Daiwa Eurotelcoblog No. 15 Monday 24th November - Trouble in the broadband pipe, part 1 (original email blast 3:57 PM Monday, 24th November, 2003)

Ethernet over coaxial cable in the Netherlands
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Readers of our research will recall that back in September we drew attention to the announcement of an agreement between Essent Kabelcom and Teleste (TEL1V FH, EUR5.89) to trial new equipment which claimed to provide Ethernet over standard coaxial cable with no additional CPE. More recently, we had seen reports in various newsletters suggesting that Essent had purchased Nuera VoIP gateways. All of this whet our appetite to learn more, and last Thursday we were treated to a conference call with Mr. Jelle Cnossen, Head of Network R&D at Essent Kabelcom, regarding some fascinating innovations in the pipeline for 2004. What we learned filled us with something approaching "shock and awe".

Just as a bit of background, Essent Kabelcom is the second-largest Dutch cable operator, based mainly in the eastern portion of the Netherlands, and serves 1.8m households, 250,000 of which are broadband subs. Broadband net additions year-to-date are c.100,000, and the company had a record week with 7,000 net adds two weeks ago. The background to Essent's new initiative in Ethernet is this: Essent was looking for a way to eliminate the costly and complex problem of node-splitting necessary with EuroDocsis cable modem deployments (the practice of progressively subdividing the number of homes served within one node, in order to offset the effects of bandwidth contention brought about by increasing penetration of broadband services).

The solution developed by Teleste, in response to an idea from Essent, was a very small Ethernet switch which resides in the end amplifier (familiar to pedestrians in many countries as the mysterious green metal cabinet found at intervals along sidewalks and on street corners - in the case of Essent, this box is normally only 50cm high x 30cm wide). In the case of Essent's network topology, these end amplifiers are normally found within 100m of the households they serve. Connected through multitaps into the individual coaxial feeds, the ethernet switches are capable of delivering 10Mbps symmetrical Ethernet to the home. This compares to the 1 to 2 Mbps on offer in Essent's existing premium cable modem packages, and is comparable to the speeds delivered in metro fiber solutions like B2 Bredbandsbolaget and Fastweb, but notably without the installation of fiber. The other advantage is that the customer premises only require a standard passive RJ45 connection in the wall.

The thing which we found most interesting is that costs of this Ethernet-over-coax solution, including the other alterations necessary higher up the network cascade, do not differ from the deployment of EuroDocsis cable modem services, at EUR100 - 150 per sub. The service also should deliver long-term cost savings over cable modem, as contention is no longer an issue (within the node, at least), and the reduction in noise means that cablecos can use much higher modulation schemes to increase bandwidth. Unsurprisingly, Essent is seeing a lot of interest from other European cable operators.

Essent is planning a trial of 3,000 homes in the Southern Netherlands in Q2 next year, for around three months. We therefore expect a commercial launch in H2 2004, perhaps more towards the end of the year. Network-wide roll-out should not be expected to be as fast as EuroDocsis, which was completed in three months, but should be completed within a year of start. Essent also claims to be seeing intense interest in the technology from other cable operators, and it is our understanding that Teleste is working on variations of the technology to suit different network topologies (Essent insisted on a maximum of 100m distance from switch to customer premises based on its existing topology and also its desire to keep other associated equipment passive - other cablecos will require different solutions).

Implications
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At the very least we think KPN has a significant problem on its hands starting next year. In addition to the trials and deployment of Ethernet, Essent has completed its VoIP trial and is proceeding to commercial launch next year (along with Casema and UPC we believe), initially targeting its installed base of cable modem subs, which we think may number 335,000 by that time. Assuming that the Ethernet solution proves a successful innovation, we could be looking at a step-change in the competitive positions of PTTs and cablecos more generally. For the same unit cost as a EuroDocsis deployment, Essent (or others) may be able to deliver a broadband service 10 to 20x faster than typical consumer DSL services in Europe, with greater bandwidth efficiency and scalability. This, in our view, could allow cablecos to deliver a fiber-grade service without the investment in fiber, potentially at a price very competitive with far slower DSL offerings. Additionally, the frequency of the networks is immaterial in this environment, so it would work on older, lower capacity systems, as long as they have a back channel (return path - in other words two-way data flow). It was Mr. Cnossen's view that the solution would be particularly suited to high-rise MDUs, suggesting that markets such as Germany, long "immune" to competition from cable, may be eager adaptors of this innovation. In short, networks which have so far struggled with the costs of capacity upgrades and EuroDocsis deployments may in time be able to close the gap in the broadband race, or indeed, to lure DSL subs away with a far superior triple play product.