Last week, French Senator Hervé Maurey released a report made at the request of French Prime Minister François Fillon, which explained how the French government can accelerate the deployment of fiber to the home (FTTH) infrastructure in France and prevent the creation of a digital divide between urban and rural areas. It is well known that in every country, telecom operators invest most of their money in dense urban areas where they can reap high returns. Rural areas, which generate lower returns on investment, are unattractive. However, the path from FTTH in cities to FTTH in rural areas is fraught with difficulties as the operators find rural deployments unattractive, and French local governments need to raise new (unpopular) taxes to fund fiber deployments.
Fiber to the Home for Everyone in France
In France, the situation is complicated by the fact that the government (following the European Commission’s recommendations) is pushing for more competition between operators and wants to provide high speed fiber access (FTTH) to every household in the country. Orange France Télécom, the historical incumbent is playing a specific role in the market because, as it was previously a National Monopoly, it owns a big chunk of the fiber networks in France, giving it a dominant position. For many years, the strategy of Orange France Télécom had been to make life difficult for its competitors (SFR, Bouygues, Free-Iliad and other smaller operators) by locking them out of its network. It also took advantage of its ability to control the local loop to lock customers in.
Mandatory Local Loop Unbundling in France
The French government reacted to Orange France Télécom’s dirty tricks in 2004 by requiring it to unbundle the local loop, meaning, Orange France Télécom had to allow his competitors (similar to the CLECs in the US) to enter France Telecom’s central offices to put in DSLAMs for ADSL (note: unbundling is not mandatory in the US) . This was a big success for the French regulator, ARCEP, because it drove down the price of broadband service in France, making it one of the cheapest countries in Europe to purchase a broadband connection. In addition, adoption of broadband rose dramatically.
Using a process called RIP (Public Initiative Networks), municipalities, departments and regions were also allowed to create their own fiber networks, most of them to unbundle many central offices in their territory giving open access to any operator.
The four major telecom operators in France are still very healthy despite the financial crisis, meaning the low price of DSL is not crushing their margins at all, despite their protests to the contrary. Orange France Télécom just released a strong quarterly report today with rosy predictions for the next few quarters. The low price of DSL enlarged considerably the market for broadband, and stimulated broadband use, bringing more profit to the telcos, as the costs of running updated networks have been decreasing.
The Owner of the Network is King
Now France is entering an era of switching completely from copper to fiber. This means the local loop, which is based on copper, must be replaced by fiber optic networks, all the way to the apartment. This is a huge investment, but it will last for the next half-century.
France Télécom still owns the copper and derives significant revenues (almost pure profit) for renting it to other operators. Not disclosed, these revenues are worth several billion Euros per year. This is one of the reasons why in France, the big operators have been talking a lot about FTTH for the past four years, but unlike other countries,they have done little except in the most densely populated areas like central Paris. Indeed, France has fallen far behind other countries in FTTH adoption with few FTTH subscribers (375,000 or <1%) and a low number of apartments passed (see the graphic below, FTTH Council Europe recent statistics).
France lags behind in FTTH access
Free-Iliad was the first to step up with plan for FTTH in 2006, but Free-Iliad, as a company, has only 1/50 of the resources of France Telecom and Free Iliad has no existing network. Free-Iliad started to build its own fiber networks in Paris and few cities, and tried to lease some of the municipally built networks. Xavier Niel, Iliad’s CEO prefers owning his network as part of his strategy to become a full sized operator.
Orange France Télécom decided to play for time, mentioning the lack of regulations for putting fiber in the apartments, and citing technical difficulties in interconnecting different technologies (GPON which is a telco technology versus P2P Ethernet which is an IT technology chosen by Free-Iliad), even lobbying that there was no strong demand for fiber in France. It is interesting to note that France Telecom argued in much the same way in the mid-1990s to block Internet access versus the now defunct Minitel.
Orange France Télécom’s Guerilla Strategy
Orange France Télécom then engaged in what might be seen as a “guerilla warfare” against FTTH to try to re-create a monopoly position based on fiber. It had been investing heavily in fiber networks in dense areas to overcome competition, and to fill up its empty ducts which it is required to share with competitors.
It had also refused to disclose the location of its networks in the ground to avoid renting it to competitors. Another dirty trick had been to wait until a municipality announced plans to invest in a fiber network, then at the last moment, to declare that it would also set up a network. The goal had been to torpedo public investments in these networks, which are considered by France Telecom to be unwelcome competition. It had also been battling regulations and had even brought legal action against a few municipal fiber projects (in the Pyrenées, in Limousin and in the Haut de Seine suing THD 92 which is the largest FTTH project in France driven by a Department). It lost all of these court cases. It officially stopped investing in FTTH, blocking all FTTH deployments, and refusing to cooperate with other operators as ARCEP has requested.
A race to the “syndics”
Today, Orange France Telecom (after social crisis that lasted about a year involving a series of employee suicides), has a new CEO and has officially resumed its fiber deployments in several cities, but it does not advertised fiber broadband service. The previous “guerilla” has joined the open race to the “Syndics” (Home Owners Associations) in big cities as far as the regulation has decided that the fiber network termination installed in the buildings (up to each apartment) will be installed at the cost of the operators. The network will be installed in each building by only one operator, chosen by the Syndic as “building operator”, and shared with all operators (under certain rules which are complex). It allows any resident in a building to choose the operator he wants for his own fiber access. Being chosen as the “building operator” (the one who builds the network) by the “Syndic” gives the “building operator” a lot of advantages, but it’s also a big initial investment, which works again in favor of Orange France Telecom. All three operators have the ability to be chosen as the “building operator” in any apartment building in the cities.
Two-tier broadband market in France: FTTH and DSL
The city of Paris is already almost fully covered by a fiber network, but only few buildings have installed the fiber network termination to the apartments. This partly explains the low subscription rate to FTTH.
Another reason for low FTTH subscription rates is the operators are installing FTTH in only 40 cites in France, those considered to be “densely populated and profitable areas”. These 40 cities and another 100 cities considered profitable, all representing about 5 million households out of the 24 million households in France, are seen by the operators as their main targets.
Orange France Télécom has said it will invest €2 billion over the next 5 years to cover 40 percent of the French population, Free-Iliad declares it will invest €1 billion to reach 4 million fiber plugs in 2012, and SFR will invest €250 million per year over the next 4 years. Despite these plans, barely half of the French households will have access to the fiber.
Today, the status of the non-profitable markets, which represent more than 50 percent of the French households looks unclear. It is also important in the profusion of press releases to check the terms used when numbers are given: some of them speak of households, others of plugs, many of population, still others of houses passed. Few actually refer to subscribers. And almost no one discusses coverage area. By the way, no operator in France has put a fiber optic offer at its general catalog today.
The French Government Wants 100 Percent Fiber Coverage
French President Sarkozy has set ambitious goals for fiber access in France. He wants 70 percent of the French population to have access to the fiber by 2020 and 100 percent by 2025. The estimated cost is around €25 to 30 billion but the returns are expected to be enormous: 360,000 jobs created per year, €20 billion value added, and more jobs indirectly.
The operators are eager to capture the value added in the most profitable areas, but they do not want to invest in sparsely populated areas where the return on investment is smaller and uncertain. The report made by Senator Maurey estimates that it will cost more than €15 billion to extend fiber coverage from 70 percent of the French households to 100 percent; half of this amount is for bringing coverage from 95 percent to 100 percent of the population. But the operators don’t want to make those extra investments and French government, which would like to fund these deployments, is faced with large budget deficits.
Proposal to Fund Rural Fiber Broadband Projects by Imposing New Taxes
A complicated scheme of public funds to push fiber investments in the less populated areas (half of the population) is being discussed by the national government. It relies on the power of local governments and municipalities to initiate local projects and bring operators to co-invest to put FTTH in their territories. Many issues remain unclear and once again, Orange France Télécom is in a very good position to grab the bulk of the projects, acting as a “white knight” in low density areas, albeit at the cost of the taxpayer. One of the points raised by the Maurey report shows that the government needs €600 million per year to finance the rural FTTH network. Maurey suggested raising new taxes on Internet end users. Operators are happy with that suggestion, but making broadband access more expensive will also make it harder for low-income families to afford broadband. The government is faced with a dilemma and given the aversion of many people to new taxes, it is uncertain that France will meet its 100 percent fiber dreams in the near future.