender, and we’re very supportive of them and working hard with them to build a proposition that makes sense”. Virgin Media reiterated that its status as anchor tenant is contingent on the right rates for access, as an alternative to building out its own rural network.
Nevertheless, Stevenson pointed to consultants from the two telcos working with Fujitsu on plans to emphasise industry involvement. Regulator Ofcom was said to be “incredibly interested”, while the BDUK initiative is reported to be “very heavily and very positively engaged”.
“ We’ve spent some time with [the] government explaining to them what an alternative [to BT] could look like, and the real reason for doing that is nobody was really telling anybody there was an alternative. If the UK is going to be the best broadband network in the world what’s happening now will not do it. ”
During the interview, he indicated that Fujitsu were in early discussions with BSkyB and mobile operators Telefónica O2 UK and Vodafone UK regarding the feasibility of the project.
Fujitsu to stand on the shoulders of earlier network builders
It was highlighted that, in the UK, it is possible that around two-thirds of fibre laid as part of earlier efforts to break BT’s stranglehold on network assets remains unlit, and that tapping this capacity is “absolutely” part of Fujitsu’s plans.
“ There is plenty of fibre that goes deep enough within rural communities, [meaning] that you’re not making absolutely outrageous investments in terms of very, very long digs. There’s quite a lot of [sunk] asset [available that] you can use, and, if there is a real problem, then fixed-wireless access technologies these days for backhaul is very practical. Many mobile networks globally do that, and still deliver high-capacity bandwidth, so you can feed rural communities with fibre on a local basis and still do Gigabit backhaul using wireless, if it just doesn’t make economic sense to dig. So there is a variety of backhaul techniques that we can use. ”
Fujitsu confident on continued BT relationship, despite “awkwardness”
Despite a publicly sceptical response from BT to the Fujitsu network announcement, and BTwatch‘s belief that the project could have a material impact on BT’s abilities to tap the level of government support it is anticipating to support its fibre rollout plans, Stevenson maintained that his company’s working relationship with BT would continue relatively smoothly.
Stevenson also held out the prospect of BT Retail becoming a customer of his proposed new network, although this would be an outcome that might surprise Fujitsu as much as it would BTwatch.
“ ‘Co-opetition’ is the rubbish word that people use these days. I think the reality is that Fujitsu’s a big infrastructure provider: we provide technology to BT. We’re also a big customer of BT, and we do infrastructure for a lot of people in the UK I mean, we’re not wedded to one line of business within the UK. From BT’s perspective, we still collaborate very closely on what they’re doing around 21CN [21st Century Network] and their broadband build-out. Yes, it makes for some awkward conversations, but they’re no different to [the conversations between] any other couple of big corporations, I would say. Fujitsu views BT’s ventures into global IT services as a great opportunity for collaboration. “
“ It’s truly open access. We’d love BT Retail as a customer, but it is obviously a schizophrenic conversation for BT Group to have… If Fujitsu does this, would [BT] Retail get over themselves and go and buy some? ”
Will BT raise the stakes in its fight-back?
Stevenson suggested that BT attitudes have materially changed in the period since Fujitsu unveiled its wholesale fibre commitments, with increased executive engagement, and recognition that the proposal amounts to a serious, industry-backed challenge.
Whether this increased engagement will result in an acceleration of BT fibre proposals to seize back the initiative, a re-think on strategy to accommodate a new approach to next-generation access, or a return to regulatory squabbles and resistance, remains to be seen.
[Further reference: Interview with Andy Stevenson, Chief Executive, Fujitsu Telecommunications Europe -- Market Mettle, 26 May 2011.]
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