Fiber to the Home broadband is not Free in France, but Illiad (Corporate Website) is rolling out FTTH in Paris through it’s broadband ISP Free (note the capitals).
We’ve written about Free before (see “FTTH vs. VDSL in France“) but had a chance to learn more about what Free is doing while having Dinner with Benoit Felten. He consults by day and blogs by night over at Fiberevolution… What an appropriate name for a French Fiber blog.
Here’s what is interesting about Free and their FTTH offering:
- Iliad disrupted the French broadband business by offering cut rate pricing for broadband DSL and adding more free services over time like VoIP and Video. They are to Broadband in France what Southwest Airlines is to air travel. Iliad doesn’t spend a lot on customer acquisition and relies on word of mouth, high value, and low pricing. They have a cult-like user following and hold 20% of DSL market share and 45% of all unbundled lines in France.
- According to Benoit, Free pays France Telecom about 10 Euros a month, and sells DSL, unlimited VoIP, and limited pay TV for 30 Euros a month. ARPU climbs to $35 a month with a few extras.
- Iliad is NOT deploying PON, they are doing point to point fiber. This is a massive bump in the number of SFP modules needed and presents an opportunity for module makers. Free’s architecture uses almost 2x the optics of a PON install, and at least an order of magnitude more in cabling complexity. These are not FTTH modules but instead are Ethernet SFPs sold primarily by Avago and Finisar (FNSR).
- Install capex is estimated by Iliad to average 1500 Euros a subscriber in Paris. That is a lot considering one building in Paris might have multiple subscribers.
- Free is offering FTTH for the same price as DSL. 100M FTTH and all of the other features as before for 30 Euros. Their revenue model remains the same though their costs are going up.
- They can justify this (and this is the debatable point) because once the FTTH is in place, they no longer have to pay 10 Euros a month (120 a year) for copper. According to Benoit, Iliad is stringing two fibers, one for themselves, and another for open access. If a competitor such as France Telecom (FTE) or Neuf Cegetel want to use the fiber, they pay Iliad15 Euros a month.
I’ve got to hand it to Free. I slammed them hard (see Expropriation is Not Competition) because of their success by cherry picking the best customers (otherwise known as redlining here in the US). But at least they are now putting up their own risk capital for the venture (even though they still get a regulated ride in France Telecom cable ducts).
The financial reality is that spending 1500 Euros today to save 120 Euros/year in operational expenses tomorrow is a bad investment. That’s a 5% return over a 20 year investment horizon which, pardon my French, sucks. Something has to change.
Here are what I see as likely outcomes:
- Iliad runs out of cash. The way things are set up now with razor thin return margins, this is a financial certainty in a rational market. Something has to give, or like Ferdinand de Lesseps, Free’s second act is going to be a disaster.
- Free charges more. Free is delivering massive value. And if FTTH is really what people want, they will pay a premium.
- They beg for the French government to guarantee bonds. This will eventually be needed to make the economics of FTTH work in areas of less density than France, unless the users themselves bear the costs.
- Do it cheaper. This is the most likely outcome. Free can put FTTB (Fiber to the Building) and use the copper from the basement (owned by the landlord) to the apartment. They could do this to existing ADSL subscribers transparently, and could use VDSL to reach 50Mb/s in the same manner. No messy wiring, less optics, no 10 euro a month tariff, minimal new fiber, same user experience. At some point in the future they could go fiber the whole way with PON or Pt to Pt.
It should be noted that when Free first proposed using FTTH, they claimed it would cost 1B Euros to pass 4M homes. In their latest September report they indicate costs are up to 1500 Euros/subscriber. A move to VDSL is the quickest way to rein costs back in, something that would benefit incumbent Sagem and their chip supplier, Ikanos (IKAN).
Author holds positions in Finisar, Ikanos, and NTT.
In order to understand Free’s business model we need to examine the three forms of regulation in play.
- No regulation – This is what we have in the US at this point. Verizon, AT&T, Qwest own the copper lines from the Central Office (CO) to the home. They can lease them to competitive providers at any price they wish. This applied to residences only but rulings are emerging that will continue this trend to business DSL as well. The Telecom Act of 1996 forced unbundling at set prices and led to the explosion of CLEC’s. This regulation was taken away with multiple turns of legislation and eliminated by the Brand X decision.
- Separation – Newer model that British Telecom follows as dictated by the OFCOM (British Office of Communications). BT still owns everything, but a separate, regulated subsidiary called Openreach maintains and leases the local loop copper connections to several competitive DSL providers like Carphone Warehouse (CPW) or a host of others. Or, Openreach leases it to BT itself. CPW and their competitors can choose to put their own DSLAMs in the BT CO and connect them to Openreach copper, or they can buy a wholesale DSL connection from British Telecom if they don’t have their own equipment present. Separation is the hot buzzword for Viviane Reding, who would like to use this model for the rest of the EU. We like to refer to her as the Telecom Witch Queen for her gross anti-capitalistic policies and affinity for central planning.
- Unbundling – The norm for Europe and Japan. The old PTT monopolies own and maintain the copper but are forced to lease access rights to other providers at low rates. ISP’s like Free in France or Yahoo/SoftBank in Japan pay the incumbent a regulated tariff to run their signals over the copper and use space in the CO.
From an editorial standpoint I acknowledge the shortcomings of the the no regulation model but prefer it to the others. If incumbents or new entrants don’t appear in a market, municipalities should be free to install fiber. When sufficient demand and need exists the risk capital will appear to make things happen.