The end of DSL is nigh, but collusion will save it

DSL was given a killing blow in The Netherlands today. The headline item on every TV-news and news-website from morning to evening was that DSL consumers do not get what they pay for. Not even half. Cable did much better. The messenger was the most trusted consumer organisation; Consumentenbond.

The news itself of course isn't news. Most readers here know about loop lengths and up-to xMbit/s advertising. Telecompaper recently published the same results. But the news was news because somehow this geeky little secret was headline news. Even my parents in law, retirees, were talking about it. It was everywhere.

What were the numbers?
The Consumentenbond only compared the popular 20mbit/s subscriptions. They had some of their members install a piece of software at multiple times during the day tests speeds and it was clear. Most DSL subscriptions didn't reach 10mbit/s let alone the advertised up to 20mbit/s. Cable did much better with UPC deliver 62% of the promised speed and Ziggo delivering around 80%. One of the most respected ISP's XS4ALL received an extra blow because it was called the most expensive on a price per mbit comparison at €5,60. KPN is at €5,10/mbit, the average is €2,80/mbit, Ziggo at  €1,50/mbit and UPC at €1,15/mbit. This competely left out that XS4ALL has the best loved helpdesk, free access to 950 hotspots. But anyways... the main product is internet and it is expensive at XS4ALL. KPN is even more no frills.

Mom and pop felt DSL was the better choice
So, why is this such a blow? Because in the hearts and minds of the consumer DSL was still king. Cable was something crappy, shared with the entire neighbourhood provided by greedy morons, uncapable of even  basic administrative proceses. This has now changed. The news said that the Consumentenbond said that cable was better and that means a lot here. And you know what. The Consumentenbond is right. For a consumer in the Netherlands today Cable is the best option, unless there is FTTH provided by Solcon, XMS or Concepts available.

In the last 6 months the world changed here in NL. for the first time this millennium cable got more new broadband subscribers than DSL. KPN showed tens of thousands net losses across the board. Only Tele2 got some new subscribers. The news today confirmed this lead of the cable companies.

DSL doesn't have an answer and FTTH won't be big enough.

The really bad thing for the DSL providers is that their infrastructure doesn't allow them to give a proper answer to the cable challenge. KPN promissed its All-IP network with 50mbit symmetric VDSL2 from every curb into every home by 2012. The fibre strategy of 15 december 2009 showed that this will not happen. Instead KPN will provide VDSL2 40mbit down, 4mbit up from the current central offices with their much longer loop lengths. 70% percent of customers will see a speed increase, but we don't know by how much. Chances are most people will average out close to 20mbit/s. Tele2 has gone this road already and BBNed is rolling it out too (Thanks Hendrik for alerting me that were already rolling out.) Telecom Italia is looking for a buyer for BBNed, so I wonder about their commitment towards rolling out VDSL2 to consumers

Up to 20% of consumers will get FTTH in the coming years. But there is no big bang planned, so where we stand in 2020 is anyone's guess.

Worse still is that KPN has promissed its investors that it will market VDSL as a premium product with Premium prices. The real world speed is comparable with a low-end cable subscription. With the Consumentenbond watching, this will be a tough sell. It hurts if you're advertising 40 and you can't deliver anymore than 15-20 to most people.

Cable and KPN will agree on a truce
If this were a game of Command & Conquer or Railroad Tycoon and I was running cable, I would be going for the jugular. I would up minimum bandwidth on the cheapest subscription to 50 down and 5 up. This way even the headline speed on the cheapest subscription would out shine the competitors premium product. The arrival of VDSL would be a non-event. All subscribers would run to cable and life would be good. (even more so with a competing investment in FTTH and in better Free.fr-style services) This however is the real world and KPN is a giant who gets nasty when wounded.

Of the two cable companies Ziggo is the one with the heavily leveraged balance sheet and heavy losses because of heavy interest payments. UPC can handle more as it short changed it's bond holders years ago, but the steady profit from NL is used to expand elsewhere in Europe. They don't want a price war with KPN. They want cash flow. Steady sustainable growth that doesn't strain their back office too much. KPN has strict internal rules on what it sees as an acceptable market share. Anything above is good, anything below and all hell breaks loose. The net effect will need to be that some kind of truce is agreed.

The mobile sector shows how to collude without angering the regulator
A truce exists already in the mobile market. KPN has publicly stated that it doesn't want less than 40% of the mobile market. T-mobile and Vodafone know this leaves 60% for them to split (of which 10% can go to MVNOs). Both mobile operators don't accept market shares below 20%. Now that everyone knows this everyone can optimize their business accordingly. Even the retail channel receives bonuses selling according to market share.Whenever someone gains too much or drops too much the other too will adjust their behaviour accordingly. Every marketing manager has targets to attain and everybody knows everybody.

One of the venues where this is agreed is the main stage of the Telecomtime event I blogged from this year. KPN said it was happy where it was and the other two said the same. This is not collusion in the: Yoohoo, send in the European Commission and the anti-cartel police kind of way, but the effect is the same and much harder too prove. The nice thing of doing it on stage is that you can just say you were answering a question or giving a presentation.

The way it shows is by how Dutch mobile providers have changed the fine print from per second billing to per minute billing and have reintroduced start-up fees for new subscribers.

The way forward
KPN and cable will need to signal each other where they will draw a line in the sand when it comes to market share.  Now that cable has the upper hand in head line speeds and also in television content, the playing field needs to be levelled. KPN can do this by increasing its service offer. I foresee KPN leveraging its huge wifi installed base to provide its customers with more wifi hotspots (like FON) and probably some offer with mobile broadband as well. I also expect it to invest heavily in services that are included in the package to justify the price, ie backup online for free and more free.fr type of stuff. None of this will happen before the second half of this year. KPN will bleed customers in the first half year and they won't mind it either as it will keep OPTA of their backs. After the market has rebalanced the cable operators will probably target the speed freaks as their customers and KPN will opt to capture a market that wants a full range of services.  

Confession from a fiber geek
BTW I moved from Alice 20mbit DSL to UPC 60/6 triple play this month. Saved money and roughly tripled my real world download speeds. A blogpost explaining my actions and stats will follow. (yes that really means no FTTH this year, my heart bleeds)