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Wednesday, August 15, 2007

21CN, Bands and Regional Pricing

Samknows is in the middle of producing an excellent introduction to BT’s mega rebuilding of its core network aka 21CN. Sam is much happier with a compiler than a spreadsheet, yet is immediately struck by some of the pricing differentials on the BT product sets – for example, on a QoS product BT is proposing charging 3x the amount in a rural area compared to suburbia.

To understand what is going on it is necessary to understand the new UK network topology:


Roughly speaking, most serious nationwide unbundlers (Carphone, Sky, Tiscali, O2 and Orange) will eventually unbundle down to the Tier 1 MSAN level at a minimum which is around 1200 exchanges and covers around 70% or 17.7m of the 25.3m UK homes. Again roughly speaking, most of them will backhaul using BT Ethernet products to the MetroPOPs where they will offload traffic onto their own backbones. In other words because of the BT network architecture most of the unbundlers will be using a blueprint which will be very, very similar.

The Tier 1 area is bigger than the UK cable coverage of around 11.8m homes or 47% of total UK homes, but nearly all the cable area will overlap with the unbundled or Tier-1 areas.

In order words without further industry consolidation we have:
  • 7 companies fighting for 11.8m homes or 47% of the UK
  • 6 companies fighting for 5.9m homes or 23% of the UK
  • 1 company fighting for 7.6m homes or 30% of the UK
This is a pretty controversial analysis because it ignores the plethora of resellers currently using the IPStream product who will be transitioned onto the new 21CN products of either IPStream Connect or Wholesale Broadband Connect (WBC). However, it is almost impossible to make money on ipstream in retail given current pricing and churn rates and therefore the only player with any margin is BT through its wholesale revenues or the relatively small number of ISPs who charge a premium for SME products.

I plan on starting crunching the numbers for the new 21CN products after my holidays, but basically I don’t hold out much hope for the non-infrastructure based ISP community and therefore really there is just one company, BT, fighting for the 30% Tier-2 homes or to be more precise the profit on serving the 30%. I suspect all of the BT wholesale pricing will appear competitive in the Tier 1 or Unbundled areas (ie where BT faces plenty of infrastructure based competition) and extremely expensive in the Tier 2 or non unbundled areas (ie where BT faces zero infrastructure based competition)

This equation spells a grim future in the medium term for the rural communities, not only will speed be lower because of higher than average line lengths, but they will be charged a higher price for the pleasure compared to the ultra-competitive urban areas. I think regional pricing is going to be a feature for the next few years.

The only potential beacon of light for these communities, apart from state subsidies, is Sky. After all, Sky probably has lots of high yielding ARPU customers scattered across rural UK where they currently face zero competition from Virgin Media. Here things will start to get really strange because the key ongoing variable cost is the backhaul and in some ultra-rural communities such as North Yorkshire and parts of Scotland there are initiatives laying non-BT owned fibre which will make backhaul cheaper on a wholesale basis and possibly make medium sized remote exchanges economic to unbundle. This will actually encourage Sky to unbundle exchanges where they have a known number of customers already signed up for the payTV service. In other words, Tier 2 or Band 2 exchanges will probably be unbundled on a case-by-case basis which will be all the more confusing to the Great British Public.

As this sub-par broadband future starts to dawn on the 30% of the UK who on average tend to be quite wealthy and politically vociferous, I see huge pressure being applied to the regulator, OFCOM, to do something about the perceived inequality. I for one will be leading the charge that it is not BT’s fault, but OFCOMs and the inevitable outcome of the dodgy settlement at the time of the conception of OpenReach.