LLU and wholesale DSL in Eastern Europe: money to be made for mobile operators?

Orange Slovakia’s launch this week of wholesale DSL broadband using incumbent Slovak Telekom’s network got me thinking about the potential for wholesale DSL and LLU in Eastern Europe. After much tossing and turning I think there is an opportunity here, not least for mobile operators, to make some tidy revenues, particularly important with mobile markets so stagnant revenue wise in the region. Many of the region’s fixed broadband markets remain underpenetrated with room for growth in subscriber numbers which mobile operators could take advantage of. The mobile operators have the advantages of existing telecom brand and presence and can leverage their existing mobile base for selling DSL. Selling DSL connections looks more attractive than trying to use mobile broadband as a substitute for fixed broadband. Mobile operators in Eastern Europe are moving away from this strategy in the face of increasing pressure on mobile networks, sluggish subscriber growth and difficult economics.

No doubt there are many reasons to think that local loop unbundling and wholesale DSL make uneasy bedfellows with the fixed-broadband markets of Eastern Europe. For example, the relative ease and low cost, certainly compared to Western Europe, with which potential entrants can enter the fixed broadband market by building their own fibre networks. This is because of the lower costs of civil engineering thanks to the higher preponderance of tower blocks in the region. Indeed Orange Slovakia has built its own GPON network, covering about 20% of Slovak homes, through which it has offered broadband access, IPTV and VoIP since 2007. Moreover regulatory willing is also required to make sure monthly rates for LLU and wholesale DSL are enforced effectively and this is not always present in the Eastern European region.

Netia and T Mobile Czech Republic lead the way

The success of 2 operators in Eastern Europe shows, however, that there is a decent business case for operators using local loop unbundling and wholesale DSL in the region. Mobile operator T-Mobile in the Czech Republic, using a wholesale DSL model, grew its subscriber base from 53,000 at end 3Q10 to 93,000 at end 3Q11, for example.

Netia is not active in the mobile market in Poland, apart from as a data MVNO, but has had success first using wholesale DSL and increasingly LLU and has grown its market share over the past couple of years. At the end of September 2009 the operator held a fixed broadband market share of 8.7% and this figure had grown to 11.6% at the end of September 2011. Such growth could make the operator an attractive acquisition target for one of Poland’s mobile only players, such as T-Mobile. The question is why and how have these operators been able to achieve this success and how replicable is it in other countries in the region?

How to compete if not on speeds?

In Eastern Europe DSL unbundlers and wholesale players will find it difficult to compete on maximum speeds with cable operators since Docsis 3.0 is widely available in the region through operators such as UPC.  In those countries where neighbourhood network type /FTTB/FTTH operators are present, notably Romania and Bulgaria, speeds are high which presents a problem for plain old ADSL (or also plain VDSL from the central office in T-Mobile Czech Republic’s case). However, the same argument also applies to those mobile operators that are trying to use mobile broadband as a substitute for fixed broadband.

Mobile players leverage their assets

To have success the unbundlers and wholesale players must find a different way to compete than merely having higher maximum speeds. In the case of T-Mobile in the Czech Republic the strategy is to offer add on bundles of fixed broadband and voice to customers with post paid mobile voice contracts. Once the discounts for having a mobile voice contract are factored in T-Mobile has very competitive prices when facing UPC, the Czech Republic’s main cable operator. T-Mobile’s model can serve the purpose of retaining the post paid mobile voice subscribers, helping maintain mobile margins, but has also enabled the operator to gain a foothold and revenues in the Czech fixed-broadband market. T- Mobile Czech Republic is also offering triple play bundles of fixed broadband, fixed voice and mobile broadband, again offering discounts for those taking post paid mobile voice contracts. Orange Slovakia is also leveraging its mobile assets by offering subscribers 5GB of mobile data for free which they can use whilst their DSL connection is being set up.

Netia defuses the speed issue

Netia in Poland has also had success with its strategy of offering low prices despite not being able to offer the higher speeds of cable operators or LAN players, at least in the areas where it has not acquired LAN operators. Despite its reliance on regulated products Netia is able to charge low prices thanks to the emphasis it has placed on reducing operational expenditure through its Klientomania programme. One example is improving the layout of invoices and therefore reducing the number of calls to customer service as a result of a customer’s confusion over what they have been billed for. Netia has also been clever by not forcing customers to sign a fixed term contract and so giving them greater flexibility. Instead a deferred activation fee is paid if the subscriber ends up leaving after a few months.

Netia is trying to take the importance of speed out of the market by simply offering subscribers one package consisting of the maximum speed that a particular line can deliver. The “No Limits” package offers unlimited broadband access at the highest possible speed plus unlimited fixed line domestic calls, offering customers simplicity at a reasonable price.

Absence of infrastructure competition

There is logic to saying that such an unbundling or wholesale model would not fare well in other countries in the region because the infrastructure competitors are more widespread. After all, as well as their pricing and bundling strategies T-Mobile and Netia have also succeeded partly because they have targeted areas where the likes of cable player UPC are not present, for example, in smaller towns and cities. In countries such as Hungary, where cable TV networks are more widespread and Digi has entered the market by constructing an FTTB network to deliver broadband, it is more difficult for alternative DSL operators to avoid this kind of strong competition. As a result the sum of wholesale DSL and LLU subscribers is in long term decline in Hungary

Given the fact that speed does not seem to be the be all and end all in many fixed broadband markets, as T Mobile Czech Republic and Netia have shown, wouldn’t mobile operators be better off trying to enter the fixed broadband world through wholesale DSL or LLU rather than building an FTTH network? Building an FTTH network is an infinitely more costly and therefore risky investment, despite the higher speeds it could provide. It seems to me that Orange Slovakia has more chance of success with DSL than it has had with its FTTH network, which had a take up rate of only around 16% at end September 2011. This is because the DSL offer is more focussed on price based competition, takes advantage of mobile synergies and is targeted at areas with fewer competing FTTH and cable networks.

No magic wand but a very reasonable business case

Let’s be clear: launching wholesale DSL and LLU is not going to generate massive amounts of revenue. That’s because the offers would be most likely to compete on price and you can add to that the fact that wholesale ADSL is generally a low margin business. It also will not be applicable everywhere as in some places the competition from cable and FTTH/B players is simply too strong for DSL to look like anything other than yesterday’s news. Regulation could also handicap developing a business case in certain countries. But mobile operators in the region need all the help they can get in trying to find some source of revenue growth and the opportunities that wholesale DSL and LLU provide for a low risk investment with reasonable returns are certainly not to be sniffed at.