Telcos Move to Sharing Economy as Fiber Dream Grips Europe

(Bloomberg) -- The sharing economy is spreading to European telecommunications providers, which are collaborating to speed the delivery of ultra-fast broadband over fiber-optic cables.

Carriers like Orange SA and Vodafone Group Plc have long partnered on mobile-phone masts and equipment to save money. They’re starting to take a similar approach with fiber as they prepare for the data demands of next-generation applications like virtual reality and self driving cars.

Preliminary talks reported this week between Vodafone and BT Group Plc in the U.K., where full-fiber coverage sits at 2 percent, may widen a trend that’s also taken hold in Spain and Portugal, where fiber is directly available to more than 70 percent of buildings.

“The cost of fiber is a problem,” said Bengt Nordstrom, a telecom consultant at Northstream AB in Stockholm. “Investments are very high and sometimes it may be very difficult to justify the spending.”

Fiber costs about 500 pounds ($641) per home passed in the U.K., and operators typically need a 30 percent take-up rate to make a decent return, according to Bloomberg Intelligence. BT’s Openreach network unit has put the cost of fully covering 10 million buildings with fiber, its proposed target for the mid-2020s, in the billions of pounds.

Carriers can’t avoid the investment, with the need for fixed and wireless networks to be more integrated in the future. Data use is rising at home and on mobile devices and fiber will be required to carry a boost in traffic expected to hit towers in Europe with the start of fifth-generation wireless services around 2020.

Regulators are encouraging the cooperation. The European Commission, seeking to spur competition and bring faster speeds to consumers at lower costs, is proposing to ease the regulatory burden on co-investment projects.

Partnering on fiber can also drive higher profits than renting capacity from incumbents like Spain’s Telefonica SA and Orange SA in France. New projects generate earnings before interest, taxes, depreciation and amortization margins of about 50 percent, versus 20 percent for wholesale agreements, said Erhan Gurses, a Bloomberg Intelligence analyst. Financial incentives, along with the regulatory nudge, may spur more deals, he said.

“Belgium, the U.K., and if incumbent vision changes, Austria and Germany, may emerge as the next set of countries where co-investment gains significant traction,” Gurses said.

Vodafone has been one of the biggest advocates. In Ireland, the carrier partnered with Electricity Supply Board, a power utility, to create a wholesale fiber venture. In Portugal, Vodafone did separate deals with Portugal Telecom and Optimus and later acquired the network it built with Optimus.

In Spain, the U.K.-based carrier first teamed up with Orange, but now supplements its own network by paying Telefonica for access to the much-larger national fiber grid the former Spanish monopoly built. Orange, meanwhile, has coinvestment and access-sharing agreements with Masmovil Ibercom SA.

Network sharing isn’t without barriers, including the complexity of getting rivals to do deals. Some operators can afford to invest alone, while certain incumbents such as Deutsche Telekom AG in Germany are trying to extend the life of their copper lines before making a big move into fiber. In the U.K., more regulatory incentives may be needed to encourage partnerships like the one being considered by BT and Vodafone.

“Vodafone being in negotiations with BT is a potentially very significant development for the sector, because Vodafone is a scale operation and has a track record of investment,” said Mark Williams, London-based managing director at Berkeley Research Group, a management consultant. “As both the operators and regulators get more comfortable with it, you’re going to see more deals take place.”

To contact the reporters on this story: Rebecca Penty in London at rpenty@bloomberg.net, Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Ville Heiskanen