Fibre lessons from Norway’s top broadband supplier
I recently wrote a case study on how Lyse Energi, a Norwegian energy company became the country’s leading supplier of broadband. The story was commissioned by the FTTH Council in Europe. Unfortunately, they had to cut it for space reasons, so I thank them for permission to print the full version here.
It is almost 10 years since Lyse Energi, the Norwegian regional energy supplier, decided to enter the communications market, and to do so using the most expensive networking technology available – point to point Ethernet over optical fiber with symmetrical speeds up and down the network.
That gamble is paying off. After spending nearly NOK2bn (€264.3m) on plant and equipment, Lyse now holds 43% of the Norwegian fiber market directly, and another 24% through resellers and partners. At 250,000, thanks to Altibox, its wholly-owned broadband subsidiary, Lyse now claims almost twice the number broadband customers compared to its energy customers.
This gives it about 13.4% of the total Norwegian broadband market, a penetration rate of around 70% of homes passed, and commands attention in the boardroom.
Altibox CEO Leif Aarthun Ims puts this success down to two things: the strength of the 42 partnerships, 36 in Norway and six in Denmark, that Lyse has formed with other regional power utilities on fiber-based broadband, and their willingness to be patient investors.
Lyse developed the concept of Altibox, a fiber-based triple-play (high speed internet, TV and voice) with extras, that it could sell to its own energy customers, and through other regional power companies. Mr Ims says the move was a response to the threat of deregulation in the power sector. This threatened to introduce competition, and Lyse wanted to develop other sources of revenue.
Telecommunications was a natural fit because it was an infrastructure play, and Lyse was expert at installing and operating infrastructure, he says.
Lyse chose point to point Ethernet over fiber, mainly because of its flexibility, says Mr Ims. “We can completely customise the service we provide an individual,” he says. “If we want to give someone 1Gbps, we can simply do it without affecting anyone else.”
Lyse looked at passive optical networking (PON), a cheaper point to multipoint technology, but rejected it. The customer premises equipment was too complicated, the difference in fiber and equipment costs was marginal, and the technology wasn’t as easy or cheap to upgrade, Mr Ims says.
Despite its success, Lyse remains cautious. It still won’t start network construction in a new area unless it is close to an existing point of presence, and 60% of potential subscribers sign up. But allowing residents to cut their connection costs by digging their own trenches (to an Altibox specification) helps to win commitment.
“Digging is the main cost,” says Mr Ims. “If we can cut that, it makes things much easier.”
Altibox has continuously increased the raw speed on the network. Starting in 2002 with 2Mbps, it upgraded to 4Mbps in 2004, to 6Mbps in 2005 and to 10Mbps in 2007. After testing 1Gbps in 2008, it launched a 400Mbps service in 2010, and raised its basic rate to 25Mbps.
High speed access is merely the medium for content delivery, up and down the network. Altibox has built out its content offering hugely. After beginning with 40 TV channels, today there are 150, as well as games, football, various on-demand services such as films, personal video recording, 3D, business video and interactive multiscreen services. In addition, more customers are uploading their own video to sites such as YouTube.
Video is now about 40% of Altibox’s traffic, and Mr Ims expects that share to grow. Cisco, an equipment maker, predicts that 91% of all internet traffic will be video by 2014. Fiber is the only possible medium for future TV, whose high definition, 3D nature will require speeds of 200Mbps to 600Mbps, he says.
Filling out the present product range are voice services (two VoIP lines) plus a mobile telephone and broadband service, and a fire and burglar alarm service.
Given the choice of services and packages, there is a wide range of prices on offer. Mr Ims says the average revenue per user is between NOK750 (€99) and NOK800 (€106) per month.
Which is not much unless you are a patient investor. So the emphasis now is on extending the present network and up-selling existing customers.
The customer profile lends itself to this strategy. Altibox households have about 27% higher income that average Norwegians. That suggests the 15% penetration rate of alarms in Norway is a tribute to its social harmony and policing. Even so, “We could do 25%,” Mr Ims says.
Mr Ims says he will consider extending the network to communities as small as 300 or 400 houses, provided there is a nearby point of presence. But it’s not cheap. Mr Ims says it costs about NOK25,000 (€3,300) or between US$4,500 and US$5,000 to add a customer. “Generally, we can get about 40 new Norwegian customers for every NOK1m (€132,000) we spend,” he says.
The reorganisation makes it hard to compare the financial contribution of telecommunications to Lyse’s overall performance. However, Mr Ims says that in its home market around Stavanger, the company is cash positive and heading towards its target break-even period of 10 years. In other regions, the partners have different investment criteria, with pay-back periods as low as eight years and as high as 12.
Success breeds envy, and Altibox is no exception. With only 2.2 million households, Norway’s communications market is small and, with at least seven telcos, some would say saturated with competition.
Mr Ims says the incumbent telco didn’t respond to Altibox, waiting eight years before starting to install VDSL and later fiber. “In a way, the fiber market lay open to us,” he says. “Today we have the most loyal and the most satisfied internet and TV customers in the Norwegian market,” he says.
Mr Ims is not resting on his laurels. There are already fiber links to Stockholm and Copenhagen with spare capacity. The introduction of 4G mobile telephony, with its thirst for high speed backhaul, is another opportunity. So too is the emerging smart grid to manage households’ energy consumption.
Mr Ims acknowledges that these are all potential applications that could drive network expansion and revenue growth. “But we are not there yet,” he cautions.
Nonetheless, Altibox’s parent company has prepared itself. In January 2011 Lyse reorganised its energy and telecommunications operations into smaller, more focused firms.
It split telecommunications operations into:
- Lyse Fibernett, a network infrastructure owner and operator
- Lyse Infra, to build broadband networks and connect customers as well as street lighting and power grid lines
- Lyse Fiberinvest, a company to manage partner and subsidiary relationships
- Lyse, to manage retail broadband sales
- NorAlarm, which makes and sells remote fire and burglar alarm systems, and
- Altibox, to develop fiber-based content products and sell them to Lyse subsidiaries and partners, in effect wholesaling the Altibox concept to third parties.
Most companies are a product of their unique market ecosystems, so is Altibox’s success repeatable elsewhere? “It should be absolutely reproducible in other countries,” says Mr Ims.