The merger mania on the European cable scene is creating powerful companies with the scale to challenge traditional telecom operators. James Hayes reports
Cable companies are highly attractive acquisition targets, as illustrated by recent deals such as Liberty Global’s acquisition of Dutch cable provider Ziggo, Vodafone’s acquisition of Ono in Spain and Kabel Deutschland in Germany – not to mention the Comcast/Time Warner deal in the United States. This ‘blitz’ of mergers and acquisitions (M&As) in the telecoms and cable sectors since 2013 has led to speculation that the European Commission is less concerned than it used to be with maintaining the competitive but fragmented structures once deemed necessary to stabilise market pricing.
The full repercussions of the M&A splurge are still to play out as the market landscape reshapes, and there may be more to come. As yet most brand identities involved in takeovers have been upheld, so the consolidation is less overt. Reassuring news for vendors of network technology – and the communications systems professionals who build and manage them – is that the M&A activity is, in the main, driven by a desire to acquire network infrastructure assets that can be combined or expanded, rather than scaled back to add value to a purchaser’s capitalisation profile.
The European Commission’s plans for a Digital Single Market could have something to do with Brussels’ receptivity toward deal-making: big, unifying ideas usually need big market powers to bring them into being, and a competitively fragmented market lends itself less elegantly to visions of unification. This predicament resonates particularly in respect to broadband provision from the telecoms and cable sectors. The Digital Single Market strategy would require major cable network operators to extend broadband connectivity geographically, and enhance their service offerings in terms of speed and variety.
The more ‘relaxed’ attitude of the European Union toward market consolidation between major players has been attributed partly to the European Commissioner for Digital Economy and Society, Günther Oettinger. Chief executive of Liberty Global’s Unitymedia cable business, Lutz Schüler, is on record as having pronounced that ‘the Commission’s view of consolidation in the telecom sector in Europe has changed’, and suggested that Oettinger ‘has recognised that size for European network operators is important – because size, ultimately, means increased investment’. However, size is also how communications providers come to fall under the piercing scrutiny of the regulator.
Telecoms companies may have borne the brunt of regulatory curbs and requirements over the last decade, while cable network companies have been less in the searchlight. For instance, while incumbent telecoms companies like BT have had repeated calls to open their infrastructure to rivals, cable infrastructure owners have not been subject to similar demands.
There may be historical reasons why cable operators have been less the focus of regulatory activity than the incumbent telecoms players. As they started to offer broadband internet connection in addition to broadcast TV, geographically constrained cable networks were seen as playing second fiddle to incumbents with national telephony infrastructures and growing interests in mobile network coverage. But the market has moved on, and any contentions that ‘cablecos’ are entitled to operate under different rules from ‘telcos’ have become increasingly open to challenge.
In response to the threat of DSL-based broadband, cable operators clubbed together with the purpose of enhancing their technology so it could support two-way services. The Data Over Cable Service Interface Specification (DOCSIS) standard that resulted from this effort allows cable operators to pipe telephone, TV and internet signals down the same coaxial wires in an efficient manner, elevating them to a position where they can offer an equivalent basket of services as a traditional telco.
Second, cable operators are also building out their networks with optical fibre. Market data provider IHS predicts that global hybrid fibre-coaxial optical node shipments will more than double in the run-up to 2019. Cable operators upgrading their networks with optical fibre cable are driving the growth, IHS says. This means that the enabling infrastructure they use to deliver their services is not radically different from that used by telecoms operators.
Meanwhile cable network operators – whose infrastructures (in the UK and elsewhere) were rolled out mostly using commercial investment, and who still rely on private funding for future expansio – have enjoyed relative immunity from requirements for them to open up their assets to third-party service providers in the interests of competition and the public good. But will that immunity hold in the post-liberalised telecom world, where state-sponsored initiatives now strive to make broadband ubiquitous?
‘Traditionally, cable coverage expanded only to urban and – marginally – to suburban areas, while copper networks [were left to target] rural and remote areas,’ said Dr. Nikolaos Korfiatis, senior lecturer in business analytics, Centre for Competition Policy, University of East Anglia. ‘Both [territories] carry the same rules in terms of market provision... Cable network providers and telecoms fall under the same regulatory oversight – the mode of delivery should not have difference in the regulatory oversight. Should the highway code be different depending on the car you drive?’
Advocacy in favour of the opening of cable networks for broadband provisioning may, naturally enough, be informed by more commercial agendas, when broadband retailers stake claims for a slice of the cable broadband pie; but the cable incumbents would have it that the rules of the telecoms unbundling cannot be applied to their operating model on a like-for-like basis.
Cable is different... isn’t it?
In understanding the factors informing telecom and cable operators’ general stance toward regulation, it is always instructive to remember that neither delivery model was originally designed for high-speed internet access; as Julie Kunstler, principal analyst, component & intelligent networks practice at Ovum, explained: ‘Historically, the role of cable operators was TV. Cable operator franchises were heavily regulated by governmental agencies to ensure that cable TV reached both urban and rural populations. It was only later – much later – that cable began to offer data and voice services.’
This fundamental differentiating factor makes less of a difference today. ‘While there is a considerable argument [on whether coaxial-based] cable should be seen as an alternative to copper, there is no substantial argumentation that those two delivery channels are competing for the same share of the pie,’ added Dr Nikolaos Korfiatis at the Centre for Competition Policy.
The last decade’s advances using ever-higher frequency transmission have enabled both copper and cable to achieve much greater speeds, Korfiatis added; however, as speed-led sales-and-marketing has clouded the issue over the last few years, the question of whether all-copper and copper/fibre networks can be pushed ever further in terms of capacity has been the subject of much debate.
Suggestions that the technological limits of copper networks might result in opportunities for cable to exploit are speculative, commented Benoît Felten, CEO and chief research officer of Diffraction Analysis. ‘To be honest, I’m not sure it will make a difference...’ he said. In his view, the cable sector has not positioned itself as a direct competitor to copper alternatives, because it prefers to avoid like-for-like comparisons.
‘Cable sees itself as a potential monopoly, and like all potential monopolies [it] thinks opening-up is bad [for it] – even if [that position is] proven otherwise by economics,’ Felten explained. ‘So I don’t expect cable to embrace openness – and [neither do I] expect cable regulation to change significantly.’
‘Regulation is still national, which means that significant market positions are not examined locally,’ said Benoît Felten at Diffraction Analysis. ‘As long as that remains the case, the regulatory tools are not well aligned to force the opening of cable, except in countries where cable is near ubiquitous – such as the Netherlands and Belgium... In these countries some attempts have been made.’
In 2013, Belgian regulators finalised their decision to impose on the cable operators Brutélé-Tecteo (under the Voo brand), Coditel (now Numericable) and Telenet a requirement to open up their networks to third-party operators wishing to provide customers with television services – rather than broadband alone – on the grounds that multi-play bundles are of increasing importance to consumers. Liberty Global-owned Telenet appealed the decision in Brussels, unsuccessfully; a result that could set a precedent for the rest of Europe.
Controversy over open cable is also breaking out in the Netherlands. Although there are a number of smaller cable broadband providers, the sector is dominated by Liberty Global-owned Ziggo Group, incorporating UPC and Ziggo, which together control some 90 per cent of the cable broadband market, and with it the cable TV market. Altogether cable networks are available across 97 per cent of the population in the Netherlands.
The mooted merger between the Dutch operations of Vodafone and Ziggo Group may revive the interest of both government and the regulator in the question of extending the obligation to open networks beyond those of KPN. While a successful merger of the cable companies’ activities in the Netherlands would represent weightier competition against the former incumbent, the government is concerned that it would also introduce a potential oligopoly. In September 2014 Dutch finance minister Henk Kamp stated that the Dutch government viewed open network access as essential, because having only two national operators is not sufficiently competitive.
However, ‘Cable is fighting tooth and nail against opening up,’ reported independent industry analyst Herman Wagter. ‘Only the incumbent [KPN] is forced to open up its network, on the physical level [both on fibre-to-the-home and copper], by the regulator (ACM). The cable networks are all free from this obligation – but not because of lack of trying by the regulator...’
In assessing like-for-like rules, the assumption that ‘opening up’ cable networks can be enacted in much the same way that local loop unbundling has been achieved in the telecoms world needs to be examined. Cable networks are not designed and configured like telecoms copper networks.
As things stand, ‘it would not be easy to require cable operators to “unbundle” – open up – their networks to third parties,’ said Ovum’s Julie Kunstler. ‘It could be done, and the level of work required would depend on the level of unbundling, same as you can see in new fibre networks.’
Some fundamental issues would have to be determined and agreed, Kunstler suggested: ‘For example, would the existing cable operator just open-up at the higher service levels, or do you want to open-up at lower levels in the network?'
Diffraction Analysis’s Benoît Felten agreed that, while sharing of more detailed technical advice on the intricacies of cable network unbundling may be necessary, this issue should not prove to be a major stumbling block to more open cable networks: ‘The “technology” argument against opening-up cable is bogus, at least for active wholesale. Unbundling might be more tricky and, as far as I know, has never been tried.’
He added: ‘The main difference between the telecoms world and the cable world is that in the cable world you have to share/resell frequencies. It’s complex, but not unfeasible. A bitstream wholesale offer would be technically feasible. A physical unbundling offer probably wouldn’t make economic sense.’
‘The problem with cable networks is that – unlike their phone line counterparts configuration to facilitate access by more than one operator is costly and requires investment in terms of equipment,’ said the Centre for Competition Policy’s Dr Nikolaos Korfiatis. ‘The question here is who will be able to take over such cost, since the cost of installing cable networks was already taken over by the cable providers.’
- James Hayes is a freelance technology journalist based in Stevenage, UK
Market view: UK
When five years ago Ofcom ruled that BT should, in the interests of openness, make its duct infrastructure and telegraph poles available to other network operators, BT retorted that if this same spirit was to be applied fairly, Virgin Media’s infrastructure should be subject to the same requirement. At the time, Ofcom disagreed, and said the policy variance was due to the fact that Virgin Media did not have ‘significant market power’.
Up until last year’s announcement of its £3 billion Project Lightning programme of network investment, Virgin Media had shied away from expanding its network. The Project Lightning announcement won Virgin Media a prime ministerial pat-on-the-back. But the harmony between government and Virgin Media was relatively short lived and, before the end of 2015, Virgin consolidated its UK market stance with two rather uncharacteristic moves.
First, Virgin Media publicly cautioned regulators and the government over compelling its rival BT to divest Openreach, with the assertion that such a move would deter investment in broadband improvements. ‘It does not send a good message to any investor if the state is to consider taking the network property of a business,’ Virgin Media chief executive Tom Mockridge said in a speech at Broadband World Forum last October.
Mockridge took the opportunity to comment on two other competition issues. He called upon the government to cease subsidies for rural superfast broadband roll-out, claiming this makes it more difficult for rival infrastructure owners to invest: ‘This is an area where letting the markets compete would be positive for the whole economy, having competing networks without the need for the government to subsidise one.’
Virgin Media’s next move, last September, involved it with a small cadre of network infrastructure builders who felt a united front was timely; along with CityFibre, euNetworks, and Zayo, it announced the creation of the Infrastructure Investors Group (IIG), an industry group that is pro-competition and pro-investment, with the slogan ‘Infrastructure competition is alive and well in the UK’. At its launch the IIG pledged to ‘work to ensure that the benefits of a pro-investment environment are fully recognised by policy makers and industry stakeholders.