When it comes to broadband development, Europe is still something of a laggard compared to other regions. But the pace of change is accelerating, says Ernst & Young's Adrian Baschnonga
The broadband market in Europe remains a fast-evolving area of the industry. More than five in 10 households in the EU27 now have access to high-speed Internet and governments are eager to boost take-up further, recognising that an increase in penetration translates into per-capita GDP growth.
However, compared to other regions, Europe is something of a laggard, trailing markets such as Japan and South Korea as well as other advanced economies in North America when it comes to penetration rates.
This situation is even more pronounced in the emerging market for super-fast broadband through fibre connections. In its latest Digital Competitiveness report, the European Commission highlights that fibre in its various guises accounts for between 2% and 5% of all EU broadband lines, compared to 51% in Japan and 46% in South Korea. To improve this, the Commission is pushing for at least 50% of European households to be subscribing to 100 Mbps services by 2020.
Even these ambitious targets do not tell the whole story, with many governments eager to ensure that the advent of faster speeds does not widen so-called digital divides between those with access to broadband and those without. However, funding mechanisms for new infrastructure remain hotly debated. In the UK, prospective solutions have ranged from adding an end-user broadband tax to setting aside part of the TV licence fee. This is in contrast to markets like Australia and Singapore, where the government is taking a direct role in funding the creation of a super-fast broadband network.
At the same time, market landscapes are shifting. It is no coincidence that European countries boasting the highest fibre penetration rates - Sweden, for example, where fibre accounts for more than one in five broadband connections - have seen widespread deployment of fibre by municipalities. In Denmark, meanwhile, regional power utilities have been at the forefront of fibre rollout.
Even the very definition of broadband is changing in the wake of strong take-up of mobile broadband, which now accounts for around one in five of all broadband connections in Europe. Late last year, the Austrian regulator deemed mobile broadband connections a potential substitute for fixed broadband connections. Following this, the country's broadband access market was partially deregulated in a move that initially unsettled the European Commission.
In other countries, this issue of substitution may apply less, since mobile broadband is largely taken as a complement to, rather than replacement for, fixed broadband. Indeed, mobile broadband speeds still lag their fixed-line counterpart. A study last year by UK firm Epitiro found that real-life UK speeds reach, on average, just 24% of the headline data rates advertised by operators.
Meanwhile, questions of competitor access to broadband infrastructure remain contentious. The situation varies from market to market: in the Netherlands, cable players are required to make their networks available to third-party resellers, while in most other countries the onus remains solely on the incumbent. Little is set in stone, however: recent developments in Italy have seen leading alternative network operators collaborate on a fibre rollout plan of their own.
While arguments for efficient investment and greater competition continue, it is easy to overlook the services enabled by broadband. Offers featuring VoIP, IPTV, online gaming, music and security services are becoming more popular. For operators, this represents a route to offsetting slowing growth rates in broadband connections by boosting customer stickiness and growing incremental revenues.
For consumers this translates into an ever-expanding range of bundles, many of which offer significant discounts. In this light, operators will have their work cut out monetising new bundle elements. New research from comparison Web site Simplify digital shows that UK households can save up to £550 a year if they take a triple-play package of broadband, landline and TV services.
Yet operators have made promising progress with key parts of the bundle. Following soft launches a few years ago, operator IPTV services are a credible option in the pay-TV market. The latest data from Point Topic shows that Western Europe accounted for 44% of IPTV subscribers worldwide at the end of March.
IPTV services are now becoming more sophisticated, with integrated functionality that allows end users to program the set-top box via the Web and mobile handset, for example. Partnerships also continue to play an important role in service creation and management alongside technical capability.
ISPs have also been making headway in music streaming and download services. Denmark's TDC has established an all-you-can-eat music download service that saw a streaming service option added at the end of last year. Meanwhile, Norwegian incumbent Telenor has partnered with mobile content provider Aspiro to offer a music streaming service with access to more than 6.5 million songs.
Compared to TV and music bundle elements, solutions around home networking are only just taking shape. Standardisation will be a vital enabler, as highlighted by the G.hn standard for next-generation wired home networks that was recently approved by the International Telecommunication Union. Semiconductor manufacturers are expected to incorporate this, paving the way for consumers to share various types of content over any type of existing home connections whether coaxial cable, phone line or powerline. Nevertheless, challenges remain, such as a lack of interoperability between different standards.
Operators are also catering for scenarios where new wiring is possible. To this end, solutions that use Plastic Optical Fibre (POF) are already being trialled in France, Portugal and Switzerland as operators look to reduce installation times for home networking services.
Getting the right infrastructure in place for home networking is one challenge, but operators are also focused on the role they can play in smart services inside the home. A variety of smart metering initiatives are already underway and, going forward, smart solutions can embrace everything from offering a near-real-time view of energy consumption to controlling home security and household appliances via multiple devices.
At present, perceptions around the business model remain flexible. Operators see themselves working with utilities to help make the most of smart energy opportunities. However, some players see home energy management services playing a growing role in bundle packages of the future.
At the same time, technology players also have a keen eye for opportunities in this area. Intel, for example, has showcased home energy management services, featuring a home information display that allows families to set climate controls and security systems to pre-arranged settings.
While the value chain for new applications is still forming, many operator strategies will still pivot on the reliability and reach of their existing infrastructure. In April, Orange UK announced that it would hand its LLU (Local Loop Unbundled) network over to BT, a move that gives it greater scope to focus on customer service while boosting coverage levels.
Meanwhile, many broadband providers are sharpening their focus on select customer groups. In the UK, Demon Internet plans to woo small-business users currently on residential lines. In addition, cable operators also see upside in what is a historically under-served SME segment while mobile operators are looking to get in on the act with bundles that include fixed-line broadband.
These new approaches to the enterprise make sense in the context of rising broadband demand. In a recent survey conducted by Ernst & Young - Beyond connectivity: can telecoms operators offer new services to business customers? - 35% of respondents in Western Europe identified fixed Internet access as a service that would be given a higher spending priority over the next two years, compared to now.
As technologies improve, services mature and customer expectations evolve, it is clear that the pace of change in the broadband market is unlikely to slow.
Adrian Baschnonga is a Senior Analyst in the Global Telecommunications Center of Ernst & Young