During one of the conference breaks in Lisbon, I had the chance to catch up with Kai Seim who runs Kai Seim & Partners, an active consulting firm in Germany. Kai Seim & Partners issued the “Fibre in Germany” last year that covers broadband infrastructures development in Germany. A nice read if you haven’t bought it yet. Kai is very knowledgeable of the business in Germany, and he gave me some excellent insight on what’s going down in Deutchland. Here’s what he had to say.
Kai, tell me a few things about Kai Seim & Partners.
We, as a company do consulting in the Telco industry. Our customers are municipalities and utilities that consider expanding their broadband infrastructures or even starting a broadband network build-out. Other customers include network operators or equipment suppliers; vendors that need a better market intelligence. We help them to better understand the market and better streamline their products; especially in cases where products does not fit exactly in the market.
When you say products you mean retail CPE?
I’m talking about PON IADs. The question is what you have to change in the old fashioned IADs that work with DSL networks to make it work in a fiber network. There are also ducts and tubes. How do they compare with each other, what is the best choice for a given network, etc.
You see, the Telco industry is familiar with working with the big customers, the incumbent and the two others. Tyco, Corning and others oversaw at the beginning NetCologne. NetCologne did complete a big network rollout. In terms of figures, NetCologne became a huge network which was neglected by the big vendors. So they are currently looking for things to change in their attitude to win the market. And that’s where we can help them.
So, having worked with the German municipalities, what would you say is the need to start a fiber rollout? What you see are the key drivers for municipal broadband networks?
The biggest driver is the competition among the cities. It’s the fear that the incumbent’s VDSL does not address the local communities’ needs. DT only focuses on 50 cities, but there are several cities with reasonable size, with tens or hundreds thousands of inhabitants where you can only get adsl2+ or similar services. Probably within most of those cities there is one coax network but is not covering the whole city, only islands within. Lots of these cities fear they fall behind in the competition with other cities. They fear that their businesses will move to the largest cities like Hamburg and Cologne and will lose tax revenues. Employment and quality of life is another issue as well.
So cities think that if they can get fiber, with potentially bigger speeds than large cities they may attract businesses or at least keep what they already have. In Germany right now it is difficult to market new business parks or housing if there is no fiber/broadband available. I am aware of several housing areas that they can’t sell due to lack of infrastructure.
Also, the utilities are under strong pressure from the regulatory authority and thus they tend to leverage assets to protect their business and to have a nice story for their owners. So they work to not only deliver power or gas but also fiber broadband.
In what sense they are pressured?
In the past there was little regulation in these markets, but the last 5 years prices are slowly being regulated and so the margins are reduced as well. So they look for new revenue streams.
How do you see public sector’s involvement in broadband development developing in the coming years, especially in light of the financial turmoil and the economic difficulties most EU members anticipating in the future?
I’m guessing, as all of us, it is going to be similar to the yoyo game. We will invest, and then we’ll stop and then we will invest again, etc. this will last at least until the economic crisis is behind us.
In Germany there is a big stimulus package. I’m not sure if they are going to have a second or a third package. What I see is that a lot of municipalities and local utilities make reasonable investment plans in regards of fiber because they see themselves as the only prospect to investment.
So how much municipal investment decisions are affected by the economic crisis?
Municipalities are heavily affected. Some of them almost lost all their incomes from businesses tax. And this sometimes affected their households tremendously. So, they really experience huge deficits, when the economy comes back, next year the tax income will increase again. Starting from next year they plan to repay the deficits.
Regarding the central government and regulation; do you see a tendency to leave things to the open market? And in that sence possibly accepting the fact that xDSL is going to be ok for the country for the time being?
You have to distinguish, at least in Germany, about which level of policy taking you are talking. If we talk at the local level, there is clear decision that DSL is not enough and we have to go for fiber. On the federal level, the state level, there is a clear unwillingness to invest, and there has always been a clear policy to rely on so called volunteer agreements between the market actors. Yet, there has been recently a paper issued by Kartellamt (note: the German anti-trust regulation body – http://www.bundeskartellamt.de/), which effectively says that if you do it with DT we will act against you, if you do it without DT we will accept. So all collaborative solutions without DT are nice, and those with DT are ugly.
That includes all investments in NGAN, they don’t call it fiber.
That’s very interesting. Has it changed the dynamics?
Yes it is but there is still no real case for that. We need the proof of concept. There is a long tradition of agreements based on mutual interests. And I would guess that open access will be tried out in the market to come up with a proposal on what it should be like, and how it could be applied, to avoid regulatory measures/effects. The regulatory authority will wait until all these proposals are on the table before making any decisions.
Do municipalities consider private investment in their plans for fiber deployment?
No, they don’t look for investors. They leverage the good ratings and get cheap money. Now I am aware of interest rates of less than 4%.
So they borrow money and do it themselves?
Yes.
Therefore, there is no such thing as PPP in Germany?
The PPP is very complicated; you see there is always the European Commission, which anyone likes to avoid. What I see probably is European wide RFI to concession etc to operate the network. I see however a lot of collaborative solutions to come up based on interworking of local utilities which will them try to find an operator for the network as a whole.
How would you describe a typical model in German municipalities?
Network is owned by the municipal utility probably in combination with ownership by the municipality itself. There are also some privately organized, but publicly steered, with a public majority involved in the operating company.
What is a public utility in Germany?
It is power, water, sewage; depends on the local conditions.
And these entities would lend the infrastructure to the operating entity?
It could be; yes.
What do you think is the factor that mostly affects CAPEX?
What I believe today I can tell you, but ask me again in one year (laughing).
The one thing which I really think is complicated is the contract you have to make with the landlords to enter a house, which almost opens room for whatever bargaining discussions. The next thing affecting capex is how you do the civil works. Whether you go fiber-reach, how deep you go in the OSP etc.
…and what about the OPEX?
Topologies like for instance, netcologne which I would name double star architecture with active gear in the OSP aren’t cheap. I think that’s very expensive, if you start from power consumption and truck loads.
The other approach we see in Germany is that of M-Net’s (note: M-Net operates in Munich), a home run (point to point) at the physical layer operated with GPON. But this is too young to tell you an idea in regards about OPEX. As a network planner I could tell you that this could be very cheap in operating it. They do central splitting at the CO. I think that’s a good approach.
Kai, thank you for this interview.
Thank you too, Costas.
