DSL Prime: Underperformance in Closed Markets

Kennard's Carlyle fails to grow subscribers in Hawaii. In Britain, government intervention will be required in order to equal the high standards in the rest of Europe.

by Dave Burstein of DSL Prime and Future of TV [March 11, 2008]

Gordon Brown, Mr. Prime Minister, has decided Britain can't afford the second rate Internet BT is proposing. (1 Mbps up, 20 Mbps down or so.) His OFCOM chief, Ed Richards, is refusing to give BT a subsidy; Ben Verwaayen is holding out for government money or increased monopoly power. Stepping in to make a deal is cabinet minister Shriti Vadera. Insider Kip Meeks holds out little hope for avoiding a giveaway to BT. "Success will depend on securing the support of the big players—the BTs, the Skys and the Carphone Warehouses" (next issue, UK, Who Will Pay). Franco Bernabč at Telecom Italia has just canceled hundreds of millions in investments until he also gets a government handout.

Vivianne Reding at the EU might object to a subsidy to a dominant carrier. She deeply believes in making competition effective. To my surprise, she strongly recommends point-to-point fibre deployment rather than GPON or VDSL. "It is the only approach to next generation access that permits a completely open access policy with the unbundling that has put Europe in the lead today." GPON has been the almost exclusive choice in the West (BT, Verizon, AT&T), but Amsterdam and Geneva want a more open system. Her battle with Germany over VDSL competition show how problematic that can be, and GPON could be even more trouble.

Sorry this issue ran so long. I didn't have enough time to write anything shorter. Maybe some of you will be at Victor Harwood's Media Summit Wednesday and Thursday in New York. Say hello to the round fellow with a (temporarily diminished) beard. If I had the travel budget I'd be off to Ultrabroadband in Paris and Telco 2.0 in London, but for now they are an ocean too far.

Stories not yet written
The potential nightmare for telcos worldwide has begun in FranceNumericable is offering DOCSIS 3.0 downstream (? 50 Mbps) to two million homes already. Their part owner, Carlyle, just hired Sarkozy's half brother Oliver, which should eliminate their regulatory problems.

*** I'm glad to be working on a positive AT&T story. Ralph de la Vega comments AT&T will offer a reliable 25 megabit download, with actual speeds much higher than "up to 24 megabits" deceits. They've recently installed a million ports for U-Verse, so the subscriber count should head up quickly.

*** I also have a positive Alcatel story. Ralph Penza is betting $700 million Alcatel will come back because it's a "classic value investment."

*** Deutsche Telekom is offering unbundling with surprising terms. The press reports say it's based on 75 Kbps of backhaul, while other European carriers are already 250 Kbps or more. I'm checking with DT for details; 75 Kbps is not enough to compete in a video world.

*** I still also owe Ikanos a write-up on their new chips, and have notes from both Infineon and Conexant financial reporting.

*** How to serve West Burrafirth, Shetland Island and other remote towns

A disagreement, not a correction: Comcast strongly asserts I should not have written the story that they intend for DOCSIS 3.0 to reach 50 percent of their subscribers in 2009. I'm waiting for them to get back to me with better information about what their real plans are for 2009 if that story is mistaken. I have indirect confirmation their build will come very rapidly, unless more technical problems come up. Moving fast is the best way to resolve some of their D.C. problems. DOCSIS 3.0 is at least 12 times faster than what they have now on the upstream, and even more compared to AT&T and Qwest.

Trouble in Kennard's Hawaiian Paradise
DSL subs actually fall
DSL is a $60 billion business worldwide that will continue to grow overall. However, we've definitively passed "peak DSL." The growth rate will not come back. A solid majority of western carriers are seeing net adds drop. Korea has fewer than 10 percent of homes unconnected. Scandinavia with 20 to 30 percent unconnected has slow growth. Nations about half served typically grow faster than that. (France, U.K. U.S.) Few grow as fast as they did when 75 percent of homes had no broadband.

Korea and Japan are actually seeing DSL subscribers fall as many switch to fiber. Hawaii is the first example I've seen of an actual drop in DSL numbers because of slow growth and a loss to cable. I was amazed at such a severe problem, because Bill Kennard at owner Carlyle is among the most brilliant and thoughtful people I've met in this industry. I remember an event at which he spoke after half a dozen senior CEOs, and clearly was thinking ahead of any of them.

Hawaii Tel's problem is apparently that the private equity group is trying to pull out too much cash after overpaying when they bought the property from Verizon. Buyout firms for the last decade have developed a strategy of cutting expenditures dramatically and pulling out enough cash to guarantee a profit. They hope to raise efficiency enough to compensate, but that's not always possible.

Hawaii Tel has serious service problems likely to become worse as they cut staff. They've upgraded to ADSL2 in some areas, but haven't invested in fiber or many remote cabinets.

Copyright 2008 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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