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Friday, March 02, 2007

Virgin Media Broadband

There was a couple of comments on the Virgin Media results conference call that raised my eyebrows and put my overhype antennae in full detection mode: first that Virgin Media had 650MHz of spare capacity and the second that they were rolling out 20meg broadband nationwide, soon to be followed by 50meg which is currently on trial. Let’s put this nonsense in full context…

First, despite the shiny new brand Virgin Media is still a veritable hot-potch of cable systems glued together over the years with wave after wave of acquisitions. Today, Virgin still has portions of its network in which broadband is still NOT available. In fact despite being predominately located in suburban areas, broadband is only available to 94.5% of homes passed whereas DSL technology is available to 99% of ALL UK homes including some very rural areas. Virgin Media doesn’t publish the plans for complete digitization of their network, if fact I don’t believe there is a plan because it would cost too much capex. So to say that 10meg is available to all is slightly disingenuous - saying the vast majority ie 11.8m out of 12.5m homes passed - I could quite accept if there wasn’t another limiting factor.

Cable broadband has its own set of acronym spaghetti, such as Docsis 1.0, 1,1, 2.0, 3.0 and Eurodocsis. As I understand it, the Virgin Media is not completely using the same standard throughout the whole UK network. Again this could be fixed, but again it costs capex and again I’m not sure if a Virgin Media plan exists. As per normal in the comms game, the higher the version number, the higher the SHARED bandwidth and although Docsis shares the bandwidth ultra-efficiently and transparently to the user this is the next limiting factor.

Cable systems are architected in a typical branch manner: Super Head Ends feed Regional Head Ends which in turn feed Hubs which in turn feed Nodes which in turn feed Distribution Points which in turn feed Homes. In the Virgin Media network, the CMTS (Cable Modem Termination System, the cable equivalent of DSLAMs, also known as uBRs – universal Broadband Routers) are placed at Hubs.

If we take DOCSIS 2.0 as an example which uses a 36-meg shared pipe of a 6MHz channel, the calculation of peak hour bandwidth required is:
• Homes passed * Broadband Penetration * Peak Hours Percentage * Average Download = Bandwidth Required
Or as a worked example:
• 50,000 Home Passed * 0.4 Penetration * 1 in 15 using * 20kb/sec = 27-meg which fits quite nicely in a 36-meg pipe.
It is pretty obvious to see why any network operator hates p2p traffic which consistently uses bandwidth throughout the day even when a human is not present at the computer and also finds video streaming at high bandwidth expensive to deliver.

It is also pretty obvious that to allow Virgin Media to sell 10-meg and 20-meg pipes, the economics only work because people do not consistently use the 10-meg or 20-meg capacity. To be fair, this is not specific to cable, but the way all networks including voice and wireless are designed.

However, it is also pretty clear that Virgin Media can oversell connections in a particular hub and reading the various forums it is also pretty obvious that some hubs in the Virgin Media are overloaded and people are noticing that available bandwidth is severely limited in peak hours. One solution of course is to implement traffic shaping and pick on the biggest hog, p2p. This is currently being tested in the Preston area and I’d be extremely surprised if it is not rolled out across the UK network – all DSL networks do it, so why not? – especially if it saves some capex.

The other solution is to add more downstream channels and I know quite a few UK hubs already have multiple 36-meg pipes with individual users allocated to each pipe. Again implementing this is pretty simple if the capex is available and has the added bonus of the possibility for creating good-boy and bad-boy pipes.

It doesn’t take Albert Einstein to figure out that to further increase bandwidth, one route is to bond pipes together to create one pipe to rule them all. This is in fact exactly what DOCSIS 3.0 does and how Virgin Media plan have the capability to deliver 50-meg to the home. However, a slight problem is that the standard hasn’t been agreed yet and therefore we are talking in reality current activity is a combination of lab work and field trials. Despite, the hype Virgin Media is only playing with 50-meg with ARRIS as a supplier of pre-Docsis 3.0 equipment in Kent: there is basically zero probability of DOCSIS 3.0 being rolled out across the UK in the short term.

In thinking about all this I decided it was best to speak to the uber-guru of the broadband world Dave Burnstein of the ultra-vital-read DSLprime newsletter fame. In his typical low-key and modest fashion he claimed he was too busy trying to keep up with the DSL and FTTH scene to get into DOCSIS, but then added he knew that 160-meg down, 400-meg down and even 1-gig down were working fine in the labs. Think about that for a moment: sharing 1-gig downstream - that would easily support 100-meg to the home in a reasonably loaded Hub branch - that would easily download a 1GB mpeg4 encoded 90 minute movie in 80 seconds. Then think about how long it takes to visit the local video store and how frustrated you are when they don't carry some obscure movie that tickles your fancy.

Of course, 1-gig would involve bonding around 28 channels (6MHz) at 36-meg each which is around 168MHz of capacity. This brings us back to the Steve Burch comment that he had 650MHz of frequency available - well, I just don’t believe that he has around 650MHz of capacity available. Perhaps if every network was digital only with limited TV channels, but frequency usage of cable networks is a story for another day.

This brings us to back to the overhype antennae – yes theoretically Virgin Media could have 650MHz spare across the network and yes theoretically they could deliver 50-meg to every home on the network. However, it would cost a huge amount of capital and this is one thing that Virgin Media doesn’t have. If we super-optimistically add £100/home to roll out Docsis 3.0 (remember a new modem is needed in every home) that’s £1.3bn to roll-out 50-meg across the Virgin Media network. And that is before capex to complete digitisation of the network, additional capacity in current overloaded areas and limited expansion of the network for new homes in current coverage.

One thing that was also stated and stressed in the conference call was that capex was expected to remain constant compared to 2006 (approx. £575m) for the foreseeable future. Given that capex covers software, such as the back office integration projects and maintenance capex such as normal wear and tear and upgrade of kit – I really doubt that Virgin Media have much more than £300m available for new projects, such as network expansion and new services.

The next problem that Virgin Media have is the war with BSkyB – the longer and bloodier it becomes the less cash flow the operations will generate and given the Chairman has committed to increasing Free Cash Flow by 50% year-on-year for the next couple of years – the balancing item is of course Capex, which by my reckoning is reducing with every punch that Murdoch connects with. Of course, Virgin Media could go to Wall St and announce a complete change of direction and then again pigs might fly.

All of this makes the delivery of 50-meg to the cable home less and less likely.

Cable Users should not be completely in tears: there is a reason why Virgin Media won the best UK Consumer Broadband provider and that is because cable in the UK really is currently much better than the current DSL offerings for the average Joe Public. DSL is suffering because of the hype created by 8-meg claims and 24-meg claims by DSL providers when they are perfectly aware that they deliver on average nowhere near this bandwidth to the Great British Public. Survey after survey shows that people are completely sick and tired of the hype and lack of delivery in bandwidth, availability and support in the DSL world.

I cannot for the life of me figure out why Virgin Media are trying to join the overhype game.