Vodafone@Home: The Hare and the Tortoise
Vodafone UK announced today a home product to be launched in the New Year - no fancy hybrid phones and nothing really innovative like femtocells.
This is actually cheaper than the TalkTalk and Sky equivalents if you are outside their unbundled areas and not that much more expensive than their LLU products. The drawback is that only Vodafone Contract customers are eligible.
On the Data Side, Vodafone will already have quite a sophisticated Radius Architecture because of the 3G card business and more importantly a method of provisioning it from the Back Office / Order Handling Systems. They also will have quite a reasonably sized internet backbone with plenty of peering arrangements to the wider internet domains. The only real addition that Vodafone requires on the data side is the rental of enough capacity in the form of BT Centrals to ensure a decent service.
On the Voice Side, Vodafone will have their voice network already deeply interconnected with the BT network and therefore will already be paying absolute minimum interconnection costs. I’m also sure that Vodafone will have enough POTS line capacity on its fixed line voice switches to mean minimal incremental capital expenditure is required. Yes, Vodafone will already have fixed voice switches to provide some of the business services.
The cost of renting a WLR from BT is £9.16/month and a line card is £8.40/month which brings us to £17.56/month. The connection costs for a WLR is only £2 for WLR, but it is £40 for a new broadband connection and £11 for a broadband line transfer. At a minimum, this should add an average £1/month over the length of the contract.
The giant BT costs are for the variable bandwidth driven BT Central costs which are £125k/month + £175k for installation for each 622Mbps pipe - smaller pipes are available at higher unit costs. These are the not only the most expensive, but the BT Central bandwidth determines the Quality of Service at Peak Hours. I can easily see the BT Central Costs eating the rest of the Revenue. I think the product is probably breakeven before Marketing, Acquisition and Support Costs are taken into account.
Where the service possibly will provide a return is if it reduces churn – Vodafone effectively puts a price on this at £10/month gross, given that a non-Vodafone contract customer has to pay £35/month. This is the logic of the design of the product.
There is another variable that currently I unaware of and that is the future reduction of BT Wholesale prices for IPStream. BT are allowed to revamp prices post 1.5m LLU lines, which should happen around the time Vodafone launch their product. I have a not-so-funny feeling that BT is going to drop their prices quite substantially which is going to affect the economics of LLU build out. I also think BT Wholesale are really smart and will drop the prices in such a way that the smaller ISPs continue to pay high reseller charges whereas potentially big customers such as Vodafone can get big volume discounts which is currently not possible
Effectively today, there are two options in the broadband market:
Vodafone would love this option, because they probably already have connectivity to these Metro Nodes as part of their existing voice delivery. Other alt-nets, such as Thus, Colt, Global Crossing and Verizon would also love this option as it would leverage their existing networks to deliver both wholesale and lower cost IP-VPNs to multi-branch corporates. Realistically, the BT 21CN MetroPOPs are going to be named as the nodes with currently the heaviest traffic and these nodes already will have a lot of third party fibre connectivity. The smaller ISPs could be tricked into liking it as well, because the altnet will probably be able to offer cheaper wholesale services than BT and therefore they will see a short term reduction in costs without the risk of LLU wholesaling. This gives the smaller ISPs the potential of a little breathing space whilst cunningly moving the credit risk from BT to the altnet sector.
The only people who will hate this option are the people deeply committed to LLU unbundling. This has the potential to make the LLUers network design obsolete before build-out. Effectively, the devil will be in the detail of the BT Wholesale pricing scheme, but I think that once 1.5m LLU lines are unbundled no-one can stop BT Wholesale setting whatever pricing scheme it dreams up - this was all part of the settlement of creating OpenReach.
I. Pricing
£25/month is actually quite cheap for what you get in the bundle: line rental, radsl (max) broadband, non-geographic calls + free whingeline. The only upside on revenue for Vodafone are call charges outside the bundle which are to mobile calls, non-geographical + international calls. There are no setup charges and you don’t need to buy a modem or pay a set-up fee.This is actually cheaper than the TalkTalk and Sky equivalents if you are outside their unbundled areas and not that much more expensive than their LLU products. The drawback is that only Vodafone Contract customers are eligible.
II. Technology
It is an archetypical BT Reseller product and therefore all the problems with LLU do not apply. It is extremely easy to provision and there is limited infrastructure risk, because BT is providing the majority of the equipment and connectivity.On the Data Side, Vodafone will already have quite a sophisticated Radius Architecture because of the 3G card business and more importantly a method of provisioning it from the Back Office / Order Handling Systems. They also will have quite a reasonably sized internet backbone with plenty of peering arrangements to the wider internet domains. The only real addition that Vodafone requires on the data side is the rental of enough capacity in the form of BT Centrals to ensure a decent service.
On the Voice Side, Vodafone will have their voice network already deeply interconnected with the BT network and therefore will already be paying absolute minimum interconnection costs. I’m also sure that Vodafone will have enough POTS line capacity on its fixed line voice switches to mean minimal incremental capital expenditure is required. Yes, Vodafone will already have fixed voice switches to provide some of the business services.
III. Profit
I cannot see how Vodafone is currently planning to make a profit on the service: £25/month revenues is £21.27 net of VAT, even if Vodafone get a generous uplift of £5/month for other voice services it is only £25.53 net of VAT.The cost of renting a WLR from BT is £9.16/month and a line card is £8.40/month which brings us to £17.56/month. The connection costs for a WLR is only £2 for WLR, but it is £40 for a new broadband connection and £11 for a broadband line transfer. At a minimum, this should add an average £1/month over the length of the contract.
The giant BT costs are for the variable bandwidth driven BT Central costs which are £125k/month + £175k for installation for each 622Mbps pipe - smaller pipes are available at higher unit costs. These are the not only the most expensive, but the BT Central bandwidth determines the Quality of Service at Peak Hours. I can easily see the BT Central Costs eating the rest of the Revenue. I think the product is probably breakeven before Marketing, Acquisition and Support Costs are taken into account.
Where the service possibly will provide a return is if it reduces churn – Vodafone effectively puts a price on this at £10/month gross, given that a non-Vodafone contract customer has to pay £35/month. This is the logic of the design of the product.
There is another variable that currently I unaware of and that is the future reduction of BT Wholesale prices for IPStream. BT are allowed to revamp prices post 1.5m LLU lines, which should happen around the time Vodafone launch their product. I have a not-so-funny feeling that BT is going to drop their prices quite substantially which is going to affect the economics of LLU build out. I also think BT Wholesale are really smart and will drop the prices in such a way that the smaller ISPs continue to pay high reseller charges whereas potentially big customers such as Vodafone can get big volume discounts which is currently not possible
Effectively today, there are two options in the broadband market:
i) Almost Full Service from BT – allow ISPs to use the BT copper pairs, local exchange equipment and backhaul – the ISP connects to a single point. This is the current IPStream product; andThere is a hybrid third option which is not currently sold:
ii) Raw Pipe from BT – allow ISPs to use the BT copper pairs, local exchange space and ISPs provide their own exchange equipment and backhaul. The ISP connects to how many of BT’s 5,591 local exchanges they desire. For instance TalkTalk is planning on connecting to 1,000 of biggest exchanges.
iii) Partial Backhaul from BT – allow ISPs to use the BT copper pairs, local exchange equipment and provide partial backhaul to a Metro Aggregation point or Metro-POP. A larger ISP with its own backbone network could then connect to these Metro-POPs using its own backbone.A variant of this third option has been used since the beginning of time for voice and data circuit provision – it is distance based charging. And more importantly BT already plan to deploy around 130 of these MetroPOP nodes as part of the 21CN design.
Vodafone would love this option, because they probably already have connectivity to these Metro Nodes as part of their existing voice delivery. Other alt-nets, such as Thus, Colt, Global Crossing and Verizon would also love this option as it would leverage their existing networks to deliver both wholesale and lower cost IP-VPNs to multi-branch corporates. Realistically, the BT 21CN MetroPOPs are going to be named as the nodes with currently the heaviest traffic and these nodes already will have a lot of third party fibre connectivity. The smaller ISPs could be tricked into liking it as well, because the altnet will probably be able to offer cheaper wholesale services than BT and therefore they will see a short term reduction in costs without the risk of LLU wholesaling. This gives the smaller ISPs the potential of a little breathing space whilst cunningly moving the credit risk from BT to the altnet sector.
The only people who will hate this option are the people deeply committed to LLU unbundling. This has the potential to make the LLUers network design obsolete before build-out. Effectively, the devil will be in the detail of the BT Wholesale pricing scheme, but I think that once 1.5m LLU lines are unbundled no-one can stop BT Wholesale setting whatever pricing scheme it dreams up - this was all part of the settlement of creating OpenReach.
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