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Will The Internet Break? ISP economics assessment to 2012

Summary.... The report, 'Will the internet break? ISP economics assessment to 2012' includes an assessment of the economic pressures on ISPs, in-depth analysis of the capabilities of current and emerging fixed broadband access platforms and refers to Screen Digest data covering 20 Western European markets, North America and Mexico.

The report, 'Will the internet break? ISP economics assessment to 2012' includes an assessment of the economic pressures on ISPs, in-depth analysis of the capabilities of current and emerging fixed broadband access platforms and refers to Screen Digest data covering 20 Western European markets, North America and Mexico.

Key findings:

  • Consumer broadband connections in North America, Mexico and Western Europe reached 155m by year-end 2007. By 2012, this figure is predicted to reach 228m.
  • Tight regulation on broadband access in Western Europe has driven the dominance of DSL, while cable is the most popular platform in the US. Fibre-to-the-premises connections represented a minor portion of the market - under 5 per cent - in the two respective regions at year-end 2007.
  • The battleground for broadband providers on both sides of the Atlantic has centred on speed and price. Average marketed broadband speeds have risen consistently over the last five years.
  • Two main factors are squeezing profit margins: robust price competition and a swell in traffic which is pushing up bandwidth costs. Traffic is set to intensify with mass video consumption via online platforms bringing content to the living room TV.
  • Notably from an ISP perspective, monthly average revenues per user (ARPU) have eroded and are predicted to continue to fall to 2012. This effect is particularly acute in Western Europe where the regulatory environment has fostered intense price rivalry, driven by local loop unbundling (LLU).
  • Such is the pressure on margins in Western Europe, that even before a host of other ISP expenses have been taken into account - like mounting data costs, heavily subsidized end-user hardware, staffing and network equipment - many ISPs' balance sheets are already looking slim. In 2007, Screen Digest analysis reveals that in the European 'Big Five', DSL providers, which dominate the region's broadband market, were left with monthly returns of around Euro6-Euro7 once ongoing line fees were paid to incumbent telcos. This has fallen from over Euro16 in 2002 and could slide to as low as Euro5 by 2012 if pricing trends continue.
  • The big losers in the ARPU decline are the pure-play internet service providers (ISPs) which have tried to offset the squeeze by bundling additional services with broadband access. However, the effect of these value-added services has been limited. New entrants with another core area of profitability, such as pay-TV and mobile phone companies, have transformed broadband access itself into a low-cost bolt-on in packages.
  • Providers owning backhaul infrastructure built close to users, including LLU, cable and fibre operators, are better positioned to absorb data costs than ISPs with limited or no infrastructure.
  • A number of factors are fostering deployment of next-generation access networks (NGANs), which Screen Digest defines as emerging high-speed fibre- and DOCSIS 3.0-based networks. However, in Western Europe, uncertainty over practicalities and economics of NGANs is delaying rollout.

In the report:

  • In-depth discussion of the strengths and weaknesses of the business models of different fixed line broadband providers - including fibre-based, cable and DSL ISPs
  • Overview of the technical capacities of different fixed access platforms
  • Forecast subscriber and access revenue data to 2012

Table of contents

Tables and charts
Executive Summary
Definitions and Notation
Bits and bytes
Exchange rate

The growth of internet traffic
What is broadband?
Dominant fixed platforms
The growth of consumer broadband
The swell in traffic
Explosion in services integrating video and software
The transition to high-definition (HD) video: a heavier load
Multiple connected PCs and devices using connections
Peer-to-peer (P2P) software used for illegal file-sharing
Pressures on ISP profit margins

Regulation and competition define the industry
Broadband regulation differs according to market and platform
US vs Western Europe: to regulate or not to regulate?
Western Europe:
DSL has welcomed a range of providers
LLU has helped drive competition
DSL dominates cable
NGANs deployed locally; incumbent telcos moving to wider rollouts
Competition characterised by network rivalry
Two US incumbent telcos leading NGAN rollout
Broadband availability
Western Europe:
Widespread DSL provision
Case study: ConnectKentucky
Rural areas frequently lack rivalry between fixed providers
Access revenues under pressure, leading to consolidation

The economics of current-generation platforms
Competition driven by speed and price

Wholesale and unbundled DSL: differing routes to the consumer
Local Loop Unbundling (LLU)
Vibrant LLU sectors create two-tiered pricing and services
Economies of scale: LLU restricted to urbanised areas and well-backed players
All DSL is not created equal
Real-world speed deteriorates with loop length
Poor quality copper infrastructure can lower throughput
Line crosstalk and electrical interference can affect achieved speed
LLU operators can undercut wholesale DSL prices
LLU can respond to speed and pay-TV rivalry
DSL: costs and data flow
1) Access
2) Backhaul capacity
3) Core - international data transit to the internet
LLU and wholesale DSL: a comparison of economics
Access analysis - the squeeze from price competition
Backhaul: a point of contention
Owning the backhaul, absorbing the data costs
Western Europe: revenue flow between parties under different DSL provision models
Backhaul analysis - the impact of rising user demand
A dual threat to LLU?: de-regulated wholesale broadband and incumbent telcos' NGAN build
De-regulation of wholesale broadband
Incumbent telcos' build-out of NGAN networks

Cable broadband:
Broadband strategies built around core TV businesses
How cable broadband is delivered
Cable's bandwidth capability
Maximising bandwidth potential, leveraging existing infrastructure
Cable: owning the network
Network rollout restricted to urban areas
Beneficial operating economics
Exempt from open-access obligation
Ability to absorb rising bandwidth costs

The economics of next-generation platforms
What is a next-generation access network (NGAN)?
Investment cost: return in what timeframe?
Key drivers to NGANs
1) Technical
2) Economic
a) Operational cost savings
b) Capital cost savings
3) Regulation can hinder NGAN deployment
NGAN platforms: advantages and disadvantages

Choosing FTTC over FTTP
Cases where FTTP could be a more attractive proposition

A costly but future-proofed architecture

Two main benefits: bandwidth capacity and efficiency
Network upgrade is comparatively cost effective

Emerging trends and challenges
Reconfiguring user payment models to reduce or subsidise ISP bandwidth bills
"Happy hour" download periods
"Meter-based" charging
Open web: traffic inspection and content exploitation
Blocking or throttling of particular application traffic
Charging for priority delivery of online services
Closed platform: leveraging infrastructure to launch content delivery networks (CDNs)
Emerging advertising models

Tables and Charts

Tables and charts
Executive Summary
Number of consumer broadband connections
Consumer broadband connections by region
Broadband penetration
Consumer broadband penetration by country

The growth of internet traffic
Examples of broadband definitions
Speeds capable using different broadband technologies
US: forecast online video data consumption
Download speed for different types of content over different broadband connection speeds
Definition of closed and open broadband services
Example of average monthly user data transfer by UK ISPs
Number of PC households
PC households by region
US: broadband-connected living room devices

Regulation and competition define the industry
Western Europe, North America and Mexico: broadband connections split by type (2007)
Examples of ISPs in the Big Five split by core business type
Western Europe: incumbent telcos' share of retail DSL broadband connections
Western Europe: incumbent telcos' share of retail DSL market
Western Europe: unbundled lines
Broadband connections by access technology (2007)
Western Europe: unbundled DSL share of total DSL connections
Examples of broadband ISPs exiting markets
Annual broadband access ARPU by technology
Western Europe, North America & Mexico: top 20 ISPs ranked by subscribers (2007)
BT Group broadband ISP customers
Deutsche Telekom broadband ISP customers
Telecom Italia broadband ISP customers
France Telecom broadband ISP customers
Telefonica broadband ISP customers
Big Five incumbent telcos: global broadband ISP customers
Examples of services bundled with broadband access

The economics of current-generation platforms
Sample ISPs offerings in different countries (as of Q3 2008)
Average marketed DSL speed
Western Europe: average DSL and cable marketed speeds
Western Europe, North America & Mexico: average broadband price
Overview of components in DSL provision
Maximum xDSL throughput to UK households
Western Europe: full and shared access unbundling prices
Western Europe: full and shared access unbundling prices (2007)
Maximum xDSL bandwidth capacity at various loop lengths
Big Five: difference between recurrent DSL line costs and ARPU
Local loop unbundling (LLU) (simplified)
Wholesale DSL from incumbent telco (simplified)
Simple resale DSL from incumbent telco
Forecast number of broadband DSL connections
Forecast number of broadband cable connections
Cable share of total broadband connections
DSL share of total broadband connections
Cable broadband distribution
Average marketed cable speed
Western Europe: cable homes passed
Western Europe: proportion of cable homes passed that are 2-way enabled
Analogue and digital cable penetration
NGAN providers by type

The economics of next-generation platforms
Example of future household throughput requirement
Capital cost per home passed & connected using next-generation broadband platforms
Western Europe: examples of possible regulatory remedies on NGAN platforms
Example FTTH rollout costs (France Telecom)
Point to point
Average marketed alternative access technology speed
FTTP share of total broadband connections
Forecast number of broadband FTTP connections
US: NGAN addressable households
US: announced or deployed roll-out areas for NGAN platforms
Western Europe: examples of NGAN rollout
US: examples of NGAN rollout
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