Timing crucial in catching the broadband wave

As with narrowband, many commentators and decision makers are now voicing doubts about the prospects for broadband. Concerns centre on the perceived glut of backbone capacity and the heavy borrowing needed to put down the necessary infrastructure. There are also fears about the rapid commoditisation of connectivity, with many believing that it may hit broadband providers before their business plans have managed to go into so-called ‘harvest mode'.

The broadband competitive landscape and accompanying value chain, however, are much more complex than that. One company's capacity glut is another company's improved profit margin due to lower connectivity charges. Backbone capacity is only one variable in the equation.

That there is a glut of capacity is undeniable. There was always going to be one because laying cables takes much longer than traffic growth. What was unexpected, however, was the failure to materialise of the traffic explosion that everyone was predicting. The proliferation of ‘back of the envelope' type research behind such predictions was undoubtedly one factor behind this disappointing outcome. Another was the dotcom collapse, which nipped the nascent interactive content development sector in the bud, before it even had time to grow out of its narrowband formative years. The biggest impediment, however, has been the so-called ‘last mile' into users' premises, be they businesses or residential customers.

Incumbent former state monopolies have fought tooth and nail to maintain their role as gatekeepers of this relationship. Ridding on the back of complicit or ineffectual government regulators, they have managed to do so pretty well. This has all been at a price to both users and capacity suppliers and by proxy, the equipment providers as well, and has definitely helped stunt traffic growth.

Results from Atlantic Telecom this week illustrate clearly how much value there is in having a direct relationship with the end user. In Germany the company was able to extract a 260% premium from lines sold directly to end-users compared to their wholesale prices charged to resellers.

The ‘last mile' will be a key battleground and those with a presence in that space will become of vital to those looking to own a part of the broadband value chain. In this context, the reverse takeover of Easynet by Marconi-controlled Ipsaris is an important development.

In the media the deal was portrayed as Marconi ‘unloading' Ipsaris, or Marconi resolving the conflict of interest, which saw the company - in effect - competing with its clients. All that might be so, but the resulting combined entity could form a good nucleus around which an important European broadband player is formed.

Easynet, its should not be forgotten, still has an important presence in the narrowband market and as a combined entity with Ipsaris becomes an important player in its own right, with an offering combining last mile and trunk connectivity and a good geographical presence with operations in the UK, Benelux, French and German markets. Although Marconi will be selling some of its controlling stake, it will remain a key shareholder.

Marconi has also lent significant amounts in the form of equipment credits to Atlantic Telecom, which, despite a good start with ADSL in Germany and a strong presence in Scotland, may not bringing in revenues in time to avoid giving the likes of Marconi some financial leverage. If sentiment on the capital markets towards broadband improves by then, further finance should not be an issue, but assuming it has not, a combination of the new Easynet entity with Atlantic Telecom could be pretty attractive. In addition to a strengthened ‘last mile' presence in Germany and Holland, it would also bring fixed wireless broadband access know-how, always useful when facing recalcitrant incumbents. Atlantic Telecom has also made some good moves in the hosting business. It has invested in Host Europe, formerly Magic Moments, and has a useful agreement with Energis in Germany, which will see Energis, which has bought into the hosting market there through Ision, use Atlantic Telecom's connectivity rather than build its own network.

What makes this scenario more attractive is that most of the capital expenditure has already taken place and most deals could be done using paper, making it pretty a cash efficient way - in terms of the sector - of building a formidable pan-European presence throughout the broadband value chain.

Of course, this is all highly speculative and may be a case of adding two and two and getting 22. The recent troubles of Redstone in the UK and E-Planet in Italy have shown that timing in this market is crucial in order to catch and surf the wave of rising demand without having to carry the entire up-front cost burden. Whoever gets it right, however, will enjoy a great ride.